Registration of securities issued in business combination transactions

Fair Value

v3.23.3
Fair Value
6 Months Ended 12 Months Ended
Jun. 30, 2023
Dec. 31, 2022
Fair Value Disclosures [Abstract]    
Fair Value

Note 10 — Fair Value

Fair Value Option Election — Convertible Notes

We elected to account for the Senior Convertible Notes by applying the fair value option. Under the fair value option, the financial liability is initially measured at its issue-date estimated fair value and subsequently remeasured at its estimated fair value on a recurring basis at each reporting period date. The change in estimated fair value resulting from changes in instrument-specific credit risk is recorded in other comprehensive loss as a component of equity. The remaining estimated fair value adjustment is presented as a single line item within Other (expense) income in our condensed consolidated statements of operations under the caption, Change in fair value of convertible notes.

For the Senior Convertible Notes, which are measured at fair value categorized within Level 3 of the fair value hierarchy, the following represents a reconciliation of the fair values for the three and six months ended June 30, 2023 and June 30, 2022:

 

Three Months Ended June 30,

 

Six Months Ended June 30,

   

2023

 

2022

 

2023

 

2022

Fair value balance at beginning of period

 

$

8,462,000

 

 

$

15,337,000

 

 

$

14,607,000

 

 

$

17,305,000

 

Principal payments in cash and Common Stock

 

 

(115,000

)

 

 

(2,080,000

)

 

 

(6,429,457

)

 

 

(5,380,000

)

Change in fair value reported in the statements of operations

 

 

893,000

 

 

 

294,000

 

 

 

1,048,457

 

 

 

1,727,000

 

Change in fair value reported in other comprehensive loss

 

 

25,000

 

 

 

(163,000

)

 

 

39,000

 

 

 

(264,000

)

Fair value balance at end of period

 

$

9,265,000

 

 

$

13,388,000

 

 

$

9,265,000

 

 

$

13,388,000

 

The estimated fair value of the Senior Convertible Notes was computed using Monte Carlo simulations, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined by GAAP. The unobservable inputs utilized for measuring the fair value of the Senior Convertible Notes reflect our assumptions about the assumptions that market participants would use in valuing the Senior Convertible Notes as of its issuance date and subsequent reporting periods.

We estimated the fair value by using the following key inputs to the Monte Carlo Simulation Models:

Fair Value Assumptions – Convertible Notes

 

June 30,
2023

 

December 31,
2022

Face value principal payable

 

$

8,233,271

 

 

$

14,662,727

 

Original conversion price

 

$

4.75

 

 

$

4.75

 

Value of Common Stock

 

$

0.605

 

 

$

0.69

 

Expected term (years)

 

 

1.3

 

 

 

1.8

 

Volatility

 

 

111

%

 

 

77

%

Market yield

 

 

41.7

%

 

 

44.3 to 43.9

%

Risk free rate

 

 

4.9

%

 

 

4.4

%

Issue date

 

 

October 5, 2021

 

 

 

October 5, 2021

 

Maturity date

 

 

October 5, 2024

 

 

 

October 5, 2024

 

Fair Value Measurement — Private Warrants

For the Private Warrants, which are classified as derivative liabilities on our condensed consolidated balance sheets and are measured at fair value categorized within Level 3 of the fair value hierarchy, the following represents a reconciliation of the fair values for the three and six months ended June 30, 2023 and June 30, 2022:

 

Three Months Ended June 30,

 

Six Months Ended June 30,

   

2023

 

2022

 

2023

 

2022

Fair value balance at beginning of period

 

$

 

$

45,127

 

 

$

 

$

63,178

 

Change in fair value reported in the statements of operations

 

 

 

 

(33,845

)

 

 

 

 

(51,896

)

Fair value balance at end of period

 

$

 

$

11,282

 

 

$

 

$

11,282

 

We utilized a binomial lattice model, which incorporates significant inputs, specifically the expected volatility, that are not observable in the market, and thus represents a Level 3 measurement as defined in GAAP. The unobservable inputs utilized for measuring the fair value of the Private Warrants reflect our estimates regarding the assumptions that market participants would use in valuing the Warrants as of the end of the reporting periods.

We recognize changes to the derivative liability against earnings or loss each reporting period. Upon exercise of the Private Warrants, holders will receive a delivery of Akerna shares on a net or gross share basis per the terms of the Private Warrants and any exercise will reclassify the Private Warrants, at the time of exercise, to shareholder’s equity to reflect the equity transaction. There are no periodic settlements prior to the holder exercising the Private Warrants. There were no transfers in or out of Level 3 from other levels for the fair value hierarchy.

We estimated the fair value by using the following key inputs:

Fair Value Assumptions – Private Warrants

 

June 30,
2023

 

December 31,
2022

Number of Private Warrants

 

 

225,635

 

 

225,635

Original conversion price

 

$

230

 

$

230.00

Value of Common Stock

 

$

0.605

 

$

0.69

Expected term (years)

 

 

0.96

 

 

1.46

Volatility

 

 

NM

 

 

NM

Risk free rate

 

 

NM

 

 

NM

NM – Not meaningful.

Fair Value Measurement — 2022 Unit Offering Common and Underwriter Warrants

The fair value of the Common Warrants and Underwriter Warrants issued in connection with our 2022 Unit Offering represent a measurement within Level 3 of the fair value hierarchy and were estimated based on the following key inputs as of the date of the 2022 Unit Offering:

Fair Value Assumptions – 2022 Common and Underwriter Warrants

 

July 5,
2022

Exercise price

 

$

4.60

 

Expected term (years)

 

 

5.0

 

Volatility

 

 

136.9

%

We utilized a Black-Scholes-Merton option pricing model, which incorporates significant inputs, specifically the expected volatility, that are not observable in the market, and thus represents a Level 3 measurement as defined in GAAP. The unobservable inputs utilized for measuring the fair value of the Common and Underwriter Warrants reflect our estimates regarding the assumptions that market participants would have used in valuing the Warrants as of the date of the 2022 Unit Offering or July 5, 2022. The fair value of the Common Warrants and Underwriter Warrants was recorded in equity as a component of the net proceeds received from the 2022 Unit Offering (see Note 9).

Note 15 — Fair Value

Fair Value Measurement — Contingent Consideration

In connection with our acquisition of 365 Cannabis in October 2021, the 365 Cannabis selling shareholders had the potential to earn contingent consideration payable in Common Stock or cash if certain revenue criteria were met. The fair value of the contingent consideration, or Earn-out Obligation, on the date of acquisition of 365 Cannabis was $6.3 million. The Earn-out Obligation was reduced by $3.0 million in September 2022 in connection with the finalization of the purchase accounting associated with the acquisition of 365 Cannabis. The carrying amount of the Earn-out Obligation was further reduced to its fair value of $2.3 million on December 31, 2022 in connection with the sale of 365 Cannabis that was completed in January 2023. The corresponding adjustments have been reflected in the loss from discontinued operations for the year ended December 31, 2022.

We value contingent consideration using a probability-weighted discounted cash flow model, which incorporates inputs that are not observable in the market and thus represents a Level 3 measurement as defined in GAAP. The unobservable inputs utilized for measuring the fair value of the contingent consideration reflect management’s own assumptions about the assumptions that market participants would use in valuing the contingent consideration as of the valuation date, as well as our knowledge of specific transactions that effect the calculation.

Fair Value Option Election — Convertible Notes

We elected to account for both the Senior Convertible Notes and the 2020 Notes by applying the fair value option. Under the fair value option, the financial liability is initially measured at its issue-date estimated fair value and subsequently remeasured at its estimated fair value on a recurring basis at each reporting period date. The change in estimated fair value resulting from changes in instrument-specific credit risk is recorded in Other comprehensive

income as a component of stockholders’ equity (deficit). The remaining estimated fair value adjustment is presented as a single line item within Other income (expense) in our consolidated statement of operations under the caption, Change in fair value of convertible notes.

For the 2020 Notes and Senior Convertible Notes, which are measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values for the periods presented:

2020 Notes

 

 

 

 

Ending fair value balance – December 31, 2020

 

$

13,398,000

 

Principal payments in cash and Common Stock

 

 

(15,172,727

)

Change in fair value reported in the statements of operations

 

 

2,030,904

 

Change in fair value reported in other comprehensive income

 

 

(70,000

)

Gain on extinguishment of debt reported in the statement of operations

 

 

(186,177

)

Ending fair value balance – October 5, 2021

 

$

 

For the Senior Secured Notes, which are measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from October 5, 2021 to December 31, 2022:

Senior Convertible Notes

 

 

 

 

Beginning fair value balance on October 5, 2021

 

$

18,000,000

 

Principal payments in cash and Common Stock

 

 

 

Change in fair value reported in the statements of operations

 

 

(665,000

)

Change in fair value reported in other comprehensive income

 

 

(30,000

)

Ending fair value balance – December 31, 2021

 

$

17,305,000

 

Principal payments in cash and Common Stock

 

 

(5,337,273

)

Change in fair value reported in the statements of operations

 

 

2,884,273

 

Change in fair value reported in other comprehensive income

 

 

(245,000

)

Ending fair value balance – December 31, 2022

 

$

14,607,000

 

The estimated fair value of the Senior Convertible Notes and the 2020 Notes were computed using Monte Carlo simulations, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined by GAAP. The unobservable inputs utilized for measuring the fair value of the Senior Convertible Notes and the 2020 Notes reflect our assumptions about the assumptions that market participants would use in valuing the Senior Convertible Notes and 2020 Notes as of the issuance date and subsequent reporting periods.

We determined the fair value of the Senior Convertible Notes by using the following key inputs to the Monte Carlo Simulation Model:

 

As of December 31,

Fair Value Assumptions – Senior Convertible Notes

 

2022

 

2021

Face value principal payable

 

$

14,662,727

 

 

$

20,000,000

 

Conversion prices, as adjusted for the Reverse Stock Split and certain securities offerings

 

$

4.75

 

 

$

4.05

 

Value of Common Stock on measurement date

 

$

0.69

 

 

$

1.75

 

Expected term (years)

 

 

1.8

 

 

 

2.8

 

Volatility

 

 

77

%

 

 

75

%

Market yield (range)

 

 

44.3 to 43.9

%

 

 

37.1 to 0

%

Risk free rate

 

 

4.4

%

 

 

1.0

%

Issue date

 

 

October 5, 2021

 

 

 

October 5, 2021

 

Maturity date

 

 

October 5, 2024

 

 

 

October 5, 2024

 

Fair Value Measurement — Private Warrants

For the Private Warrants, which are classified as derivative liabilities on our consolidated balance sheets and measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values for the years ended December 31, 2022 and December 31, 2021:

 

Year Ended December 31,

   

2022

 

2021

Fair value balance at beginning of period

 

$

63,178

 

 

$

311,376

 

Change in fair value reported in the statements of operations

 

 

(63,178

)

 

 

(248,198

)

Fair value balance at end of period

 

$

 

 

$

63,178

 

We utilized a binomial lattice model, which incorporates significant inputs, specifically the expected volatility, that are not observable in the market, and thus represents a Level 3 measurement as defined in GAAP. The unobservable inputs utilized for measuring the fair value of the Private Warrants reflect our estimates regarding the assumptions that market participants would use in valuing the 2019 Public Warrants as of the end of the reporting periods.

We recognize changes to the derivative liability against earnings or loss each reporting period. Upon exercise of the Private Warrants, holders will receive a delivery of Akerna shares on a net or gross share basis per the terms of the Private Warrants and any exercise will reclassify the Private Warrants, at the time of exercise, to stockholders’ equity to reflect the equity transaction. There are no periodic settlements prior to the holder exercising the Private Warrants. There were no transfers in or out of Level 3 from other levels for the fair value hierarchy.

We estimated the fair value by using the following key inputs:

 

As of December 31,

Fair Value Assumptions – Private Warrants

 

2022

 

2021

Number of Private Warrants

 

 

225,635

 

 

225,635

 

Exercise price, as adjusted for the Reverse Stock Split

 

$

230.00

 

$

230.00

 

Value of Common Stock on measurement date

 

$

0.69

 

$

1.75

 

Expected term (years)

 

 

1.46

 

 

2.46

 

Volatility

 

 

NM

 

 

85.8

%

Risk free rate

 

 

NM

 

 

0.8

%

Fair Value Measurement — 2022 Unit Offering Common and Underwriter Warrants

The fair value of the Common Warrants and Underwriter Warrants issued in connection with the 2022 Unit Offering represent a measurement within Level 3 of the fair value hierarchy and were estimated based on the following key inputs as of the date of the 2022 Unit Offering:

Fair Value Assumptions – 2022 Common and Underwriter Warrants

 

July 5,
2022

Exercise price as adjusted for the Reverse Stock Split

 

$

4.60

 

Expected term (years)

 

 

5.0

 

Volatility

 

 

136.9

%

We utilized a Black-Scholes-Merton option pricing model, which incorporates significant inputs, specifically the expected volatility, that are not observable in the market, and thus represents a Level 3 measurement as defined in GAAP. The unobservable inputs utilized for measuring the fair value of the Common and Underwriter Warrants reflect our estimates regarding the assumptions that market participants would have used in valuing the Warrants as of the date of the 2022 Unit Offering or July 5, 2022. The fair value of the Common Warrants and Underwriter Warrants was recorded in equity as a component of the net proceeds received from the 2022 Unit Offering (see Note 13).