1 Q1 false 0001755953 --12-31 2023 Akerna Corp. 1 The fair value of the acquisition date contingent consideration was reduced to $6.3 million during the three months ended September 30, 2022. In accordance with the Convertible Notes Amendment, the conversion price was lowered to $6.21 per share from $81.00 per share through October 4, 2022 (see Note 10). The 2019 Public Warrants are exercisable for 290,690 shares of Common Stock at $230.00 per share or a ratio of 20 warrants for one share of Common Stock. A total of 14,095,400 Pre-funded Warrants were issued and exercised in exchange for 704,770 shares of Common Stock. 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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 March 31, 2023

 

OR

 

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 May 12, 2023, there were 5,767,815 shares of the registrant’s common stock, par value $0.0001 per share, outstanding. 


 

 





INDEX

Page Number







PART I FINANCIAL INFORMATION
Item 1. 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 Stockholders Deficit (unaudited) 4

Condensed Consolidated Statements of Cash Flows (unaudited) 6

Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 35



PART II OTHER INFORMATION 
Item 1. Legal Proceedings 37
   Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3. Defaults Upon Senior Securities 38
Item 4. Mine Safety Disclosures 38
Item 5. Other Information 38
Item 6. Exhibits 39

SIGNATURES 40


i


AKERNA CORP.
 Condensed Consolidated Balance Sheets
  (unaudited)


 

March 31,

 


December 31,

 

 

2023

 


2022

 

Assets


 


 

 

Current assets  

 

 


 

 

Cash

$

881,639

 


$

877,755

 

Restricted cash

 

499,940

 


 

7,000,000

 

Accounts receivable, net

 

340,473

 


 

674,626

 

Prepaid expenses and other current assets

 

989,483

 


 

1,209,623

 

Assets held for sale



5,130,028

Total current assets

 

2,711,535

 


 

14,892,032

 

 

 

 

 


 

 

 

Fixed assets, net

 

40,443

 


 

48,879

 

Capitalized software, net

 

494,251

 


 

654,556

 

Intangible assets, net
2,041,667


2,164,722
Goodwill 
1,708,303


1,708,303
Total assets $ 6,996,199

$ 19,468,492








Liabilities and Stockholders’ Deficit

 

 

 


 

 

 

Current liabilities

 

 

 


 

 

 

Accounts payable, accrued expenses and other accrued liabilities 

$

3,804,896

 


$

4,426,419

 

Contingent consideration payable



2,283,806

Current portion of deferred revenue 

 

516,796

 


 

568,771

 

Current portion of long-term debt
6,885,543


13,200,000
Liabilities held for sale



2,246,222

Total current liabilities

 

11,207,235

 


 

22,725,218

 

 

 

 

 


 

 

 

Deferred revenue, noncurrent




161,802
Long-term debt, less current portion
1,576,457


1,407,000
Total liabilities
12,783,692


24,294,020








Commitments and contingencies (Note 8)

 

 


 

 

 

 






 

Stockholders’ deficit

 

 

 


 

 

 

Preferred stock, par value $0.0001; 5,000,000 shares authorized, 1 share special voting preferred stock issued and outstanding at March 31, 2023 and December 31, 2022

 

 


 

 

Special voting preferred stock, par value $0.0001; 1 share authorized, issued and outstanding as of March 31, 2023 and December 31, 2022, with $1 preference in liquidation; exchangeable shares, no par value, 285,032 and 285,672 shares issued and outstanding as of March 31, 2023 and December 31, 2022 respectively
2,180,495


2,185,391

Common stock, par value $0.0001; 150,000,000 shares authorized, 5,767,650 and 4,602,780 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

 

576

 


 

460

 

Additional paid-in capital

 

161,718,381

 


 

160,207,367

 

Accumulated other comprehensive income
353,529

347,100

Accumulated deficit

 

(170,040,474

)

 

(167,565,846

)

Total stockholders’ deficit


(5,787,493

)  



(4,825,528

)

Total liabilities and stockholders’ deficit  

$

6,996,199

 


$

19,468,492

 

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

1


AKERNA CORP.

 Condensed Consolidated Statements of Operations

(unaudited)

 

 


For the Three Months Ended

      


March 31,

 


2023

2022

Revenue







      Software

$ 2,596,762

$

3,802,752


      Consulting





427,009

      Other revenue


5,927


15,319

Total revenue


2,602,689


4,245,080

Cost of revenue


1,051,081


1,523,009

Gross profit


1,551,608


2,722,071

Operating expenses








      Product development


845,478


1,715,747
      Sales and marketing
781,491


2,051,133

      General and administrative


1,561,901

1,922,331
      Depreciation and amortization
291,796


1,481,444
      Impairment of long-lived assets



15,447,101

Total operating expenses


3,480,666


22,617,756

Loss from operations


(1,929,058 )

(19,895,685 )

Other (expense) income








      Interest (expense) income, net


(487,316 )

(741 )
      Change in fair value of convertible notes
(155,457 )

(1,433,000 )
      Change in fair value of derivative liability 



18,051

Total other (expense) income


(642,773 )

(1,415,690 )








Net loss from continuing operations before income taxes 


(2,571,831 )

(21,311,375 )
 Income tax benefit on continuing operations



99,444
Net loss from continuing operations
(2,571,831 )

(21,211,931 )
Net gain (loss) from discontinued operations
97,203

(740,962 )

Net loss

$ (2,474,628 )
$ (21,952,893 )

 








Basic and diluted weighted average common shares outstanding


5,354,366


1,580,289
Basic and diluted loss per common share from continuing operations $ (0.48 )
$ (13.42 )
Basic and diluted earnings (loss) per common share from discontinued operations $ 0.02

$ (0.47 )

Basic and diluted loss per common share

$ (0.46 )
$ (13.89 )

 

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


2


AKERNA CORP.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited) 




Three Months Ended March 31,


2023


2022

Net loss $ (2,474,628 )
$ (21,952,893 )
Other comprehensive (loss) income






Foreign currency translation


20,429


(33,800 )
Unrealized (loss) gain on convertible notes
(14,000 )

101,000
Comprehensive loss $ (2,468,199 )
$ (21,885,693 )

 

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

 

3


AKERNA CORP.

Condensed Consolidated Statements of Changes in Stockholders Deficit

For the Three Months Ended March 31, 2023

(unaudited)


    


Special Voting Preferred Stock

Common 

 


Additional
Paid-In



Accumulated Other Comprehensive

 


Accumulated

 


Total Stockholders

 

 


Share

Amount

Shares

 


Amount

 


Capital



Income

 


Deficit

 


 Deficit

 

 









 

 


 

 


 





 


 

 


 

 

Balance – January 1, 2023 
285,672

$ 2,185,391


4,602,780

$ 460

$ 160,207,367

$ 347,100

$ (167,565,846 )

$ (4,825,528 )
Conversion of exchangeable shares to common stock
(640 )

(4,896 )

32





4,896









Settlement of convertible notes






1,164,251


116


1,396,985








1,397,101
Stock-based compensation












109,133








109,133
Issuance of common stock upon vesting of restricted stock units






587















Foreign currency translation adjustments















20,429





20,429
Unrealized loss on convertible notes















(14,000 )




(14,000 )
Net loss


















(2,474,628 )

(2,474,628 )
Balance – March 31, 2023
285,032

$ 2,180,495


5,767,650

$ 576

$ 161,718,381

$ 353,529

$ (170,040,474 )
$ (5,787,493 )

 

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


4



AKERNA CORP.

 Condensed Consolidated Statements of Changes in Stockholders Equity

For the Three Months Ended March 31, 2022

(unaudited)


    


Special Voting Preferred Stock

Common 

 


Additional
Paid-In



Accumulated Other Comprehensive

 


Accumulated

 


Total Stockholders 

 

 


Share

Amount

Shares

 


Amount

 


Capital



Income

 


Deficit

 


Equity

 

 









 

 


 

 


 





 


 

 


 

 

Balance – January 1, 2022 


309,286

$
2,366,038



1,550,094

 


$

155

 


$

146,030,203



$ 61,523

$

(88,508,236

)

$

59,949,683

 

Conversion of exchangeable shares to common stock


(2,434 )

(18,620 )

122





18,620









Settlement of convertible notes






169,843



17



3,299,983









3,300,000
Shares withheld for withholding taxes






(222 )




(5,615 )








(5,615 )
Shares returned in connection with acquisition






(13,988 )

(1 )

(939,999 )







(940,000 )
Stock-based compensation












316,855









316,855
Issuance of common stock upon vesting of restricted stock units






2,174
















Liabilities with shares






732






45,066









45,066
Foreign currency translation adjustments

















(33,800
)




(33,800 )
Unrealized gain on convertible notes

















101,000




101,000
Net loss




















(21,952,893 )

(21,952,893 )
Balance – March 31, 2022

306,852

$ 2,347,418


1,708,755


$
171

$ 148,765,113

$ 128,723
$ (110,461,129
)
$ 40,780,296

 

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


5


AKERNA CORP.

Condensed Consolidated Statements of Cash Flows

(unaudited) 


For the Three Months Ended March 31, 

 

2023

 


2022

 

Cash flows from operating activities

 

 


 

 

Net loss $ (2,474,628 )
$ (21,952,893 )

Adjustments to reconcile net loss to net cash used in operating activities:


 

 


 

 

 

Gain on sale of discontinued operations, net
(212,601 )


Credit loss expense


62,524


 

174,794

 

Stock-based compensation expense


109,133

 


 

304,237

 

Impairment of long-lived assets





15,478,521
Amortization of deferred contract cost
24,014


113,251
Depreciation and amortization
316,303


1,993,391
Foreign currency (gain) loss 
(26,920 )

5,596
Change in fair value of convertible notes

155,457

1,433,000
Change in fair value of derivative liability


(18,051 )

Changes in operating assets and liabilities:



 


 



       Accounts receivable, net


(20,397

)

 

(1,335,939

)

       Prepaid expenses and other current assets


195,229


 

178,869

       Accounts payable, accrued expenses and other current liabilities
(409,119 )

445,969
       Deferred income tax liabilities


(110,107 )

       Deferred revenue


(256,630

)

 

(296,032

)

Net cash used in operating activities


(2,537,635

)

 

(3,585,394

)

Cash flows from investing activities


 

 


 

 

 

Developed software additions



 

(647,022

)
Proceeds from sale of discontinued operations
600,000



Net cash provided by (used in) investing activities


600,000


 

(647,022

)

Cash flows from financing activities


 

 


 

 

 

Value of shares withheld related to tax withholdings


(49 )

(5,615 )
Principal payments of convertible notes

(4,917,356 )

Net cash used in financing activities


(4,917,405

)

 

(5,615

)

Effect of exchange rate changes on cash and restricted cash


53,364


 

(8,544

)

Net change in cash and restricted cash


(6,801,676

)

 

(4,246,575

)
Cash and restricted cash of continuing operations - beginning of period 
7,877,755


13,087,627
Cash and restricted cash of discontinued operations - beginning of period
305,500


1,354,899

Cash and restricted cash - beginning of period


8,183,255

 


 

14,442,526

 

Cash and restricted cash of continuing operations - end of period


1,381,579


9,498,205
Cash and restricted cash of discontinued operations - end of period



697,746

Cash and restricted cash - end of period

$

1,381,579

 


$

10,195,951

 

Cash paid for interest $ 787,187

$
Cash paid for income taxes, net of refunds received $

$ 5,210
Supplemental disclosures of non-cash investing and financing activities: 






Settlement of convertible notes in common stock $ 1,397,101

$ 3,300,000
Conversion of exchangeable shares to common stock
4,896


18,620
Settlement of other liabilities in common stock



45,065
Stock-based compensation capitalized as software development



12,618
Capitalized software additions included in accounts payable



1,114,108
Fixed asset additions included in accounts payable



24,614
Termination of contingent consideration obligation in connection with sale of discontinued operations
2,283,806



Shares of common stock returned in connection with acquisition 



940,000
Acquisition-related working capital adjustment recorded in other current assets 400,000
Reduction to accrued expenses from an acquisition-related working capital settlement



160,000

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

6


AKERNA CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 – Description of Business

 

Akerna Corp., herein referred to as we, us, our, the Company or Akerna was formed upon completion of the mergers between MTech Acquisition Corp. (“MTech”) and MJ Freeway, LLC (“MJF”) on June 17, 2019 as contemplated by the Merger Agreement dated October 10, 2018, as amended (the “Mergers”). Akerna provides software as a service (“SaaS”) solutions within the cannabis industry that enable regulatory compliance and inventory management through our wholly-owned subsidiaries MJF, Trellis Solutions, Inc., or Trellis, Ample Organics, Inc., or Ample, solo sciences, inc., or Solo and Viridian Sciences, Inc., or Viridian. Our proprietary 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 also 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 platforms, MJ Platform®, Trellis®, Ample and Viridian to state-licensed businesses, and our regulatory software platform, Leaf Data Systems®, to state government regulatory agencies. Our solutions are considered non-enterprise offerings (“Non-Enterprise”) that meet the needs of our small and medium business (“SMB”) and government regulatory agency customers and our Viridian  solutions are considered enterprise offerings (“Enterprise”). 

 

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. 


Strategic Shift in Business Strategy


During the fourth quarter of 2022, we committed to a number of significant actions described below that collectively represent a strategic shift in our business strategy for 2023 and beyond.


Exiting the Enterprise Software Business


The development of our Enterprise software business, which began with the acquisitions of Viridian and The NAV People Inc. d.b.a. 365 Cannabis (“365 Cannabis”) in 2021, did not achieve a sustainable scale in a timely manner consistent with our original plans. Accordingly, we committed to an effort to market this business unit and on January 11, 2023, we completed the sale of 365 Cannabis to 365 Holdco - LLC (the “Buyers”) pursuant to a stock purchase agreement (the “365 SPA”) for (i) cash in the amount of $0.5 million and the (ii) the termination and release of our obligation to the Buyers for contingent consideration in connection with our original acquisition of 365 Cannabis from the Buyers in 2021 (the “Earn-out Obligation”). In accordance with the 365 SPA, we and the Buyers agreed that the value of the Earn-out Obligation was $2.3 million for purposes of the sale of 365 Cannabis and was reflected as Contingent consideration payable on our condensed consolidated balance sheets as of December 31, 2022.


While we explored similar sale options for Viridian, we were unable to commit to any definitive transaction. Accordingly, we informed Viridians customers that we do not plan to continue software and support services beyond the date of existing contracts, all of which expire during the first half of 2023. With the sale of 365 Cannabis and our commitment to wind down the operations of Viridian, we have effectively exited the Enterprise software business. Accordingly, we have suspended efforts to seek any new revenue generating opportunities and will only service the existing customers of Viridian in connection with our contractual commitments. 


Disposal of Non-Core SMB Software Products and Brands


In addition to the our exit from the Enterprise software business, we initiated efforts to explore a sales process for the non-core components and brands of our SMB/Non-Enterprise business unit, including Trellis, a cultivation and compliance software platform, Solo, a seed-to-sale tagging and tracking software platform and Last Call Analytics (“LCA”), a retail analytics platform. On January 31, 2023, we completed the sale of LCA for cash in the amount of $0.1 million. While we pursued sale opportunities for Trellis and Solo, we were ultimately unable to commit to any definitive transactions. Accordingly, we have communicated with the remaining customers of those businesses that we will discontinue software service and support upon the expiration of existing contracts during the first half of 2023. Similar to Viridian, as discussed above, we have suspended efforts to seek any new revenue generating opportunities and will only service the existing customers of Solo and Trellis in connection with our contractual commitments. 




Exit Strategy


With the completion of the sales of 365 Cannabis and LCA and the commitment to effectively discontinue and wind down the operations and service associated with Viridian, Solo and Trellis, our remaining core SMB and governmental business unit is comprised of MJF and Ample. Concurrent with the actions described above, we entered into letters of intent with two unrelated parties in the fourth quarter of 2022 to (i) explore the sale of our remaining core SMB and governmental business unit and (ii) realize the potential value of our publicly-held holding company through a merger or similar transaction. Collectively, pursuit of these transactions reflects our intention to fully exit the SaaS industry.


On January 27, 2023, we entered into a securities purchase agreement (“MJF-Ample SPA”) with POSaBIT Systems Corp (“POSaBIT”) to sell MJF and Ample for $4.0 million in cash. Subsequently, we received a superior offer from Alleaves Inc. (“Alleaves”), as described below, which was presented to POSaBIT for an opportunity to match or exceed Alleaves offer in accordance with the MJF-Ample SPA. POSaBIT ultimately declined to present a counter-offer and on April 5, 2023, we terminated the MJF-Ample SPA. As a result of the termination, Akerna owes POSaBIT a termination fee of $140,000 and payment of up to $60,000 in reasonable fees and expenses. 


On April 28, 2023, we entered into a securities purchase agreement (the “SPA”) with MJ Freeway Acquisition Co (“MJA”), a subsidiary of Alleaves. Upon the terms and subject to the satisfaction of the conditions described in the SPA, including approval of the transaction by Akerna’s stockholders, Akerna will sell MJF and Ample to MJA (the “Sale Transaction”) for a purchase price of $5.0 million, consisting of $4.0 million in cash at closing and a loan by MJA to Akerna in the principal amount of $1.0 million evidenced by a note and security documents (as described in detail below) with such note to be deemed paid in full upon closing. The purchase price is subject to adjustment at closing of the Sale Transaction attributable to variances from target working capital (as set forth in the SPA) and further adjustment post-closing upon delivery of a post-closing statement by MJA within 75 days after the closing subject to a $0.5 million cap on any post-closing working capital adjustments. The closing of the Sale Transaction is subject to customary closing conditions as well as the required approval of the stockholders of Akerna and the concurrent closing of the merger transaction, as described below. The obligation of MJA to close on the Sale Transaction is also subject to satisfaction of certain additional conditions regarding employee retention and contractual matters associated with MJFs and Amples customers, among others. Under the SPA, Akerna and MJA have agreed to provide limited indemnification to each other with respect to certain tax matters, in each case capped at a maximum amount of $0.5 million. We or MJA may terminate the SPA upon mutual consent and either party may terminate the SPA unilaterally under certain conditions as described in the SPA. In the event that MJA or Akerna terminates the SPA pursuant to certain of the sections set forth above, Akerna will be required to pay MJA a termination fee of $290,000 and reimburse MJA for its reasonable fees and expenses up to $60,000.


On January 27, 2023, we entered into an agreement and plan of merger (the “Merger Agreement”) with Gryphon Digital Mining, Inc. (“Gryphon”) and Akerna Merger Co. (“Akerna Merger”). Upon the terms and subject to the satisfaction of the conditions provided in the Merger Agreement, including the approval of the transaction by Akerna’s and Gryphon’s stockholders, Akerna Merger will be merged with and into Gryphon (the “Merger”), with Gryphon surviving the Merger as a wholly-owned subsidiary of Akerna. Following the closing of the Merger, the former Gryphon and Akerna stockholders immediately before the Merger are expected to own approximately 92.5 percent and 7.5 percent, respectively, of the outstanding capital stock on a fully diluted basis. Upon completion of the Merger, Akerna will change its name to Gryphon Digital Mining, Inc. The closing of the Merger is subject to customary closing conditions including the required approval of the stockholders of Akerna and Gryphon, the approval of the Nasdaq Capital Market (the “Nasdaq Market”) of the continued listing of Gryphon after the closing of the Merger and the simultaneous closing of the Sale Transaction, among others. We and Gryphon may terminate the Merger upon mutual consent and either party may terminate the Merger unilaterally under certain conditions. In the event either party terminates the Merger pursuant to certain conditions, we will be required to pay Gryphon a termination fee of $275,000 less any reimbursed expenses. The Merger is expected to be treated by Akerna as a reverse merger, or a change of control, whereby the stockholders of Gryphon will have majority ownership and control of Akerna after the transaction is complete.


Concurrent with the signing and in support of the Sale Transaction and the Merger, we and each of the holders of the 2021 Senior Secured Convertible Notes (the “Senior Convertible Notes”) entered into exchange agreements (the “Exchange Agreements”) whereby the holders would ultimately convert the principal amounts of each of their note holdings to a level that would represent 19.9 percent of the outstanding shares of our common stock, $0.0001 par value (“Common Stock”) prior to the closing of the Sale Transaction and the Merger. Immediately prior to the stockholder vote required for the closing of those transaction, the remaining Senior Convertible Notes outstanding would be converted into a special class of exchangeable preferred stock to facilitate the required stockholder vote and then be converted into shares of our Common Stock subject to the Merger. For a limited period, the conversion price of the Senior Convertible Notes was lowered to $1.20 per share from $4.75 per share. We anticipate scheduling a meeting of stockholders during the third quarter of 2023 to approve the Sale Transaction and the Merger and we expect these transactions to close shortly thereafter.

7


Secured Note and Ancillary Agreements


On May 3, 2023, we received a loan in the amount of $1.0 million from MJA in connection with the Sale Transaction. Accordingly, we and MJA entered into a $1.0 million secured promissory note (the “MJA Note”). The MJA Note bears simple interest at the rate of ten percent (10%) per annum from the date of issuance until repayment of the MJA Note which will be due and payable on April 28, 2024, or, upon completion of the Sale Transaction, in which case the MJA Note shall be deemed paid in full. Akerna’s obligations under the MJA Note have been secured pursuant to a Security and Pledge Agreement (the “Security Agreement”). The Security Agreement creates a security interest in all of the personal property of Akerna and certain of its subsidiaries. In addition, certain subsidiaries of Akerna entered into a guaranty agreement with MJA (the “Guaranty Agreement”) under which they will guarantee the obligations of the Company under the Security Agreement and the MJA Note.


In connection to the MJA Note, the Security Agreement, and the Guaranty Agreement (collectively, “New Note Transaction Documents”) and solely to permit Akerna to issue the MJA Note and execute and perform its obligations under the New Note Transaction Documents and a Subordination Agreement (as defined below), each of the holders (each, a “Holder”) of the Senior Convertible Notes issued pursuant to a Securities Purchase Agreement dated October 5, 2021 (“2021 SPA”) agreed to waive the prohibition on issuing indebtedness other than Permitted Indebtedness (as defined in the Senior Convertible Notes) pursuant to Section 14(b) of the Senior Convertible Notes and the prohibition permitting Liens (as defined in the Senior Convertible Notes) to exist other than Permitted Liens (as defined in the Senior Convertible Notes) pursuant to Section 14(c) of the Senior Convertible Notes and Section 5(g)(v) of the 2021 SPA (the “Waiver”). In connection to the New Note Transaction Documents, MJA, Akerna, and HT Investments MA LLC (the “Senior Agent”, together with the Holders, the “Senior Creditors”), as collateral agent under the 2021 SPA, each on behalf of the respective Holders, entered into a subordination and intercreditor agreement (the “Subordination Agreement”), whereby the parties agreed that the payment of any and all obligations, liabilities and indebtedness of every nature of Akerna, its applicable subsidiary and/or affiliates from time to time owed to MJA under the Subordinated Debt Documents (as defined in the Subordination Agreement) will be subordinate and subject in right and time of payment, to the prior payment in full of all obligations under the Senior Convertible Notes.


Financial Reporting and Classification


As a result of the corporate actions described above, 365 Cannabis and LCA (together, the “Discontinued Group”) met the criteria to be considered “held for sale” as that term is defined in accounting principles generally accepted in the United States (“GAAP”). Accordingly. the assets and liabilities of these entities are classified and reflected on our condensed consolidated balance sheets as held for sale as of December 31, 2022 and their results of operations are classified as discontinued operations in the condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022, respectively. Certain financial disclosures including major components of the assets and liabilities and results of operations of the Discontinued Group are provided in Note 12. Our core SMB and governmental business unit (MJF and Ample), the businesses for which we have committed to terminate operations (Viridian, Solo and Trellis) and our publicly-held parent holding company (Akerna Corp.) comprise our continuing operations. Collectively, these entities are presented as  continuing operations for all periods presented herein and until such time that stockholder approval is received for the Sale Transaction and the Merger.

8



Note 2  Basis of Presentation and Summary of Significant Accounting Policies

 

Going Concern and Managements Liquidity Plans


In accordance with the Financial Accounting Standards Board’s (“FASB”) standard on going concern, Accounting Standard Update (“ASU”) No. 2014-15Disclosure of Uncertainties about an Entitys Ability to Continue as Going Concern (“ASU 2014-15”), we assess going concern uncertainty in our consolidated financial statements to determine if we have sufficient cash, cash equivalents and working capital on hand and any available borrowings on loans, to operate for a period of at least one year from the date the condensed consolidated financial statements are issued, which is defined as the “look-forward period” in ASU 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions regarding implementing curtailments or delays in the nature and timing of programs and expenditures to the extent we deem probable that such implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU 2014-15.


The accompanying consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. However, since our inception in 2019 we have incurred recurring losses from operations, used cash from operating activities, and relied on capital raising transactions to continue ongoing operations. As of March 31, 2022, we had a working capital deficit of $8.5 million with $0.9 million in unrestricted cash available to fund future operations. We anticipate continuing to generate losses from operations and using cash from operating activities for the foreseeable future, although at lower than historical levels as a result of restructuring actions taken during the second quarter of 2022 and the curtailment of activities associated with our discontinued operations as well as those business that we plan to terminate. Furthermore, in March 22 and March 23, 2023, respectively, we received two notices (the “Notices”) from The Nasdaq Stock Market LLC (the “Nasdaq”) indicating that (i) the bid price of the Company’s Common Stock is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share (the “Bid Price Notice”) and (ii) the Company’s stockholders’ equity is below the minimum listing standard requirement of $2.5 million (the “Stockholder Equity Notice”) for continued listing on the Nasdaq. The Notices have no immediate effect on the continued listing status of our Common Stock on the Nasdaq, and, therefore, our listing remains fully effective. We are provided a compliance period of 180 calendar days from the date of the Bid Price Notice, or until September 18, 2023, to regain compliance with the minimum closing bid requirement. Regarding the Stockholders Equity Notice, we were provided a 45 day period in which to submit a plan to regain compliance. On May 8, 2023, we submitted the required compliance plan to the listings staff of the Nasdaq which, if accepted, Nasdaq may grant an extension of up to 180 calendar days from the date of the Stockholder Equity Notice, or September 19, 2023, to evidence compliance. We are currently waiting on a response from the Nasdaq regarding the acceptance of the compliance plan. Collectively, these factors raise substantial doubt regarding our ability to continue as a going concern for the twelve months from the date our consolidated financial statements have been issued.


As described in Note 1, we have committed to the Sale Transaction to complete our intended exit from the SaaS industry and to the Merger as the most favorable strategic alternative for our stockholders. There can be no assurance that we will be successful in executing and completing the Sale Transaction and the Merger and obtaining sufficient funding, if necessary, on terms acceptable to us to fund continuing operations through the anticipated closing of the aforementioned transactions, if at all. Our ability to continue as a going concern is dependent upon our ability to successfully execute the aforementioned transactions. Despite the comprehensive scope of our collective plans, the inherent risks associated with their successful execution are not sufficient to overcome substantial doubt about our ability to continue as a going concern for one year from the date of issuance of our consolidated financial statements. Accordingly, if we are unable to execute our plans within the timeframe described above, we may have to reduce or otherwise curtail our continuing operations which could significantly and adversely affect our results of operations or we may determine to dissolve and liquidate our assets. If we fail to meet the financial covenants of the Senior Convertible Notes and cannot obtain a waiver from such provisions or otherwise come to an agreement with the Holders of the Senior Convertible Notes, such Holders may declare a default on the debt which could subject our assets to seizure and sale, negatively impacting our business. 


The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.


9



Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and with the instructions to the Quarterly Report on Form 10-Q and Article 8 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all of the information normally required by GAAP or Securities and Exchange Commission rules and regulations for complete financial statements. In management’s opinion, these condensed consolidated financial statements include all adjustments, consisting of normal recurring items, considered necessary for the fair presentation of the results of operations for the interim periods presented. The operating results for three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023. 


The condensed consolidated balance sheet as of December 31, 2022, 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, 2022, which were included in our report on Form 10-K filed on March 20, 2023.

 

Principles of Consolidation

 

Our accompanying consolidated financial statements include the accounts of Akerna and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 


Use of Estimates


The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the consolidated financial statements and accompanying notes thereto. Our most significant estimates and assumptions are related to the valuation of acquisition-related assets and liabilities, capitalization of internal costs associated with software development, fair value measurements, credit loss reserves, impairment assessments, loss contingencies, valuation allowance associated with deferred tax assets, stock based compensation expense, and useful lives of long-lived intangible assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates. 


Accounts Receivable, Net

 

We maintain an allowance for credit losses equal to the estimated uncollectible amounts based on historical information, current conditions, and reasonable and supportable forecasts. Receivables are written-off and charged against the recorded allowance when we have exhausted collection efforts without success. The allowance for credit losses was $0.3 million and $0.4 million as of March 31, 2023 and December 31, 2022, respectively.


Concentrations of Credit Risk


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


During the three months ended March 31, 2023 and 2022, two government clients accounted for 26 percent and 28 percent of total revenues, respectively. As of March 31, 2023, and December 31, 2022 two government clients accounted for less than one percent and 33 percent, respectively of net accounts receivable. 


10


 

Warrants


We evaluate warrants that we may issue from time to time under a two-step process provided in GAAP. The first step is intended to distinguish liabilities from equity. Warrants that could require cash settlement are generally classified as liabilities. For warrants that are considered outside of the scope of liability classification, a second step evaluates warrants as either a derivative subject to derivative accounting and disclosures or as equity instruments based upon the specific terms of the underlying warrant agreement and certain other factors associated with the our capital structure. Warrants that are indexed to the Companys Common Stock while we meet certain other conditions with respect to its capital structure, including the ability to satisfy the warrant settlement obligations with a sufficient number of registered shares, do not qualify as derivatives and are classified as components of equity. Certain of the warrants sold by MTech in its initial public offering that were converted to Akerna warrants in connection with the Mergers (the “Private Warrants”) are not indexed to our common stock in the manner contemplated as described herein. As a result, the Private Warrants are precluded from equity classification and are recorded as derivative liabilities. At the end of each reporting period, changes in fair value during the period are recognized within the condensed consolidated statements of operations. We will continue to adjust this derivative liability for changes in the fair value until the earlier of (a) the exercise or expiration of the Private Warrants or (b) the redemption of the Private Warrants, at which time they will be reclassified to Additional paid-in capital. As of March 31, 2023, all of our other outstanding warrants, including certain other MTech warrants that were converted to Akerna warrants upon our formation (the “2019 Public Warrants”), are classified within stockholders’ equity.


Segment Reporting

 

We operate our 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 (CODM), our Chief Executive Officer, in deciding how to allocate resources and assess performance. Our CODM 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:

 


As of March 31, 2023


As of December 31, 2022

Long-lived assets:






United States $ 40,442

$ 48,880
Canada  
4,244,222


4,527,581
Total $ 4,284,664

$ 4,576,461

 


Adoption of Recent Accounting Pronouncements


The FASB issued ASU No. 2016-13Measurement of Credit Losses on Financial Instruments (ASU 2016-13) which introduced a new model for recognizing credit losses on financial instruments based on estimated current expected credit losses, or CECL. ASU 2016-13 requires an entity to estimate CECL on trade receivables at inception, based on historical information, current conditions, and reasonable and supportable forecasts. We adopted ASU 2016-13, and subsequent amendments on January 1, 2023. The impact of the adoption of ASU 2016-13 on our consolidated financial statements was not material.


11


 

Subsequent Events


Management has evaluated all of our activities through the issuance date of our condensed consolidated financial statements and has concluded that, with the exception of (i) the termination of the MJF-Ample SPA with POSaBIT on April 5, 2023, (ii) the entry into the SPA with MJA and the receipt of $1.0 million on May 3, 2023 in connection with the MJA Note, each as disclosed in Note 1, no other subsequent events have occurred that would require recognition in our condensed consolidated financial statements or disclosure in the notes thereto. 


Note 3  – Revenue and Contracts with Customers

 

Disaggregation of Revenue

We derive the majority of our revenue from subscription fees paid for access to and usage of our SaaS solutions for a specified period of time, typically one to three years. 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. Our 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 our software at any time. The following tables summarizes our revenue disaggregation by customer type and geographic region for the following periods:



Three Months Ended March 31,



2023


2022

Government

$

679,569

 


$

1,168,330


Non-government

1,923,120

 


3,076,750


 

$

2,602,689

 


$

4,245,080




Three Months Ended March 31,



2023


2022

United States

$

1,978,079

 


$

3,328,636


Canada

624,610

 


916,444


 

$

2,602,689

 


$

4,245,080


 

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 Companys 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. As the performance obligations are satisfied, revenue is recognized as discussed above in the product descriptions.


Transaction Price Allocated to Future Performance Obligation


GAAP 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 many of the contracts the Company has entered into with customers are for a twelve-month subscription term, a significant portion of performance obligations that have not yet been satisfied as of March 31, 2023 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 $2.8 million as of March 31, 2023, of which $2.4 million is expected to be recognized as revenue over the next twelve months.  


12


 

Deferred Revenue

 

Deferred revenue represents the unearned portion of subscription and implementation fees. Deferred revenue is recorded when cash payments are received in advance of performance. Deferred amounts are generally recognized within one to three years. Deferred revenue is included in the accompanying consolidated balance sheets under current liabilities, net of any long-term portion that is included in noncurrent liabilities. The following table summarizes deferred revenue activity for the three months ended March 31, 2023:

 

 

As of
December 31, 2022

 


Net additions

 


Revenue recognized

 


As of
March 31, 2023

Deferred revenue

$

730,573

 


2,382,985

 


(2,596,762

)

$

516,796

 

Of the $2.6 million of revenue recognized in the three months ended March 31, 2023, $0.4 million was included in deferred revenue at December 31, 2022.

 

Costs to Obtain Contracts


We capitalize sales commissions that are directly related to obtaining customer contracts and that would not have been incurred if the contract had not been obtained. These costs are included in the accompanying consolidated balance sheets and are classified as a component of Prepaid expenses and other current assets. Deferred contract costs are amortized to sales and marketing expense over the expected period of benefit, which we have determined to be one to three years based on the estimated customer relationship period. The following table summarizes deferred contract cost activity for the three months ended March 31, 2023:


 

As of
December 31, 2022

 


Additions

 


Amortized costs 

 


As of
March 31, 2023

Deferred contract costs

$

36,465

 


2,820

 


(24,014)

$

15,271

 

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Note 4   Intangible Assets, net and Goodwill


Finite-lived Intangible Assets

All of our finite-lived intangible assets, including capitalized software, as of March 31, 2023 and December 31, 2022 are attributable to Ample. We did not capitalize any software development costs during the three months ended March 31, 2023; however, we capitalized $1.5 million during the three months ended March 31, 2022.

We performed a two step impairment test for the asset groups that had indicators of impairment during the three months ended March 31, 2023 and 2022 and ultimately did not record any impairments during either of these periods.

Goodwill

Non-Enterprise Reporting Unit  

For the three months ended March 31, 2023, no impairment to goodwill was recorded for our Non-Enterprise business unit as the fair value exceeded the carrying value as of March 31, 2023. All of the goodwill as of March 31, 2023 is attributable to Ample. For the three months ended March 31, 2022, due primarily to declines in market valuation from December 31, 2021, we recorded an impairment charge of $15.5 million of which $8.0 million was attributable to Ample, $6.3 million was attributable to Solo and $1.2 million was attributable to Trellis. The remaining goodwill associated with Solo and Trellis was fully impaired in the second half of 2022.

Enterprise Reporting Unit

For the three months ended March 31, 2023 and 2022, no impairments to goodwill were recorded for our Enterprise business unit as there was no goodwill asset present as of March 31, 2023 and the fair value exceeded the carrying value as of March 31, 2022. All of the goodwill as of March 31, 2022 was attributable to Viridian which was fully impaired in the second half of 2022.

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Note 5 – Long Term Debt

 

Long-term debt consisted of the following as of the dates presented:


March 31, 2023


December 31, 2022

Fair value of debt
8,462,000


14,607,000
Less: Current portion
(6,885,543 )

(13,200,000 )
Noncurrent portion $ 1,576,457

$ 1,407,000

 


Senior Convertible Notes 

In October 2021we entered into the 2021 SPA resulting in the issuance of the Senior Convertible Notes to two institutional investors in a private placement transaction. The Senior Convertible Notes were issued for an aggregate principal amount of $20.0 million for $18.0 million reflecting an original issue discount of 10 percent or $2.0 million. The net proceeds from the issuance of the Senior Convertible Notes were used to payoff and retire convertible notes that were issued in 2020 and fund acquisitions and continued investment in our technology infrastructure. The Senior Convertible Notes rank senior to all of our other and future indebtedness. The Senior Convertible Notes mature on October 4, 2024 and can be repaid in shares of Common Stock or cash. The Senior Convertible Notes are convertible into shares of Common Stock of Akerna at a conversion price of $4.75 per share effective October 4, 2022 which represents an adjustment, as required by the 2021 SPA, from $6.21 per share as a result of the offering of convertible preferred stock on that date. The Senior Convertible Notes are to be repaid in monthly installments.


In connection with the 2021 SPA and the Senior Convertible Notes, we and certain of our subsidiaries entered into an amended Security and Pledge Agreement (the “Security and Pledge Agreement”) with the lead investor, in its capacity as collateral agent (in such capacity, the “Collateral Agent”) for all holders of the Senior Convertible Notes. The Security and Pledge Agreement creates a first priority security interest in all of the personal property of the Company and certain of its subsidiaries of every kind and description, tangible or intangible, whether currently owned and existing or created or acquired in the future (the “Collateral”).


Upon the occurrence of an “Event of Default” under the Security and Pledge Agreement, the Collateral Agent will have certain rights under the Security and Pledge Agreement including taking control of the Collateral and, in certain circumstances, selling the Collateral to cover obligations owed to the holders of the Senior Convertible Notes pursuant to its terms. An “Event of Default” under the Security and Pledge Agreement means (i) any defined event of default under any one or more of the transaction documents (including the Senior Convertible Notes), in each instance, after giving effect to any notice, grace, or cure periods provided for in the applicable document, (ii) the failure by us to pay any amounts when due under the Senior Convertible Notes or any other transaction document, or (iii) the breach of any representation, warranty or covenant by the Company under the Security and Pledge Agreement.  


In connection with the occurrence of an event of default, the holders of the Senior Convertible Notes will be entitled to convert all or any portion of the Senior Convertible Notes at an alternate conversion price equal to the lower of (i) the conversion price then in effect, or (ii) 80% of the lower of (x) the volume-weighted average price (“VWAP”) of the Common Stock as of the trading day immediately preceding the applicable date of determination, or (y) the quotient of (A) the sum of the VWAP of Common Stock for each of the two trading days with the lowest VWAP of the Common Stock during the ten consecutive trading day period ending and including the trading day immediately prior to the applicable date of determination, divided by (B) two, but not less than $10.80 per share.


15


In connection with the Exchange Agreements that were entered into in January 2023, the conversion price of the Senior Convertible Notes was lowered to $1.20 per share from $4.75 per share for a limited period. During the three months ended March 31, 2023,  the holders of the Senior Convertible Notes converted a total of $1.4 million of principal for 1,164,251 shares of Common Stock at the lowered price of $1.20 per share.

Method of Accounting and Activity During the Periods

Upon the date that they were issued, we made an irrevocable election to apply the fair value option to account for the Senior Convertible Notes. Disclosures, including the assumptions used to determine the fair value of the Senior Convertible Notes, are provided in Note 10. 

During the three months ended March 31, 2023, we made $6.3 million in principal payments on the Senior Convertible Notes, of which $4.9 million was settled in cash and the remaining $1.4 million was settled in Common Stock. During the three months ended March 31, 2023, the fair value of the Senior Convertible Notes increased by $0.2 million. Of the adjustment, an increase of less than $0.1 million resulted from instrument-specific credit risk and was recognized as other comprehensive loss and accumulated in equity and an increase of $0.2 million was recognized in our consolidated statement of operations as a change in fair value of convertible notes. As of March 31, 2023, the fair value of the Senior Convertible Notes on our consolidated balance sheet was $8.5 million. During the three months ended March 31, 2022, we made $3.3 million in principal payments on the Senior Convertible Notes, all of which was settled in Common Stock. During the three months ended March 31, 2022, the fair value of the Senior Convertible Notes increased by $1.3 million. Of the adjustment, a decrease of $0.1 million resulted from instrument-specific credit risk and was recognized as other comprehensive income and accumulated in equity and an increase of $1.4 million was recognized in our consolidated statement of operations as a change in fair value of convertible notes.  

 

Note 6  Income Taxes

 

Our effective tax rate was 0.00% and 0.45% for the three months ended March 31, 2023 and 2022, respectively. Differences between the statutory rate and our effective tax rate resulted from changes in valuation allowance and permanent differences for tax purposes in the treatment of certain nondeductible expenses. Our effective tax rate was impacted by indefinite-lived deferred tax liabilities in the 2022 period, resulting primarily from the acquisition of 365 Cannabis in 2021, which cannot be considered as a source of future taxable income available to utilize recorded deferred tax assets based on the Companys scheduling and the 80% limit on the utilization of net operating loss carry forwards under current U.S. tax law. While there were none in the 2023 period, we paid nominal amounts for income taxes, net of refunds received, in certain state and national jurisdictions during the three months ended March 31, 2022.


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Note 7  Supplemental Balance Sheet Disclosures

 

Prepaid expenses and other current assets consisted of the following as of the dates presented: 

 


March 31,


December 31,


 2023
 
 2022

Software and technology

$
242,485
 
$ 168,792
Professional services, dues and subscriptions   41,379  
  183,614
Insurance   103,039  
  224,785
Deferred contract costs    15,271  
  36,465
Unbilled receivables   515,541  
  544,212
Other   71,768  
  51,755
Total prepaid expenses and other current assets  $ 989,483  
$ 1,209,623


Accounts payable, accrued expenses, and other accrued liabilities consisted of the following as of the dates presented



March 31,


December 31,


2023


2022

Accounts payable  $ 1,760,864  
$ 1,510,287
Professional fees   113,827  
  155,161
Sales taxes   145,433  
  219,285
Compensation   381,888  
  368,440
Contractors   524,610  
  562,993
Settlements and legal
833,768


950,213
Interest and other   44,506  
  660,040
Total accounts payable, accrued expenses and other accrued liabilities $ 3,804,896  
$ 4,426,419

 

Note 8  Commitments and Contingencies

 

Litigation


On January 13, 2023, Courier Plus Inc. d/b/a Dutchie (Dutchie) filed a complaint in the Court of Common Pleas, Dauphin County, Commonwealth of Pennsylvania against Akerna and MJF alleging unfair competition, tortious interference and unjust enrichment with respect to MJF’s exclusive contract with the Commonwealth of Pennsylvania. We filed a preliminary objection alleging serious defects, such as jurisdiction, and we worked with the Commonwealth of Pennsylvania to ensure compliance with our contract. We intend to defend our position vigorously and, at this time, do not believe an estimate of potential loss, if any, is appropriate.


On April 2, 2021, TreCom Systems Group, Inc. (“TreCom”) filed suit against Akerna and MJF in federal District Court for the Eastern District of Pennsylvania, seeking recovery of up to approximately $2.0 million for services allegedly provided pursuant to a Subcontractor Agreement between MJF and TreCom. MJF provided a notice of termination of the operative Subcontractor Agreement on August 4, 2020. MJF disputes the validity of TreCom’s invoices and the enforceability of the alleged agreement that TreCom submitted to the court. Akerna filed counterclaims against TreCom for breach of contract, a declaratory judgment, commercial disparagement, and defamation. TreCom failed to return Akerna’s intellectual property and issued numerous disparaging statements to one of Akerna’s clients. TreCom subsequently filed a motion to dismiss these counterclaims, which was denied by the court. Akerna intends to vigorously defend against TreCom’s claims, and pursue its own claims. With respect to the TreCom matter, we established a loss contingency $0.2 million in 2021 which remains outstanding as of March 31, 2023.


As of March 31, 2023, and through the date these consolidated financial statements were issued, there were no other legal proceedings requiring recognition or disclosure in the consolidated financial statements.


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Other


In connection with the Sale Transaction and the Merger, we have a commitment to compensate our financial advisor for up to three percent of the transaction value in success fees, subject to a minimum of $1.5 million, should the transactions be completed. In addition, we are party to arrangements with our executive officers and certain other administrative employees pursuant to their employment, retention and transaction success agreements that may result in the receipt by such executive officers and employees of cash severance payments and other transaction success bonuses and benefits with a total value of approximately $1.4 million (collectively and not individually), but not including the accelerated vesting of any equity awards held by those officers.


Operating Leases


During the first half of 2022, we began negotiations to terminate the 365 Cannabis office lease in Las Vegas, Nevada. We established an obligation of $0.5 million which is management’s best estimate of the costs to exit the lease. As of March 31, 2023, the lease termination matter remains unresolved. 


Note 9 – Stockholders Deficit


Common and Preferred Stock


We have one single class of Common Stock of which 150,000,000 shares are authorized with a par value of $0.0001 per share. The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders of the Company. Subject to the prior rights of all classes or series of stock at the time outstanding having prior rights as to dividends or other distributions, all stockholders are entitled to share equally in dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available. Subject to the prior rights of our creditors and the holders of all classes or series of stock at the time outstanding having prior rights as to distributions upon liquidation, dissolution, or winding up of the Corporation, in the event of liquidation, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of all liabilities. The stockholders do not have cumulative, preemptive rights, or subscription rights. 


We also have 5,000,000 authorized shares of preferred stock, $0.0001 par value per share, of which one share of special voting preferred stock (the “Special Voting Preferred Stock”) is issued and outstanding (see below).


18



Special Voting Preferred Stock and Exchangeable Shares 


In connection with a prior transaction in which we acquired Ample in exchange for 3,294,574 shares of exchangeable shares (the “Exchangeable Shares”), we issued of a single share of our special voting preferred stock (the “Special Voting Preferred Stock”), for the purpose of ensuring that each Exchangeable Share is substantially the economic and voting equivalent of a share of Akerna Common Stock and that each Exchangeable Share is exchangeable on a 20-for-one basis for a share of Akerna Common Stock, subject to certain limitations and adjustments. Each holder of Exchangeable Shares effectively has the ability to cast votes along with holders of Akerna Common Stock. The Exchangeable Shares do not have a par value. The Special Voting Preferred stock has a par value of $0.0001 per share and a preference in liquidation of $1.00. The Special Voting Preferred Stock entitles the holder to an aggregate number of votes equal to the number of the Exchangeable Shares issued and outstanding from time to time and which we do not own. The holder of the Special Voting Preferred Stock and the holders of shares of Akerna Common Stock will both vote together as a single class on all matters submitted to a vote of our shareholders. At such time as the Special Voting Preferred Stock has no votes attached to it, the share shall be automatically cancelled. 


During the three months ended March 31, 2023, certain Ample shareholders exchanged a total of 640 Exchangeable Shares with a value of $4,896 for 32 shares of Akerna Common Stock. The exchange was accounted for as an equity transaction and we did not recognize a gain or loss on this transaction. As of March 31, 2023, there were a total of 285,032 exchangeable shares remaining as issued and outstanding which could be exchanged for 14,252 shares of Akerna Common Stock. 

 

ATM Program

In 2021, we entered into an Equity Distribution Agreement with Oppenheimer & Co. Inc. (“Oppenheimer”) and A.G.P./Alliance Global Partners (“AGP”) pursuant to which we could offer and sell from time to time, up to $25 million of shares of our Common Stock through an “at the market” equity offering program (the “2021 ATM Program”). From its inception through September 23, 2022, a total of 118,629 shares of Common Stock with an aggregate gross purchase price of $2.7 million, including 90,809 shares with an aggregate gross purchase price of $0.8 million sold during 2022, were sold under the 2021 ATM Program. On September 23, 2022, we, Oppenheimer and AGP mutually agreed to terminate the 2021 ATM Program.


On September 28, 2022, we entered into a new agreement with AGP pursuant to which we may offer and sell up to $20.0 million of shares of our Common Stock (the “2022 ATM Program”) from time to time through AGP as the sales agent for which they will receive a commission of 3.0% of the gross proceeds. The 2022 ATM Program is currently limited to $3.5 million due to certain restrictions imposed by the registration statement underlying the offering (the “Baby Shelf Limitation”). Under the Baby Shelf Limitation, we may not offer Common Stock under the registration statement with a value of more than one-third of the aggregate market value of our Common Stock held by non-affiliates in any twelve-month period, so long as the aggregate market value of our Common Stock held by non-affiliates is less than $75.0 million. Net proceeds from the sale of Common Stock under the 2022 ATM Program will be used for general corporate purposes including working capital, marketing, product development and capital expenditures. Through December 31, 2022, we sold a total of 552,148 shares of Common Stock with an aggregate gross purchase price of $1.1 million under the 2022 ATM Program. There were no offerings of Common Stock under the 2022 ATM program during the three months ended March 31, 2023.


2022 Unit Offering

On July 5, 2022, we completed the 2022 Unit Offering which was comprised of an aggregate of (i) 29,382,861 units consisting of 1,469,143 shares of Common Stock together with Common Stock warrants (the “Common Warrants”) to purchase up to 1,469,143 shares of Common Stock (together, the “Units”) and (ii) 14,095,400 pre-funded units, consisting of 14,095,400 pre-funded warrants (“Pre-funded Warrants”) to purchase 704,770 shares of Common Stock, together with Common Warrants to purchase up to 704,770 shares of Common Stock (together, the “Pre-funded Units”). The Units were sold at a public offering price of $0.23 per unit and the Pre-funded Units were sold at a public offering price of $0.2299 per pre-funded unit. The Pre-Funded Warrants were exercised immediately thereafter at their nominal exercise price of $0.002 per share. The Common Warrants accompanying each of the Units and Pre-funded Units were issued separately and are immediately tradeable separately upon issuance. The Common Warrants had an original exercise price of $4.60 per share subject to certain adjustments, are immediately exercisable and will expire five years from the date of issuance. In connection with a convertible redeemable preferred stock offering in October 2022, the exercise price of the Common Warrants was reduced to $3.518 per share effective October 5, 2022 and further reduced to $0.88 per share effective January 27, 2023 as a result of the lowering of the conversion price for the Convertible Notes in connection with the Exchange Agreements.

19



In addition, we issued to the Underwriter warrants to purchase additional shares of Common Stock (the “Underwriter Warrants”). The Underwriter Warrants provided for the purchase of up to 108,696 shares of Common Stock. The Underwriter Warrants are exercisable at any time and from time to time, in whole or in part, commencing from six months after June 29, 2022 (the “Effective Date”) and ending five years from the Effective Date, at a price per share equal to $4.60, subject to certain adjustments. In connection with a convertible redeemable preferred stock offering in October 2022, the exercise price of the Underwriter Warrants was reduced to $3.518 per share effective October 5, 2022 and further reduced to $0.88 per share effective January 27, 2023 as a result of the lowering of the conversion price for the Convertible Notes in connection with the Exchange AgreementsThe Underwriter Warrants may be transferred by the Underwriter without restriction during the same period.

As of March 31, 2023, a total of 45,652,174 warrants exercisable for 2,282,609 shares of Common Stock remain outstanding from the 2022 Unit Offering including 43,478,261 Common Warrants exercisable for 2,173,913 shares of Common Stock and 2,173,913 Underwriter Warrants exercisable for 108,696 shares of Common Stock. In accordance with our policy, we assessed the warrants issued in connection with the 2022 Unit Offering and determined that there are no instances outside of the Companys control that could require cash settlement. In addition, we determined that the warrants issued in connection with the 2022 Unit Offering do not meet the definition of a derivative as they are indexed to the Companys Common Stock and they satisfy all of the additional qualifications to be classified within equity. Through March 31, 2023, the Common Warrants and Underwriter Warrants remain classified within equity.

2019 Warrants

In connection with MTech’s initial public offering, MTech sold units consisting of one share of MTech’s common stock and one warrant of MTech (“MTech Public Warrant”). Each MTech Public Warrant entitled the holder to purchase one share of MTech’s common stock. Concurrently with MTech’s initial public offering, MTech sold additional units on a private offering basis. Each of these units consisted of one share of MTech’s common stock and one warrant of MTech (“MTech Private Warrant”). Each MTech Private Warrant entitled the holder to purchase one share of MTech’s common stock.   

 

Upon completion of the Mergers between MTech and MJF on June 17, 2019, the MTech Public Warrants and the MTech Private Warrants were converted to the 2019 Public Warrants and Private Warrants, respectively, at an exchange ratio of one-for-one to a warrant to purchase one share of Akernas Common Stock with identical terms and conditions. Concurrent with our 20-for-1 reverse stock split during the fourth quarter of 2022, the exchange ratio of the 2019 Public Warrants and the Private Warrants was changed to 20 warrants for one share of Common Stock. The Private Warrants have contingent exercise provisions such that when the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company. Accordingly, the requirements for accounting for the Private Warrants as equity are not satisfied and the Private Warrants have been reflected on our consolidated balance sheets as a derivative liability and are not included the summary of outstanding warrants presented below  

Outstanding Warrants

The following table summarizes our warrants outstanding as of the dates presented:

 

Exercise Price

 

Expiration Date

 

Balance as of December 31, 2022


  Issued

  Exercised 
    Expired
   

Balance as of

March 31, 2023

 
2019 Public Warrants (1)
$ 230.00   6/19/2024     5,813,804    
         
      5,813,804  
2022 Unit Offering