kern-20210930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from / to

Commission file number 001-39096

AKERNA CORP.

(Exact name of registrant as specified in its charter)

Delaware		83-2242651
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1550 Larimer Street, #246 Denver, Colorado		80202
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (888) 932-6537

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	KERN	Nasdaq Stock Market LLC (Nasdaq Capital Market)
Warrants to purchase one share of common stock	KERNW	Nasdaq Stock Market LLC (Nasdaq Capital Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No ☒

As of November 9, 2021, there were 30,735,549 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

	INDEX	Page Number

PART I	FINANCIAL INFORMATION
	Condensed Consolidated Balance Sheets (unaudited)	1
	Condensed Consolidated Statements of Operations (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Loss (unaudited)	3
	Condensed Consolidated Statements of Changes in Equity (unaudited)	4
	Condensed Consolidated Statements of Cash Flows (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures.	36

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings.	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities.	40
Item 4.	Mine Safety Disclosures.	40
Item 5.	Other Information.	40
Item 6.	Exhibits	41
	SIGNATURES	42

AKERNA CORP.

Condensed Consolidated Balance Sheets

(unaudited)

	September 30,			December 31,
	2021			2020
Assets
Current assets:
Cash	$	9,608,788		$	17,840,640
Restricted cash		508,261			500,000
Accounts receivable, net		1,647,619			1,753,547
Prepaid expenses and other current assets		2,194,221			2,458,727
Total current assets		13,958,889			22,552,914

Fixed assets, net		52,322			1,193,433
Investment, net		226,101			233,664
Capitalized software, net		6,167,413			3,925,739
Intangible assets, net		7,311,541			7,388,795
Goodwill		46,790,018			41,874,527
Total Assets	$	74,506,284		$	77,169,072

Liabilities and Equity

Current liabilities
Accounts payable, accrued expenses and other accrued liabilities	$	5,185,519		$	3,188,576
Deferred revenue		908,256			843,900
Current portion of long-term debt		—			11,707,363
Derivative liability		160,201			311,376
Total current liabilities		6,253,976			16,051,215

Long-term debt, less current portion		3,834,001			3,895,237

Total liabilities		10,087,977			19,946,452

Commitments and contingencies (Note 7)		—			—

Equity:
Preferred stock, par value $0.0001; 5,000,000 shares authorized, 1 share special voting preferred stock issued and outstanding at September 30, 2021 and December 31, 2020		—			—
Special voting preferred stock, par value $0.0001; 1 share authorized, issued and outstanding as of September 30, 2021 and December 31, 2020, with $1 preference in liquidation; exchangeable shares, no par value, 385,947 and 2,667,349 shares issued and outstanding as of September 30, 2021 and December 31, 2020 respectively (See Note 4)		2,952,495			20,405,219
Common stock, par value $0.0001; 75,000,000 shares authorized, 27,167,917 and 19,901,248 issued and outstanding at September 30, 2021 and December 31, 2020, respectively		2,717			1,990
Additional paid-in capital		132,803,659			94,086,433
Accumulated other comprehensive loss		(44,639	)		(91,497	)
Accumulated deficit		(71,295,925	)		(57,179,525	)
Total equity	$	64,418,307		$	57,222,620
Total liabilities and equity	$	74,506,284		$	77,169,072

The accompanying notes are an integral part of these condensed consolidated financial statements

AKERNA CORP.

Condensed Consolidated Statements of Operations

(unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Revenues
Software	$	4,557,960		$	3,323,592		$	12,809,841		$	8,519,635
Consulting		551,402			332,587			1,135,033			1,156,171
Other		26,140			57,825			111,540			112,381
Total revenues		5,135,502			3,714,004			14,056,414			9,788,187
Cost of revenues		1,971,382			1,739,937			5,339,929			4,954,721

Gross profit		3,164,120			1,974,067			8,716,485			4,833,466

Operating expenses
Product development		1,566,478			1,758,826			4,517,836			3,722,551
Sales and marketing		2,002,461			2,097,502			5,564,519			6,255,371
General and administrative		2,077,474			2,470,187			8,306,417			9,053,476
Depreciation and amortization		1,238,420			1,171,022			3,605,435			2,387,629
Total operating expenses		6,884,833			7,497,537			21,994,207			21,419,027

Loss from operations		(3,720,713	)		(5,523,470	)		(13,277,722	)		(16,585,561	)

Other (expense) income:
Interest (expense) income, net		(238,283	)		(3,687	)		(1,175,789	)		27,751
Change in fair value of convertible notes		(23,227)			778,000			(2,030,904	)		1,544,000
Change in fair value of derivative liability		194,046			762,646			151,175			392,605
Gain on forgiveness of PPP Loan		2,234,730			—			2,234,730			—
Other (expense) income, net		—			—			243			(124	)
Total other (expense) income		2,167,266			1,536,959			(820,545	)		1,964,232

Net loss before income taxes and equity in losses of investee		(1,553,447	)		(3,986,511	)		(14,098,267	)		(14,621,329	)
Income tax expense		—			—			(10,570	)		(30,985	)
Equity in losses of investee		—			(1,534	)		(7,564	)		(5,225	)

Net loss		(1,553,447	)		(3,988,045	)		(14,116,401	)		(14,657,539	)
Net loss attributable to noncontrolling interest in consolidated subsidiary		—			8,815			—			858,574
Net loss attributable to Akerna shareholders	$	(1,553,447	)	$	(3,979,230	)	$	(14,116,401	)	$	(13,798,965	)

Basic and diluted weighted average common stock outstanding		26,442,446			13,934,945			24,312,510			13,181,691
Basic and diluted net loss per common share	$	(0.06	)	$	(0.29	)	$	(0.58	)	$	(1.05	)

The accompanying notes are an integral part of these condensed consolidated financial statements

AKERNA CORP

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

	For the Three months ended						For the Nine months ended
	September 30,						September 30,
	2021			2020			2021			2020
Net loss	$	(1,553,447	)	$	(3,988,045	)	$	(14,116,401	)	$	(14,657,539	)
Other comprehensive (loss) income:
Foreign currency translation		63,905			—			65,858			—
Unrealized (loss) gain on convertible notes		(3,000	)		(70,000	)		(19,000	)		(7,000	)
Comprehensive loss	$	(1,492,542	)	$	(4,058,045	)	$	(14,069,543	)	$	(14,664,539	)

The accompanying notes are an integral part of these condensed consolidated financial statements

AKERNA CORP.

Condensed Consolidated Statements of Changes in Equity

For the Three Months Ended September 30, 2021

(unaudited)

	Special Voting Preferred Stock					Common						Additional Paid-In			Accumulated Other Comprehensive			Accumulated			Total
	Share		Amount			Shares			Amount			Capital			Income			Deficit			Equity

Balance – July 1, 2021	1,039,373		$	7,951,203			25,332,439		$	2,533		$	123,856,649		$	(105,544	)	$	(69,742,478	)	$	61,962,363
Conversion of Exchangeable Shares to common stock	(653,426	)		(4,998,708	)		653,426			66			4,998,642			—			—			—
Settlement of convertible debt	—			—			470,634			47			1,413,895			—			—			1,413,942
Shares withheld for withholding taxes	—			—			(31,422	)		(3	)		(103,704	)		—			—			(103,707	)
Shares issued in connection with Asset Purchase	—			—			83,333			8			299,992			—			—			300,000
Stock-based compensation	—			—			—			—			510,132			—			—			510,132
Shares issued in connection with the ATM program	—			—			556,388			56			1,828,063			—			—			1,828,119
Restricted stock vesting	—			—			103,119			10			(10	)		—			—			—
Forfeitures of restricted shares	—			—			—			—			—			—			—			—
Foreign currency translation adjustments	—			—			—			—			—			63,905			—			63,905
Unrealized loss (gains) on convertible notes	—			—			—			—			—			(3,000	)		—			(3,000	)
Net loss	—			—			—			—			—			—			(1,553,447	)		(1,553,447	)
Balance – September 30, 2021	385,947		$	2,952,495			27,167,917		$	2,717		$	132,803,659		$	(44,639	)	$	(71,295,925	)	$	64,418,307

AKERNA CORP.

Condensed Consolidated Statements of Changes in Equity

For the Nine Months Ended September 30, 2021

(unaudited)

	Special Voting Preferred Stock					Common						Additional Paid-In			Accumulated Other Comprehensive			Accumulated			Total
	Share		Amount			Shares			Amount			Capital			Income			Deficit			Equity

Balance – January 1, 2021	2,667,349		$	20,405,219			19,901,248		$	1,990		$	94,086,433		$	(91,497	)	$	(57,179,524	)	$	57,222,621
Conversion of Exchangeable Shares to common stock	(2,281,402	)		(17,452,724	)		2,281,402			228			17,452,496			—			—			—
Settlement of convertible debt	—			—			3,094,129			309			11,610,278			—			—			11,610,587
Shares withheld for withholding taxes	—			—			(80,370	)		(8	)		(437,546	)		—			—			(437,554	)
Shares issued in connection with Viridian Acquisition	—			—			1,000,000			100			6,001,900			—			—			6,002,000
Shares issued in connection with Asset Purchase	—			—			83,333			8			299,992			—			—			300,000
Stock-based compensation	—			—			—			—			1,584,755			—			—			1,584,755
Shares issued in connection with the ATM program	—			—			556,388			56			1,828,060			—			—			1,828,116
Settlement of liabilities with shares	—			—			101,705			10			377,315			—			—			377,325
Restricted stock vesting	—			—			231,418			24			(24	)		—			—			—
Forfeitures of restricted shares	—			—			(1,336	)		—			—			—			—			—
Foreign currency translation adjustments	—			—			—			—			—			65,858			—			65,858
Unrealized loss (gains) on convertible notes	—			—			—			—			—			(19,000	)		—			(19,000	)
Net loss	—			—			—			—			—			—			(14,116,401	)		(14,116,401	)
Balance – September 30, 2021	385,947		$	2,952,495			27,167,917		$	2,717		$	132,803,659		$	(44,639	)	$	(71,295,925	)	$	64,418,307

The accompanying notes are an integral part of these condensed consolidated financial statements

AKERNA CORP.

Condensed Consolidated Statements of Changes in Equity

For the Three Months Ended September 30, 2020

(unaudited)

		Special Preferred Voting Stock		Common			Additional Paid-In		Accumulated Other Comprehensive			Accumulated			Total Shareholders'			Non controlling Interests in Consolidated			Total
		Amount		Share	Amount		Capital		Income			Deficit			Equity			Subsidiary			Equity

Balance – June 30, 2020	$	—		13,203,806	$	1,321	$	71,902,474	$	63,000		$	(41,160,245	)	$	30,806,550		$	4,704,252		$	35,510,802
Adoption of ASC 606 Adjustment		—		—		—		—		—			185,826			185,826			—			185,826
Balance, July 1. 2020		—		13,203,806		1,321		71,902,474		63,000			(40,974,419	)		30,992,376			4,704,252			35,696,628
Special voting preferred stock issued in business combination		25,203,490		—		—		—		—			—			25,203,490			—			25,203,490
Conversion of exchangeable shares to common stock		(4,798,271	)	627,225		63		4,798,208		—			—			—			—			—
Acquisition of noncontrolling interest		—		800,000		80		4,695,357		—			—			4,695,437			(4,695,437	)		—
Stock-based compensation		—		—		—		764,351		—			—			764,351			—			764,351
Restricted stock vesting		—		3,025		—		—		—			—			—			—			—
Unrealized loss (gain) on convertible notes		—		—		—		—		(70,000	)		—			(70,000	)		—			(70,000	)
Net loss		—		—		—		—		—			(3,979,230	)		(3,979,230	)		(8,815	)		(3,988,045	)
Balance – September 30, 2020	$	20,405,219		14,634,056	$	1,464	$	82,160,390	$	(7,000	)	$	(44,953,649	)	$	57,606,424			—			57,606,424

AKERNA CORP.

Condensed Consolidated Statements of Changes in Equity

For the Nine Months Ended September 30, 2020

(unaudited)

		Special Preferred Voting Stock		Common					Additional Paid-In		Accumulated Other Comprehensive			Accumulated			Total Shareholders'			Non controlling Interests in Consolidated			Total
		Amount		Share		Amount			Capital		Income			Deficit			Equity			Subsidiary			Equity

Balance – January 1, 2020	$	—		10,921,485		$	1,093		$	51,060,652	$	—		$	(31,340,510	)	$	19,721,235			—			19,721,235
Special voting preferred stock issued in business combination		25,203,490		—			—			—		—			—			25,203,490			—			25,203,490
Conversion of exchangeable shares to common		(4,798,271	)	627,225			63			4,798,208		—			—			—			—			—
Common stock issued in business combination		—		2,299,650			230			20,081,236		—			—			20,081,466			—			20,081,466
Noncontrolling interests in acquired subsidiary		—		—			—			—		—			—			—			5,554,011			5,554,011
Adoption of ASC 606 Adjustment		—		—			—			—		—			185,826			185,826			—			185,826
Acquisition of noncontrolling interest		—		800,000			80			4,695,357		—			—			4,695,437			(4,695,437	)		—
Stock-based compensation		—		—			—			1,524,935		—			—			1,524,935			—			1,524,935
Restricted stock vesting		—		3,025			—			—		—			—			—			—			—
Forfeitures of restricted shares		—		(17,329	)		(2	)		2		—			—			—			—			—
Unrealized loss (gain) on convertible notes		—		—			—			—		(7,000	)		—			(7,000	)		—			(7,000	)
Net loss		—		—			—			—		—			(13,798,965	)		(13,798,965	)		(858,574	)		(14,657,539	)
Balance – September 30, 2020	$	20,405,219		14,634,056		$	1,464		$	82,160,390	$	(7,000	)	$	(44,953,649	)	$	57,606,424			—			57,606,424

The accompanying notes are an integral part of these condensed consolidated financial statements

AKERNA CORP.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	For the Nine Months Ended
	September 30,
	2021			2020
Cash flows from operating activities
Net loss	$	(14,116,401	)	$	(14,657,539	)
Adjustment to reconcile net loss to net cash used in operating activities:
Equity in losses of investment		7,564			5,226
Bad debt		254,029			382,607
Stock-based compensation expense		1,584,751			1,524,935
Loss on write off of fixed assets		1,045,179			—
Gain on forgiveness of PPP loan		(2,234,730	)		—
Amortization of deferred contract cost		356,528			—
Non-cash interest expense		1,161,393			—
Depreciation and amortization		3,605,434			2,387,629
Debt issuance costs		—			1,220,557
Foreign currency loss		21,496			4,901
Change in fair value of convertible notes		2,030,904			(1,544,000	)
Change in fair value of derivative liability		(151,175	)		(392,605	)
Change in fair value of contingent consideration		—			(1,387,000	)
Changes in operating assets and liabilities:
Accounts receivable		462,482			(423,850	)
Prepaid expenses and other current assets		66,246			(232,180	)
Accounts payable and accrued liabilities		1,756,672			914,712
Deferred revenue		(927,916	)		(261,760)
Net cash used in operating activities		(5,077,544	)		(12,458,367	)

Cash flows from investing activities
Developed software additions		(3,354,453	)		(2,698,379	)
Furniture, fixtures, and equipment additions		(11,535	)		(168,839	)
Cash paid for business combination, net of cash acquired		—			(5,142,159	)
Net cash used in investing activities		(3,365,988	)		(8,009,377	)

Cash flows from financing activities
Value of shares withheld for related to tax withholdings		(437,554	)		—
Proceeds from stock offering, net		1,828,116			—
Proceeds from issuance of long term debt		—			17,164,600
Payments of principal amounts of debt		(1,164,706	)		—
Cash paid for debt issuance costs		—			(1,220,557	)
Net cash provided by financing activities		225,856			15,944,043
Effect of exchange rate changes on cash and restricted cash		(5,915	)		662
Net change in cash and restricted cash		(8,223,591	)		(4,523,039	)
Cash and restricted cash - beginning of period		18,340,640			19,280,897
Cash and restricted cash - end of period	$	10,117,049		$	14,757,858
Cash paid for interest		105,882			1,559
Cash paid for taxes		10,570			30,985
Supplemental Disclosure of non-cash investing and financing activity:
Settlement of convertible notes in common stock		10,448,932			—
Conversion of exchangeable shares to common stock		17,452,497			4,798,208
Settlement of other liabilities in common stock		377,315			—
Acquisition of noncontrolling interest		—			4,695,357
Special voting preferred stock issued in business combination		—			25,203,490
Assets acquired and liabilities assumed in business combinations:
Cash		—			445,269
Accounts receivable		556,234			994,710
Prepaid expenses and other current assets		148,417			176,441
Fixed assets		—			1,329,406
Intangible assets		1,733,000			12,180,000
Goodwill		4,915,491			46,500,030
Accounts payable and accrued liabilities		349,735			2,414,930
Deferred revenue		1,001,408			580,531
Contingent consideration		—			2,204,000

The accompanying notes are an integral part of these condensed consolidated financial statements

AKERNA CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 - Description of Business

Description of Business

Akerna Corp., herein referred to as we, us, our, or Akerna, through our wholly owned subsidiaries MJ Freeway, LLC, or MJF, Trellis Solutions, Inc., or Trellis, Ample Organics, Inc, or Ample, Viridian Sciences, Inc, or Viridian, and solo sciences, inc, or Solo, provides enterprise software solutions that enable regulatory compliance and inventory management. Our proprietary, broad and growing suite of solutions are adaptable for industries in which interfacing with government regulatory agencies for compliance purposes is required, or where the tracking of organic materials from seed or plant to end products is desired. We develop products intended to assist states in monitoring licensed businesses’ compliance with state regulations and to help state-licensed businesses operate in compliance with such law. We provide our commercial software platform, MJ Platform^®, Trellis^® and Viridian Sciences® to state-licensed businesses, and our regulatory software platform, Leaf Data Systems^®, to state government regulatory agencies. Through Solo, we provide an innovative, next-generation solution for state and national governments to securely track product and waste throughout the supply chain with solo*TAG™. The integration of MJ Platform^® and solo*CODE™ results in technology for consumers and brands that brings a consumer-facing mark designed to highlight the authenticity and signify transparency.

We consult with clients on a wide range of areas to help them successfully maintain compliance with state laws and regulations. We provide project-focused consulting services to clients who are initiating or expanding their cannabis business operations or are interested in data consulting engagements with respect to the legal cannabis industry. Our advisory engagements include service offerings focused on compliance requirement assessments, readiness and best practices, compliance monitoring systems, application processes, inspection readiness and business plan and compliance reviews. We typically provide our consulting services to clients in emerging markets that are seeking consultation on newly introduced licensing regimes and assistance with the regulatory compliant build-out of operations.

Liquidity and Capital Resources

Since our inception, we have incurred recurring operating losses, used cash from operations, and relied on capital raising transactions to continue ongoing operations. During the three and nine months ended September 30, 2021, we incurred a loss from operations of $3.7 million and $13.3 million, respectively, and for the nine months ended September 30, 2021, we used cash in operations of $5.2 million. As of September 30, 2021, we had cash of $9.6 million, excluding restricted cash, and working capital of $7.7 million. During the nine months ended September 30, 2021, the Company incurred a number of one-time, non-recurring expenses of approximately $2.9 million. These expenses include business combination and merger related costs, restructuring charges, and other non-recurring charges.

On July 23, 2021, we entered into an Equity Distribution Agreement with Oppenheimer & Co. Inc. and A.G.P./Alliance Global Partners ("ATM Program"). Pursuant to the terms of the Agreement, we may offer and sell from time to time, up to $25 million of shares of our common stock. As of September 30, 2021, we have raised $1.9 million through the issuance of 556,388 shares through the ATM program. While no assurance can be provided that we will be able to raise further capital under the program, we intend to use the net proceeds from the sale of our shares of common stock, if any, for general corporate purposes, including working capital, marketing, product development, capital expenditures and merger and acquisition activities.

Subsequent to yearend, on October 5, 2021, we entered into a securities purchase agreement with the two institutional investors that held the Company's convertible notes issued in June of 2020 (the "2020 Notes") to sell senior secured notes in a private placement (the "Senior Convertible Notes"). The Senior Convertible Notes have an aggregate principal amount of $20,000,000, an aggregate original issue discount of 10%, and rank senior to all our other outstanding and future indebtedness. Approximately $3.3 million of the proceeds from the Senior Convertible Notes were used to payoff the 2020 Notes, which were then to be cancelled. The net proceeds from the issuance of the Senior Convertible Notes was approximately $14.6 million, following the original issue discount and deductions for expenses and paydown of the 2020 Notes. These net proceeds will be used to support Akerna's ongoing growth initiatives and continued investment in current and future technology infrastructure. The Senior Convertible Notes are convertible into shares of common stock of Akerna at a conversion price of $4.05 per share. The Senior Convertible Notes mature on October 5, 2024 and are to be repaid in monthly installments beginning on January 1, 2022. The Senior Convertible Notes can be repaid in common shares or cash.

After considering all available evidence, we determined that, due to our current positive working capital, our ability to repay our senior secured convertible note with shares of our common stock, the funds raised from the ATM Program and the Senior Convertible Notes, as well as our ongoing initiatives to drive operating effectiveness, that we have sufficient working capital to sustain operations for a period of at least twelve months from the date that our September 30, 2021 financial statements were issued.

In the event the Company requires additional liquidity, the Company believes it can further reduce or defer expenses. More specifically, the Company could implement certain discretionary cost reduction initiatives relating to our spending on employee travel and entertainment, consulting costs and marketing expenses, negotiate deferred salary arrangements, furlough employees or reduce headcount or negotiate extensions of payments of rent and utilities. The Company also believes it has access to capital through future debt or equity offerings and could be successful in renegotiating the maturity dates or conversion option relating to its current outstanding notes payable, although no assurance can be provided that we would be successful in these efforts. Management will continue to evaluate our liquidity and capital resources.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain footnotes and other financial information normally required by GAAP, have been condensed or omitted in accordance with such rules and regulations. In management’s opinion, these condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and notes thereto and include all adjustments, consisting of normal recurring items, considered necessary for the fair presentation. The operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021.

The condensed consolidated balance sheet as of and for the period ended December 31, 2020, has been derived from our audited financial statements at that date but does not include all disclosures and financial information required by GAAP for complete financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with our consolidated financial statements and notes thereto for the period ended December 31, 2020, which were included in our report on Form 10-KT filed on March 31, 2021.

Principles of Consolidation

Our accompanying condensed consolidated financial statements include the accounts of Akerna, our wholly owned subsidiaries and those entities in which we otherwise have a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.

We evaluate our ownership interests, contractual rights, and other interests in entities to determine if the entities are variable interest entities, or VIEs, when we have a variable interest in those entities. Generally, a VIE is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. These evaluations can be complex and involve judgment and the use of estimates and assumptions based on available historical information.

If we determine that we hold a variable interest in a VIE and we are the primary beneficiary of the VIE, we must consolidate the VIE in our financial statements. In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and the similarity with and significance to our business activities and the business activities of the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of these VIE’s operations and general market conditions. We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and reassess our status on an ongoing basis.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes thereto. We base our estimates on assumptions that we believe to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results could differ materially from those estimates under different assumptions or conditions; however, we believe that our estimates are reasonable.

Concentrations of Credit Risk

We grant credit in the normal course of business to customers in the United States. We periodically perform credit analysis and monitor the financial condition of our customers to reduce credit risk.

During the nine months ended September 30, 2021 and 2020, one government client accounted for 11% and 23% of total revenues, respectively. During the three months ended September 30, 2021 and 2020, one government client accounted for 10% and 17% of total revenues, respectively. As of September 30, 2021 and December 31, 2020, two government clients accounted for a total of 14% and 36% of net accounts receivable, respectively.

Foreign Currency Translation

The functional currency of the Company's non-U.S. operations is the local currency. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Non-monetary assets and liabilities are translated at the historical rates in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated into U.S. dollars using the average rates of exchange prevailing during the period. Translation gains or losses are included as a component of accumulated other comprehensive loss in shareholders' equity. Gains and losses resulting from foreign currency transactions are recognized as other income (expense).

Reclassifications

Certain prior year financial statement amounts have been reclassified for consistency with the current year presentation.

Segment Reporting

The Company operates its business as one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.

In the following table, we disclose the combined gross balance of our fixed assets, capitalized software, and intangible assets by geographical location (in thousands):

	As of September 30, 2021		As of December 31, 2020
Long-lived assets:
United States	$	15,285	$	9,994
Canada		4,923		5,074
Total	$	20,208	$	15,068

Warrant Liabilities

We classify private placement warrants as liabilities. At the end of each reporting period, changes in fair value during the period are recognized within the condensed consolidated statements of operations and comprehensive loss. We will continue to adjust the warrant liability for changes in the fair value until the earlier of a) the exercise or expiration of the warrants or b) the redemption of the warrants, at which time the warrants will be reclassified to additional paid-in capital.

Investment

We hold an equity security in Zoltrain, Inc. (Zoltrain) for which the fair value is not readily determinable. Accordingly, we measure this investment at cost minus impairment, plus or minus changes resulting from observable price changes. When indicators of impairment exist, we estimate the fair value and record an impairment charge if the carrying value of the investment exceeds its estimated fair value. Any impairment charges are recorded in other (expense) income, net, in our consolidated statements of operations. Prior to the quarter ended September 30, 2021, we determined we could exert significant influence over Zoltrain's operations through voting rights and representation on the board of directors and we accounted for our investment in Zoltrain using the equity method of accounting, recording our share in the investee’s earnings and losses in the consolidated statement of operations.

Recent Accounting Pronouncements

ASU 2016-02

The Financial Accounting Standards Board, or the FASB, has issued new guidance related to the accounting for leases. The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. Following our change in fiscal year effective on December 31, 2020, the new standard is effective for us beginning on January 1, 2022 and interim periods thereafter. We have limited assets subject to operating lease and therefore expect the adoption of the new standard to result in the recognition of right of use assets and lease liabilities for any office or vehicle leases in effect at that date, we do not expect a significant impact to our results of operations.

ASU 2016-13

The FASB has issued guidance to introduce a new model for recognizing credit losses on financial instruments based on estimated current expected credit losses, or CECL. Under the new standard, an entity is required to estimate CECL on trade receivables at inception, based on historical information, current conditions, and reasonable and supportable forecasts. Following our change in fiscal year-end effective December 31, 2020, the new guidance is effective for us beginning on January 1, 2023. We are evaluating the impact of adoption of the new standard on our consolidated financial statements.

ASU 2018-15

The FASB has issued guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance (i) provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense, (ii) requires an entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and (iii) clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The guidance is applicable for us for the year ending December 31, 2021. We are evaluating the impact of adoption of the standard on our financial statements, however, do not anticipate a significant impact to our financials as a result of this guidance.

ASU 2020-01

The FASB has issued guidance clarifying the interactions between various standards governing investments in equity securities. The new guidance addresses accounting for the transition into and out of the equity method and measurement of certain purchased options and forward contracts to acquire investments. The standard is effective for us for annual and interim periods beginning on January 1, 2022, with early adoption permitted. Adoption of the standard requires changes to be made prospectively. We do not anticipate a significant impact to our financial statements as a result of this new guidance.

ASU 2021-04

On May 3, 2021, FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company is evaluating this new standard.

ASU 2021-08

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends the accounting related to contract assets and liabilities acquired in business combinations. Under current GAAP, an entity generally recognizes assets and liabilities acquired in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU 2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to businesses combinations occurring on or after the effective date of the amendment. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this new guidance on the consolidated financial statements.

Note 3 – Revenue

Financial Statement Impact of Adopting ASC 606, "Revenue from Contracts with Customers"

On July 1, 2020, we adopted ASC 606 using the modified retrospective transition method and applied this method to all contracts that were not complete as of the date of adoption. The reported results as of September 30, 2021 and December 31, 2020, and three months ended September 30, 2021 in the accompanying consolidated financial statements are presented under ASC 606.

The most significant impacts of this standard relate to the timing of revenue recognition of fixed fees under our contracts, as well as the accounting for costs to obtain contracts. Under ASC 606, revenue recognition for subscription and implementation fees begins on the launch date and is recognized over time through the term of the contract. We then recognized the remaining balance of the fixed fees ratably over the remaining term of the contract. Additionally, under ASC 606, we now defer recognition of expense for sales commissions ("contract costs"). These contract costs are amortized to expense over the expected period of benefit. Before the adoption of ASC 606, we expensed these contract costs as incurred.

Revenue Recognition Policies for the nine months ended September 30, 2020

We derive our revenues primarily from the following sources: software revenues, which are primarily comprised of subscription fees from government and commercial customers accessing our enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and consulting services provided to operators interested in integrating our platform into their respective operations, such services include: assessing compliance requirements, monitoring systems and readiness; assisting with the application process; and evaluating the operator’s inspection readiness and business plan.

We commence revenue recognition when there is persuasive evidence of an arrangement, the service has been or is being provided to the customer, the collection of the fees is reasonably assured, and the amount of fees to be paid by the customer is fixed or determinable.

Software Revenue

Software revenue consists of subscription revenue, the sale of business intelligence, data analytics and other software related services, as well as sales of solo*TAGs and solo*CODEs to customers by the roll of printed labels or as a digital code that allows customers to directly print their packing. When customers activate a solo*TAGor solo*CODE, we receive an activation fee, which is recognized upon activation by the customer. Subscription revenue is recognized ratably over the term of the contract, beginning when access to the applicable software is provided to the customer. We typically invoice customers at the beginning of the term, in multi-year, annual, quarterly, or monthly installments. When a collection of fees occurs in advance of service delivery, revenue recognition is deferred until such services commence. Revenue for implementation fees is recognized ratably over the expected term of the contract, including expected renewals.

We include service level commitments to customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits if those levels are not met. In addition, customer contracts often include: specific obligations that require us to maintain the availability of the customer’s data through the service and that customer content is secured against unauthorized access or loss, and indemnity provisions whereby we indemnify customers from third-party claims asserted against them that result from our failure to maintain the availability of their content or securing the same from unauthorized access or loss. To date, we have not incurred any material costs as a result of such commitments. Any such credits or payments made to customers under these arrangements are recorded as a reduction of revenue.

Consulting Services Revenue

Consulting services revenue consists of contracts with fixed terms and fee structures based upon the volume and activity or fixed-price contracts for consulting and strategic services. When these services are not combined with subscription revenues as a single unit of account, as discussed below, these revenues are recognized as services are rendered and accepted by the customer.

Other Revenues

Other revenue is derived primarily from point-of-sale hardware and other non-recurring revenue. From time to time we purchase equipment for resale to customers. Such equipment is generally drop-shipped to our customers and we recognize revenue as these products are delivered.

Cost of Revenue

Cost of revenue consists primarily of costs related to providing subscription and other services to our customers, including employee compensation and related expenses for data center operations, customer support and professional services personnel, payments to outside technology service providers, security services, and other tools.

Deferred Revenue

Deferred revenue consists of payments received in advance of revenue recognition from subscription, implementation and consulting services. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, contract duration, and invoice frequency. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as deferred revenue, which is a current liability on the accompanying consolidated balance sheets.

Revenue Recognition Policies for the three months ended September 30, 2020 and the three and nine months ended September 30, 2021

In accordance with ASC 606, revenue is recognized when a customer obtains the benefit of promised services, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those services. In determining the amount of revenue to be recognized, the Company performs the following steps: (i) identification of the contract with a customer; (ii) identification of the promised services in the contract and determination of whether the promised services are performance obligations, including whether they are distinct in the context of the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Disaggregation of Revenue

The Company derives the majority of its revenue from subscription fees paid for access to and usage of its SaaS solutions for a specified period of time, typically one year. In addition to subscription fees, contracts with customers may include implementation fees for launch assistance and training. Fixed subscription and implementation fees are billed in advance of the subscription term and are due in accordance with contract terms, which generally provide for payment within 30 days. The Company's contracts typically have a one-year term. The Company's contractual arrangements include performance, termination and cancellation provisions, but do not provide for refunds. Customers do not have the contractual right to take possession of the Company's software at any time.

Sales taxes collected from customers and remitted to government authorities are excluded from revenue.

The following table summarizes revenue disaggregation by product for the following periods (in thousands):

	For the Nine Months Ended September 30,
	2021		2020 ⁽¹⁾
Government	$	2,366	$	3,333
Non-government	11,690		6,455
	$	14,056	$	9,788

	For the Nine Months Ended September 30,
	2021		2020 ⁽¹⁾
United States	$	10,272	$	8,642
Canada	3,784		1,146
	$	14,056	$	9,788

(1) As noted above, prior periods have not been adjusted for the adoption of ASC 606 and are presented in accordance with historical accounting guidance in effect for those periods.

Software. Our software revenue is generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform, Ample, Viridian, and Trellis, our government regulatory platform, Leaf Data Systems, and the sale of business intelligence, data analytics and other software related services. Software contracts are generally quarterly or annual contracts paid monthly, quarterly, or annually in advance of service and cancellable upon 30 or 90 days’ notice, although we do have some multi-year commercial software contracts. Leaf Data Systems contracts are generally multi-year contracts payable annually or quarterly in advance of service. Commercial software and Leaf Data Systems contracts generally may only be terminated early for breach of contract as defined in the respective agreements. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term.

Consulting Services. Consulting services revenue is generated by providing solutions for operators in the pre-application of licensures and pre-operational phases of development. These services include application and business plan preparation as they seek licenses to be granted. Consulting projects completed during the pre-application phase generally solidify us as the software vendor of choice for subsequent operational phases once the operator is granted the license. As a result, our consulting revenue is driven as new emerging states pass legislation, and as our client-operators gain licenses. Accordingly, we expect our consulting services to continue to grow as more states emerge with legalization reforms.

Other Revenue. Our other revenue is derived primarily from point-of-sale hardware and other non-recurring revenue.

Contracts with Multiple Performance Obligations

Customers may elect to purchase a subscription to multiple modules, multiple modules with multiple service levels, or, for certain of the Company's solutions. We evaluate such contracts to determine whether the services to be provided are distinct and accordingly should be accounted for as separate performance obligations. If we determine that a contract has multiple performance obligations, the transaction price, which is the total price of the contract, is allocated to each performance obligation based on a relative standalone selling price method. We estimate standalone selling price based on observable prices in past transactions for which the product offering subject to the performance obligation has been sold separately, or by using a residual approach for consulting revenue, whereby we estimate the standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract. As the performance obligations are satisfied, revenue is recognized as discussed above in the product descriptions.

Transaction Price Allocated to Future Performance Obligation

ASC 606 provides certain practical expedients that limit the required disclosure of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied. As the Company typically enters into contracts with customers for a twelve-month subscription term, substantially all of its performance obligations that have not yet been satisfied as of September 30, 2021 are part of a contract that has an original expected duration of one year or less. For contracts with an original expected duration of greater than one year, for which the practical expedient does not apply, the aggregate transaction price allocated to the unsatisfied performance obligations was $4.2 million as of September 30, 2020, of which $2.0 million is expected to be recognized as revenue over the next twelve months.

Deferred Revenue

Deferred revenue represents the unearned portion of subscription, implementation, and consulting fees. Deferred revenue is recorded when cash payments are received in advance of performance. Deferred amounts are generally recognized within one year. Deferred revenue is included in the accompanying consolidated balance sheets under total current liabilities.

The following table summarizes deferred revenue activity for the nine months ended September 30, 2021 (in thousands):

	As of December 31, 2020			Net additions		Revenue recognized		As of September 30, 2021
Deferred revenue	$	844		5,970		(5,906	)	$	908

Of the $14.1 million of revenue recognized in the nine months ended September 30, 2021, $0.9 million was included in deferred revenue at December 31, 2020.

Costs to Obtain Contracts

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