Note 10 – Commitments and Contingencies

Litigation

On May 15 and May 23, 2023, Akerna and all its directors were named in two derivative lawsuits (McCaffrey v. Akerna et al. and Caller v. Akerna et al., Nos. 1:23-cv-01213-PAB and 1:23-cv-01300-KLM, respectively) filed in the United States District Court for the District of Colorado by stockholders Albert McCaffrey and Israel Caller, respectively, alleging that the disclosures made regarding the transactions with Gryphon and MJ Acquisition violated Sections 14(a) and 20(a) of the Securities and Exchange Act of 1934. The lawsuits contended that the disclosures omitted material information regarding the transactions and seek injunctive relief and attorneys’ fees. The two actions were dismissed without prejudice on October 3, 2023 (Caller) and October 11, 2023 (McCaffrey).

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 government contract with the Commonwealth of Pennsylvania. We filed a preliminary objection alleging serious defects, such as jurisdiction. The parties attended a hearing in July 2023. In October 2023, the courts dismissed the case but left some items available in the complaint for an appeal. Dutchie has amended its complaint and filed again. We filed another preliminary objection to their amended complaint. A hearing on A hearing on our preliminary objections is scheduled for April 9, 2024. Before and throughout this dispute, we have worked with the Commonwealth of Pennsylvania to ensure continued compliance with our contract. We intend to continue to defend our position vigorously and, at this time, do not believe an estimate of potential loss, if any, is appropriate. While this suit is attributable to the operations of MJF, Gryphon, as successor to Akerna, remains contingently liable as Akerna has been named in addition to MJF.

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. Both parties recently filed motions for summary judgment with respect to the validity of each parties’ claims.  The court has not advised the parties if it will hold a hearing on the motions or when an order is expected.  As most of the material facts at issue are disputed by the parties, the court may deny both motions, in which case the matter will move towards trial. With respect to the TreCom matter, we established a loss contingency of $0.2 million in 2021 on the books of MJF which remains outstanding as of December 31, 2023. While this suit is attributable to the operations of MJF, Gryphon, as successor to Akerna, remains contingently liable as Akerna has been named in addition to MJF.

As of December 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.

Other

On January 10, 2024, Akerna received an inquiry in the form of a civil investigation demand from the United States Department of Justice (“DOJ”) with respect to the Paycheck Protection Loan (“PPP Loan”) that the Company received in connection with the CARES Act. On January 25, 2024, Akerna received a similar request from the United States Small Business Administration (“SBAJ”) in the form of a notification of loan review and request for documents. The PPP Loan was received for $2.2 million on April 21, 2020. In August 2021, we submitted our application for forgiveness and on September 2, 2021, the PPP Loan was forgiven in full by the SBA. With respect to the DOJ and SBA inquiries, we are cooperating fully and look forward to addressing the matter and uncertainties, if any, in an expeditious manner.

In connection with the Sale Transaction and the Merger, we had a commitment to compensate our financial advisor for up to 3 percent of the transaction value in success fees, subject to a minimum of $1.5 million. As of December 31, 2023, a total of $0.650 million was accrued for the advisor. The ultimate disposition of this obligation has been assumed by Gryphon in connection with their plans for a post-Merger offering of securities.  In addition, we were party to arrangements with our executive officers and certain other administrative employees pursuant to their employment agreements and transaction success agreements that resulted in cash payments in February 2024 for transaction success bonuses and other benefits for a total of approximately $0.2 million (collectively and not individually). Certain other costs, including the value of  accelerated vesting of equity awards held by those officers, were addressed in connection with the Share Settlement Agreements (see Note 4).