kern-20220930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

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

For the transition period from / to

Commission file number 001-39096

AKERNA CORP.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

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

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

As of November 10, 2022, there were 4,429,847 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 Equity (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	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	51
	SIGNATURES	52

AKERNA CORP.

Condensed Consolidated Balance Sheets

(unaudited)

	September 30,			December 31,
	2022			2021
Assets
Current assets
Cash	$	2,490,662		$	13,934,265
Restricted cash		7,008,261			508,261
Accounts receivable, net		1,371,133			1,403,774
Prepaid expenses and other current assets		2,330,032			2,383,764
Total current assets		13,200,088			18,230,064

Fixed assets, net		124,760			153,151
Investment, net		226,101			226,101
Capitalized software, net		6,009,163			7,311,676
Intangible assets, net		17,005,584			21,609,794
Goodwill		9,025,589			46,942,681
Other noncurrent assets		—			9,700
Total assets	$	45,591,285		$	94,483,167

Liabilities and Equity
Current liabilities
Accounts payable, accrued expenses and other accrued liabilities	$	4,630,681		$	6,063,520
Contingent consideration payable		3,300,000			6,300,000
Current portion of deferred revenue		2,151,235			3,543,819
Current portion of long-term debt		9,900,000			13,200,000
Derivative liability		9,025			63,178
Total current liabilities		19,990,941			29,170,517

Long-term portion of deferred revenue		499,206			582,676
Long-term debt, less current portion		4,575,000			4,105,000
Deferred income tax liabilities		431,453			675,291
Total liabilities		25,496,600			34,533,484

Commitments and contingencies (Note 9)		—			—

Equity
Preferred stock, par value $0.0001; 5,000,000 shares authorized, 1 share special voting preferred stock issued and outstanding at September 30, 2022 and December 31, 2021		—			—
Special voting preferred stock, par value $0.0001; 1 share authorized, issued and outstanding as of September 30, 2022 and December 31, 2021, with $1 preference in liquidation; exchangeable shares, no par value, 291,192 and 309,286 shares issued and outstanding as of September 30, 2022 and December 31, 2021 respectively		2,227,619			2,366,038
Common stock, par value $0.0001; 150,000,000 shares authorized, 4,023,294 and 1,550,094 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		402			155
Additional paid-in capital		159,841,800			146,030,203
Accumulated other comprehensive income		356,028			61,523
Accumulated deficit		(142,331,164	)		(88,508,236	)
Total equity		20,094,685			59,949,683
Total liabilities and equity	$	45,591,285		$	94,483,167

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

AKERNA CORP.

Condensed Consolidated Statements of Operations

(unaudited)

		For the Three Months Ended					For the Nine Months Ended
		September 30,					September 30,
		2022		2021			2022			2021
Revenue
Software	$	5,326,830		$	4,557,960		$	17,756,272		$	12,809,841
Consulting		76,500			551,402			618,809			1,135,033
Other revenue		9,472			26,140			74,443			111,540
Total revenue		5,412,802			5,135,502			18,449,524			14,056,414
Cost of revenue		2,051,862			1,971,382			6,091,511			5,339,929
Gross profit		3,360,940			3,164,120			12,358,013			8,716,485
Operating expenses
Product development		1,374,133			1,566,478			5,240,922			4,517,836
Sales and marketing		1,882,980			2,002,461			8,304,411			5,564,519
General and administrative		1,823,076			2,077,474			6,812,617			8,306,417
Depreciation and amortization		2,118,739			1,238,420			6,094,963			3,605,435
Impairment of long-lived assets		—			—			39,600,587			—
Change in fair value of contingent consideration		(3,000,000	)		—			(3,000,000	)		—
Total operating expenses		4,198,928			6,884,833			63,053,500			21,994,207
Loss from operations		(837,988	)		(3,720,713	)		(50,695,487	)		(13,277,722	)
Other (expense) income
Interest (expense) income, net		(396,022	)		(238,283	)		(609,746	)		(1,175,789	)
Change in fair value of convertible notes		(1,113,000	)		(23,227	)		(2,840,000	)		(2,030,904	)
Change in fair value of derivative liability		2,256			194,046			54,153			151,175
Gain on forgiveness of PPP Loan		—			2,234,730			—			2,234,730
Other expense (income), net		—			—			—			243
Total other (expense) income		(1,506,766	)		2,167,266			(3,395,593	)		(820,545	)

Net loss before income taxes and equity in losses of investee		(2,344,754	)		(1,553,447	)		(54,091,080	)		(14,098,267	)
Income tax (expense) benefit		40,666			—			268,152			(10,570	)
Equity in losses of investee		—			—			—			(7,564	)

Net loss	$	(2,304,088	)	$	(1,553,447	)	$	(53,822,928	)	$	(14,116,401	)

Basic and diluted weighted average common shares outstanding		3,883,847			1,322,122			2,421,262			1,215,626
Basic and diluted net loss per common share	$	(0.59)		$	(1.17	)	$	(22.23)		$	(11.61	)

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

AKERNA CORP.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net loss	$	(2,304,088	)	$	(1,553,447	)	$	(53,822,928	)	$	(14,116,401	)
Other comprehensive (loss) income
Foreign currency translation		27,676			63,905			4,505			65,858
Unrealized (loss) gain on convertible notes		26,000			(3,000	)		290,000			(19,000	)
Comprehensive loss	$	(2,250,412	)	$	(1,492,542	)	$	(53,528,423	)	$	(14,069,543	)

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

AKERNA CORP.

Condensed Consolidated Statements of Changes in Equity

For the Three and Nine Months Ended September 30, 2022

(unaudited)

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

Balance – July 1, 2022	291,192		$	2,227,619			1,841,336		$	184		$	150,441,933		$	302,352	$	(140,027,076	)	$	12,945,012
Common shares and warrants issued in connection with unit offering	—			—			2,173,913			217			9,178,744			—		—			9,178,961
Stock-based compensation	—			—			—			—			196,124			—		—			196,124
Restricted stock vesting	—			—			8,045			1			24,999			—		—			25,000
Foreign currency translation adjustments	—			—			—			—			—			27,676		—			27,676
Unrealized gain on convertible notes	—			—			—			—			—			26,000		—			26,000
Net loss	—			—			—			—			—			—		(2,304,088	)		(2,304,088	)
Balance – September 30, 2022	291,192		$	2,227,619			4,023,294		$	402		$	159,841,800		$	356,028	$	(142,331,164	)	$	20,094,685
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	(18,094	)		(138,419	)		904			—			138,419			—		—			—
Settlement of convertible notes	—			—			207,427			21			3,925,479			—		—			3,925,500
Shares withheld for withholding taxes	—			—			(558	)		—			(13,167	)		—		—			(13,167	)
Shares returned in connection with 365 Cannabis acquisition	—			—			(13,988	)		(1	)		(939,999	)		—		—			(940,000	)
Common shares and warrants issued in connection with unit offering	—			—			2,173,913			217			9,178,744			—		—			9,178,961
Stock-based compensation	—			—			—			—			661,423			—		—			661,423
Shares issued in connection with the ATM offering program	—			—			90,809			9			761,169			—		—			761,178
Settlement of liabilities with shares	—			—			1,463			—			49,530			—		—			49,530
Restricted stock vesting	—			—			13,230			1			49,999			—		—			50,000
Foreign currency translation adjustments	—			—			—			—			—			4,505		—			4,505
Unrealized gain on convertible notes	—			—			—			—			—			290,000		—			290,000
Net loss	—			—			—			—			—			—		(53,822,928	)		(53,822,928	)
Balance – September 30, 2022	291,192		$	2,227,619			4,023,294		$	402		$	159,841,800		$	356,028	$	(142,331,164	)	$	20,094,685

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

AKERNA CORP.

Condensed Consolidated Statements of Changes in Equity

For the Three and Nine Months Ended September 30, 2021

(unaudited)

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

Balance – July 1, 2021	1,039,373		$	7,951,203			1,266,621		$	127	$	123,859,055		$	(105,544	)	$	(69,742,478	)	$	61,962,363
Conversion of exchangeable shares to common stock	(653,426	)		(4,998,708	)		32,671			3		4,998,705			—			—			—
Settlement of convertible notes	—			—			23,532			2		1,413,940			—			—			1,413,942
Shares withheld for withholding taxes	—			—			(1,571	)		—		(103,707	)		—			—			(103,707	)
Shares issued in connection with asset purchase	—			—			4,167			—		300,000			—			—			300,000
Stock-based compensation	—			—			—			—		510,132			—			—			510,132
Shares issued in connection with the ATM offering program	—			—			27,819			3		1,828,116			—			—			1,828,119
Restricted stock vesting	—			—			5,156			1		(1	)		—			—			—
Foreign currency translation adjustments	—			—			—			—		—			63,905			—			63,905
Unrealized loss on convertible notes	—			—			—			—		—			(3,000	)		—			(3,000	)
Net loss	—			—			—			—		—			—			(1,553,447	)		(1,553,447	)
Balance – September 30, 2021	385,947		$	2,952,495			1,358,395		$	136	$	132,806,240		$	(44,639	)	$	(71,295,925	)	$	64,418,307
Balance – January 1, 2021	2,667,349		$	20,405,219			995,062		$	100	$	94,088,323		$	(91,497	)	$	(57,179,524	)	$	57,222,621
Conversion of exchangeable shares to common stock	(2,281,402	)		(17,452,724	)		114,070			11		17,452,713			—			—			—
Settlement of convertible notes	—			—			154,706			15		11,610,572			—			—			11,610,587
Shares withheld for withholding taxes	—			—			(4,018	)		—		(437,554	)		—			—			(437,554	)
Shares issued in connection with Viridian acquisition	—			—			50,000			5		6,001,995			—			—			6,002,000
Shares issued in connection with asset purchase	—			—			4,167			—		300,000			—			—			300,000
Stock-based compensation	—			—			—			—		1,584,755			—			—			1,584,755
Shares issued in connection with the ATM offering program	—			—			27,819			3		1,828,113			—			—			1,828,116
Settlement of liabilities with shares	—			—			5,085			1		377,324			—			—			377,325
Restricted stock vesting	—			—			11,571			1		(1	)		—			—			—
Forfeitures of restricted shares	—			—			(67	)		—		—			—			—			—
Foreign currency translation adjustments	—			—			—			—		—			65,858			—			65,858
Unrealized loss on convertible notes	—			—			—			—		—			(19,000	)		—			(19,000	)
Net loss	—			—			—			—		—			—			(14,116,401	)		(14,116,401	)
Balance – September 30, 2021	385,947		$	2,952,495			1,358,395		$	136	$	132,806,240		$	(44,639	)	$	(71,295,925	)	$	64,418,307

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

AKERNA CORP.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	For the Nine Months Ended September 30,
	2022			2021
Cash flows from operating activities
Net loss	$	(53,822,928	)	$	(14,116,401	)
Adjustment to reconcile net loss to net cash used in operating activities:
Equity in losses of investee		—			7,564
Change in fair value of contingent consideration		(3,000,000	)		—
Bad debt expense		271,474			254,029
Stock-based compensation expense		697,377			1,584,751
Loss on write off of fixed assets		—			1,045,179
Gain on forgiveness of PPP loan		—			(2,234,730	)
Impairment of long-lived assets		39,600,587			—
Amortization of deferred contract cost		275,949			356,528
Non-cash interest expense		183,723			1,161,393
Depreciation and amortization		6,094,963			3,605,435
Foreign currency loss		4,718			21,496
Change in fair value of convertible notes		2,840,000			2,030,904
Change in fair value of derivative liability		(54,153	)		(151,175	)
Changes in operating assets and liabilities:
Accounts receivable, net		(313,176	)		462,482
Prepaid expenses and other current and noncurrent assets		(215,228	)		66,246
Accounts payable, accrued expenses and other accrued liabilities		(1,356,709	)		1,756,671
Deferred income tax liabilities		(243,838	)		—
Deferred revenue		(1,413,665	)		(927,916	)
Net cash used in operating activities		(10,450,906	)		(5,077,544	)
Cash flows from investing activities
Developed software additions		(3,324,029	)		(3,354,453	)
Fixed asset additions		(27,383	)		(11,535	)
Cash returned from business combination working capital settlement (Note 3)		400,000			—
Net cash used in investing activities		(2,951,412	)		(3,365,988	)
Cash flows from financing activities
Value of shares withheld related to tax withholdings		(13,167	)		(437,554	)
Proceeds from unit and pre-funded unit offering, net		9,178,960			—
Proceeds from exercise of pre-funded warrants		1			—
Principal payments of convertible notes		(1,432,273	)		(1,164,706	)
Proceeds from the ATM offering program, net		761,178			1,828,116
Net cash provided by financing activities		8,494,699			225,856
Effect of exchange rate changes on cash and restricted cash		(35,984	)		(5,915	)
Net change in cash and restricted cash		(4,943,603	)		(8,223,591	)
Cash and restricted cash - beginning of period		14,442,526			18,340,640
Cash and restricted cash - end of period	$	9,498,923		$	10,117,049
Cash paid for interest	$	234,227		$	105,882
Cash paid for income taxes, net of refunds received	$	12,200		$	10,570
Supplemental disclosures of non-cash investing and financing activities:
Settlement of convertible notes in common stock	$	3,925,500		$	10,448,932
Conversion of exchangeable shares to common stock		138,419			17,452,497
Settlement of other liabilities in common stock		49,530			377,315
Stock-based compensation capitalized as software development		14,046			—
Vesting of restricted stock units		50,000			—
Capitalized software included in accrued expenses		32,473			—
Shares returned in connection with 365 Cannabis acquisition (Note 3)		940,000			—
365 Cannabis working capital reduction to accrued expenses (Note 3)		160,000			—

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

AKERNA CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 - Description of Business

Description of Business

Akerna Corp., herein referred to as we, us, our, the Company or Akerna, through our wholly-owned subsidiaries MJ Freeway, LLC, or MJF, Trellis Solutions, Inc., or Trellis, Ample Organics, Inc, or Ample, solo sciences, inc., or Solo, Viridian Sciences Inc., or Viridian, and The NAV People, Inc. d.b.a. 365 Cannabis, or 365 Cannabis, provides enterprise software solutions that enable regulatory compliance and inventory management. Our proprietary, broad and growing suite of solutions are adaptable for industries in which interfacing with government regulatory agencies for compliance purposes is required, or where the tracking of organic materials from seed or plant to end products is desired. We develop products intended to assist states in monitoring licensed businesses’ compliance with state regulations and to help state-licensed businesses operate in compliance with such law. We provide our commercial software platform, MJ Platform®, Trellis®, Ample, Viridian and 365 Cannabis to state-licensed businesses, and our regulatory software platform, Leaf Data Systems®, to state government regulatory agencies. Through Solo, we provide an innovative, next-generation solution for state and national governments to securely track product and waste throughout the supply chain with solo*TAG™. The integration of MJ Platform® and solo*CODE™ results in technology for consumers and brands that brings a consumer-facing mark designed to highlight the authenticity and signify transparency.

Our Viridian and 365 Cannabis offerings are considered enterprise offerings while all other solutions are considered non-enterprise offerings that meet the needs of our small and medium-sized business, or SMB, customers.

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.

Going Concern and Management’s Liquidity Plans

In accordance with the Financial Accounting Standards Board’s (“FASB”) standard on going concern, Accounting Standard Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a 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, including marketable equity securities, and any available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is defined to 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 condensed 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 we have experienced recurring losses from operations, used cash from operating activities, and relied on capital raising transactions to continue ongoing operations. During the nine months ended September 30, 2022 and September 30, 2021, we incurred losses from operations of $11.1 million, excluding impairments, and $13.3 million, respectively, and used cash in operating activities of $10.5 million and $5.1 million, respectively. As of September 30, 2022, we had a working capital deficit of $6.8 million with $2.5 million in cash available to fund future operations. Furthermore, on May 24, 2022, we received a notice (the “Notice”) from The Nasdaq Stock Market LLC indicating that the bid price of the Company’s common stock, par value $0.0001 per share (“Common Stock”), is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on the Nasdaq Capital Market (the “Nasdaq Market”). The Notice has no immediate effect on the continued listing status of our Common Stock on the Nasdaq Market, and, therefore, our listing remains fully effective. We are provided a compliance period of 180 calendar days from the date of the Notice, or until November 21, 2022, to regain compliance with the minimum closing bid requirement. On November 8, 2022, we completed a reverse stock split of 20-for-1 (the “Reverse Stock Split”) to address our bid price compliance and believe that we will regain compliance with the bid price requirement by November 21, 2022. Collectively, these factors raise substantial doubt regarding the ability of the Company to continue as a going concern.

Management’s plan for the Company to continue as a going concern includes several initiatives and actions including those impacting continuing costs, primarily labor and technology, including hosting and applications, working capital, our short and intermediate term financing and the liquidity of our Common Stock. Certain of these initiatives and actions began during the second quarter of 2022 while others were initiated thereafter and through the second week of November 2022.

The most significant components of our plan include the following: (i) realizing annualized cost savings associated with the corporate restructuring initiative (the “Restructuring”) that we announced in May 2022 which resulted in a reduction in workforce and related operating costs (see Note 4), (ii) entering into an amendment and waiver agreement to the securities purchase agreement (the “SPA”) associated with our 2021 Senior Convertible Notes (the “Senior Convertible Notes”) on June 30, 2022 (the “Convertible Notes Amendment”) which, among other factors, provides for the deferral of the required amortization payments due and payable from July 1, 2022 through January 1, 2023 (see Note 6), (iii) securing a waiver from the holders of the Senior Convertible Notes on September 27, 2022 to maintain a reserve of authorized shares equivalent to 200 percent of the total number shares required to satisfy the obligations under the Senior Convertible Notes (the “Required Reserve Amount”), effectively continuing a similar waiver provided by the holders on June 30, 2022, for a period retroactive to August 30, 2022 through November 30, 2022, (iv) deployment for working capital needs of the net proceeds of approximately $2.0 million received from our offering of Common Stock and warrants (the “2022 Unit Offering”) in a transaction that closed on July 5, 2022 (see Note 10), net of underwriting discounts and commissions and other offering expenses and after depositing $7.0 million of the proceeds into certain restricted cash accounts in accordance with the Convertible Notes Amendment, (v) opportunistic utilization of our “at the market” offering program (the “ATM Program”) for short-term liquidity needs (see Note 10), (vi) addressing the potential liquidity of our Common Stock and increasing the viability of our ATM Program in connection with the minimum listing requirements for the Nasdaq Market through the Reverse Stock Split that was approved by our shareholders on November 7, 2022 and effectuated at 12:01 a.m Eastern Standard Time on November 8, 2022 (see Note 10), (vii) conservatively managing our working capital through disciplined cost-containment efforts and strategic management of our accounts receivable and accounts payable cycles, (viii) considering strategic partnerships and evaluating potential strategic transactions, as opportunities become available and (ix) continuing to seek to expand our customer base and realize synergies as we continue to integrate our recent acquisitions with a focus on our core business units.

We anticipate that the initiatives and actions associated with our plan described above will provide us with sufficient liquidity in order to operate our business in the normal course for the remainder of 2022 due primarily to the fact that the debt service obligations associated with the Senior Convertible Notes have been deferred to the first half of 2023 and have effectively been substantially pre-funded with the amounts deposited into restricted accounts as required by the Convertible Notes Amendment. In the remainder of 2022, we plan to continue to rigorously explore potential financing alternatives and other strategic options. In addition to and to the extent practical in the future, based on market conditions, we will consider incremental offerings through the ATM Program. From September 30, 2022 through November 10, 2022, we have utilized $0.9 million of the total $3.5 million authorized by the ATM Program. The earn-out payment associated with a 2021 acquisition, which is intended to be made in shares of Common Stock, is scheduled to be settled by the end of December 2022 (see Note 3). If the seller elects for the settlement to be made in cash, it becomes subject to a reduction of 25 percent and could be deferred into the first quarter of 2023.

If we are unable to secure other potential financing alternatives or fail to execute any other strategic options to raise sufficient additional funds through the first half of 2023, including through the ATM Program, we will have to develop and implement more aggressive plans to address our liquidity needs and our ability to satisfy the scheduled maturity of our obligations under the Senior Convertible Notes. Such plans could include extending payables, further reductions of expenditures (including the termination of additional employees) and reducing or eliminating investments in and the funding of certain of our business units and initiatives, or otherwise substantially scale back our business plan until sufficient additional capital is raised through other equity or debt offerings. Such offerings may include the issuance of shares of Common Stock, warrants to purchase Common Stock, preferred stock, convertible debt or other instruments that may dilute the interests of our current shareholders. Accordingly, we may be subject to additional risks, including retention of key employees and limitations on the extension of credit by our vendors and other service providers. If we are required to raise additional capital as discussed above and if we cannot timely raise additional funds, we may be unable to meet the financial covenants of the Senior Convertible Notes, which could result in an event of default under those instruments which could adversely impact the Company. See the risks detailed in our Form 10-K under “Item 1A. Risk Factors – Risks Relating to our Convertible Debt”.

Our ability to continue as a going concern is dependent upon our ability to successfully execute the plans described above and attain profitable operations. Despite the comprehensive scope of our plans, the inherent risks associated with their successful execution are not sufficient to fully overcome substantial doubt about our ability to continue as a going concern for one year from the date of issuance of the consolidated financial statements. Accordingly, if we are unable to raise sufficient capital we may have to reduce operations which could significantly and adversely affect our results of operations. 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 our debt, 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 relating to the recoverability and classification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to 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 the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022.

The condensed consolidated balance sheet as of December 31, 2021, 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, 2021, which were included in our report on Form 10-K filed on March 31, 2022.

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, 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 doubtful accounts equal to the estimated uncollectible amounts based on our historical collection experience and review of the current status of trade accounts receivable. Receivables are written-off and charged against the recorded allowance when we have exhausted collection efforts without success. The allowance for doubtful accounts was $0.9 million and $0.3 million as of September 30, 2022 and December 31, 2021, 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 nine months ended September 30, 2022 and 2021, two government clients accounted for 12% and 11% of total revenues, respectively. As of September 30, 2022, two government clients accounted for 46% of net accounts receivable and as of December 31, 2021 two government clients accounted for 36% of net accounts receivable.

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 Company’s Common Stock while the Company meets 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.

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 (in thousands):

	As of September 30, 2022		As of December 31, 2021
Long-lived assets:
United States	$	28,234	$	32,356
Canada		6,102		5,229
Total	$	34,336	$	37,585

Adoption of Recent Accounting Pronouncements

The FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”) which, together with related amendments to GAAP, represents ASC Topic 842, Leases (“ASC 842”). ASC 842 superseded all prior GAAP with respect to leases. ASC 842 established a right-of-use model which requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. We adopted ASC 842 effective January 1, 2022 and due to the immaterial impact of applying this standard to our limited assets subject to operating leases, there was no material impact to our balance sheets and statements of operations.

The FASB issued ASU No. 2020-01, Clarifying the Interaction between Topic 321, Topic 323, and Topic 815 (“ASU 2020-01”) which provides guidance clarifying interactions between various standards governing investments in equity securities. The guidance addresses accounting for the transition into and out of the equity method and measurement of certain purchased options and forward contracts to acquire investments. We adopted ASU 2020-01 effective January 1, 2022 and there was no material impact to our balance sheets and statements of operations.

The FASB issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, (“ASU 2021-04”) which provides clarification and reduces diversity in practice with respect to an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. We adopted ASU 2021-04 effective January 1, 2022 and there was no material impact to our balance sheets and statements of operations.

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