June 29, 2022 0 1 1 Non-accelerated Filer Q3 false 0001755953 --12-31 2022 DE Akerna Corp. 4,023,294 Underwriting Agreement and upon closing of the Unit Offering, we issued to the Underwriter warrants to purchase up to 2,173,913 shares of Common Stock (the “Underwriter Warrants” and, together with the Common Warrants and the Pre-Funded Warrants, the “Warrants”), which is 5.0% of the aggregate number of Shares and Shares issuable upon exercise of the Pre-Funded Warrants sold in the Unit Offering. 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 $0.23, which is the public offering price per unit. 0 0.1 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. The Common Warrants and Underwriter Warrants are exercisable for a combined amount of 2,282,609 shares of Common Stock at $4.60 per share or a ratio of 20 warrants for one share 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 September 30, 2022

 

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 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


i


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

1


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


2


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

 

3


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


4



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


5


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

6


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 Managements 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 Entitys 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.  

 

7



 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. 

 

8


 

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. 


9


 

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 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.  

 

10


 

Recent Accounting Pronouncements Pending Adoption 


The FASB issued ASU No. 2016-13, Measurement 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 and entity to estimate CECL on trade receivables at inception, based on historical information, current conditions, and reasonable and supportable forecasts. ASU 2016-13, and subsequent amendments, is effective for us beginning on January 1, 2023. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.


The FABS issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entitys Own Equity (ASU 2020-06), which simplified the accounting for convertible instruments. ASU 2020-06 eliminated certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, ASU 2020-06 eliminates certain of the conditions for equity classification for contracts in an entitys own equity. ASU 2020-06 also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effects of shares settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. ASU 2020-06 is required to be adopted by us beginning on January 1, 2023 and must be applied using either a modified or full retrospective approach. We are currently evaluating the impact ASU 2020-06 will have on our consolidated financial statements.


The FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which amends the accounting related to contract assets and liabilities acquired in business combinations. Under current GAAP, an entity generally recognizes assets and liabilities acquired in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU 2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to businesses combinations occurring on or after the effective date of the amendment. We are currently evaluating the impact this guidance will have on our consolidated financial statements. 


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 issuance of preferred stock in an offering that closed on October 4, 2022 and their subsequent redemption on November 9, 2022, (ii) the approval by our shareholders of the Reverse Stock Split on November 7, 2022 and its effectuation on November 8, 2022, (iii) the offering of 402,345 shares of Common Stock through our ATM Program and (iv) the repricing of certain conversion and exercise prices resulting from the preferred share issuance, as disclosed in Notes 6 and 10, no other subsequent events have occurred that would require recognition in our condensed consolidated financial statements or disclosure in the notes thereto. 


11


The effectuation of the Reverse Stock Split has been applied retrospectively to all periods presented throughout these financial statements. Accordingly, all disclosures of shares of Common Stock, restricted stock awards and restricted stock units herein and any corresponding reference to market, conversion and exercise prices have been adjusted. The following table summarizes the relevant disclosures prior to and after the Reverse Stock Split:





Prior to Reverse Split


After Reverse Reverse Split
Common stock outstanding as of: 







September 30, 2022

80,465,890
4,023,294
July 1, 2022

36,826,733
1,841,336
December 31, 2021
31,001,884
1,550,094
September 30, 2021
27,167,917
1,358,395
July 1, 2021
25,332,439
1,266,621
December 31, 2020
19,901,248
995,062
Common stock, par value $0.0001 as of:


September 30, 2022
$ 8,047
$ 402
July 1, 2022
$ 3,680
$ 184
December 31, 2021
$ 3,100
$ 155
September 30, 2021
$ 2,717
$ 136
July 1, 2021
$ 2,533
$ 127
December 31, 2020
$ 1,990
$ 100
Additional paid-in capital as of:


September 30, 2022
$ 159,834,155
$ 159,841,800
July 1, 2022
$ 150,438,437
$ 150,441,933
December 31, 2021
$ 146,027,258
$ 146,030,203
September 30, 2021
$ 132,803,659
$ 132,806,240
July 1, 2021
$ 123,856,649
$ 123,859,055
December 31, 2020
$ 94,086,433
$ 94,088,323
Weighted average common stock outstanding:


Three months ended September 30, 2022
77,676,935
3,883,847
Three months ended September 30, 2021 
26,442,446
1,322,122
Nine months ended September 30, 2022
48,425,236
2,421,262
Nine months ended September 30, 2021 
24,312,510
1,215,626


12


 




Prior to Split


After Reverse Split
Loss per share:


Three months ended September 30, 2022
$ (0.03 ) $ (0.59 )
Three months ended September 30, 2021
$ (0.06 ) $ (1.17 )
Nine months ended September 30, 2022
$ (1.11 ) $ (22.23 )
Nine months ended September 30, 2021
$ (0.58 ) $ (11.61 )
Selected exercise and conversion prices: 


2022 Common warrant
$ 0.2300
$ 4.6000
2022 Underwriter warrant
$ 0.2300
$ 4.6000
2022 Pre-funded warrant
$ 0.0001
$ 0.0020
2019 Public and Private warrants
$ 11.5000
$ 230.0000
Senior Convertible Notes conversion price
$ 0.3105
$ 6.2100
Outstanding common stock equivalents (assuming exercise and vesting, as applicable, of the underlying instruments):


2019 Public warrants
5,813,804
290,690
2019 Private warrants
225,635
11,282
2022 Common warrants
43,478,261
2,173,913
2022 Underwriter warrants
2,173,913
108,696
Unvested restricted stock units
291,983
14,599
Unvested restricted stock awards
6,679
334


Note 3 – Significant Transactions

 

Restructuring

In May 2022, we implemented the Restructuring as approved by our board of directors. The Restructuring resulted in a reduction of the Company’s workforce by 59 employees, or approximately 33 percent of the Company. We incurred costs of approximately $0.6 million in severance benefits, including employee insurance, associated payroll taxes and legal costs in connection with the Restructuring. Of the total amount incurred, $0.3 million was included in Sales and marketing costs, $0.3 million was recorded in Product development and less than $0.1 million was included in Cost of revenue and General and administrative expenses, respectively. All amounts directly attributable to the severed employees were settled in cash through the period ended September 30, 2022. Accordingly, we have no material obligations remaining associated with the Restructuring. In addition to the reduction in force, the Company's executive leadership team agreed to a temporary 25 percent reduction in salary, subject to certain conditions. 


2021 Acquisitions


Viridian Sciences

 

On April 1, 2021, we completed the acquisition of Viridian, a cannabis business management software provider that is built on SAP Business One. We acquired Viridian in exchange for 50,000 shares of our Common Stock valued at $6.0 million. In addition to the stock consideration, the agreement provides for contingent consideration of up to $1.0 million, payable in additional common stock, if Viridian meets certain revenue criteria. We finalized our purchase price accounting during the three months ended March 31, 2022 and there were no changes to the previously disclosed purchase price accounting. 


13



365 Cannabis

 

On October 1, 2021, we acquired all the issued and outstanding shares of 365 Cannabis. Under the terms of the stock purchase agreement (the Stock Purchase Agreement), the aggregate consideration for the 365 Cannabis shares consisted of an initial purchase price of (1) $5.0 million in cash, (2) $12.0 million in stock, which was settled by issuing 180,000 shares of our Common Stock, and (3) contingent value rights to be issued pursuant to a rights indenture entitling the holders thereof to receive, subject to certain adjustments as set forth in the Stock Purchase Agreement, an aggregate of up to $8.0 million in stock, in the event that 365 Cannabis achieves certain revenue targets as specified in the Stock Purchase Agreement. These rights are accounted for as contingent consideration and were initially measured at a fair value of $6.3 million. Upon the completion of the assessment period associated with the revenue targets, the fair value of the contingent consideration was reduced to $3.3 million as of September 30, 2022 with a corresponding adjustment reflected in our loss from operations for the periods ended September 30, 2022. 

 

We reached a working capital settlement agreement during the first quarter of 2022 in the amount of $1.5 million. As a result of this post-close adjustment, the 365 Cannabis purchase price was reduced by $1.5 million. This was recorded as follows: (1) a receivable of $0.4 million was recorded in other current assets on our condensed consolidated balance sheet as of March 31, 2022 and was received in the second quarter of 2022, (2) a reduction of $0.2 million was made to the working capital accrual that was recorded as of December 31, 2021, and (3) 13,988 shares of Common Stock valued at $0.9 million that were held in escrow were released back to Akerna to address the remainder of the working capital adjustment.


On May 23, 2022, we and the sellers of 365 Cannabis entered into an amendment (the “Amendment”) to the Stock Purchase Agreement in order to provide the sellers an election to have the potential earn-out payment, recognized as contingent consideration in the table below, paid in cash or Common Stock or in any combination thereof. Under the Amendment, if a seller elects to have any portion of the earn-out payment paid in cash such amount payable will be reduced by 25%.


The fair value of the consideration transferred as of the date of acquisition is reflected in the table below (in thousands): 

 

Shares issued

 

$

           11,060

 

Cash

4,982
Contingent consideration (1)

6,300
Total fair value of consideration transferred
$ 22,342
 (1) The fair value of the acquisition date contingent consideration was reduced to $6.3 million during the three months ended September 30, 2022.


The presentation below reflects our final purchase price allocation, summarizing the fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands): 

 

Cash
$ 527
Accounts receivable

 

 

486

 

Prepaid expenses and other current asset

261
Fixed assets

93
Non-compete agreement

80

Acquired technology

 

 

1,040

 

Customer relationships

13,810
Acquired trade name

270
Goodwill

12,489

Accounts payable and accrued expenses

 

 

(2,588

)
Deferred tax liabilities

(826 )

Deferred revenue

 

 

(3,300

)

Net assets acquired

 

$

22,342

 

 

14


The excess of purchase consideration over the fair value of assets acquired and liabilities assumed was recorded as goodwill, which is primarily attributed to the assembled workforce and expanded market opportunities, for which there is no basis for U.S. income tax purposes.    


Pro Forma Financial Information


The following unaudited pro forma consolidated operating results give effect to the Viridian and 365 Cannabis acquisitions, as if they had been completed as of January 1, 2021 (in thousands): 




Nine Months Ended


September 30,


2021
Revenue $ 22,218,616
Net loss $ (15,472,157 )



Three Months Ended

September 30,


2021
Revenue $ 7,520,320
Net loss $ (1,982,553 )


The pro forma financial information for the period presented above has been calculated after adjusting the results of Viridian and 365 Cannabis to reflect the business combination accounting effects resulting from this acquisition, including the amortization expense from acquired intangible assets as though the acquisition occurred as of the beginning of the periods indicated above as well as direct acquisition costs. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the years indicated above. 


Note 4  – Revenue and Contracts with Customers

 

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


Software Revenue. Our software revenue is generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform®, Ample, Trellis, Viridian, 365 Cannabis, and our government regulatory platform, Leaf Data Systems, and the sale of business intelligence, data analytics and other software related services. For our SMB customers, software contracts are generally annual contracts paid monthly in advance of service and typically cancellable upon 30 days’ notice after the end of the contract period. Leaf Data Systems contracts are generally multi-year contracts payable annually or quarterly in advance of service. Commercial software and Leaf Data Systems contracts generally may only be terminated early for breach of contract as defined in the respective agreements. Our enterprise contracts are typically multi-year contracts paid monthly in advance of services and are generally cancellable with at least one months notice before the end of the contract period. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term. We typically invoice customers at the beginning of the term, in multi-year, annual, quarterly, or monthly installments. When a collection of fees occurs in advance of service delivery, revenue recognition is deferred until such services commence. Revenue for implementation fees is recognized ratably over the expected term of the contract, including expected renewals.

 

15


 

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


Consulting Revenue. Consulting services revenue is generated by providing solutions for operators in the pre-application of licensures and pre-operational phases of development and consists of contracts with fixed terms and fee structures based upon the volume and activity or fixed-price contracts for consulting and strategic services. These services include application and business plan preparation as they seek licenses to be granted. Consulting projects completed during the pre-application phase generally solidify us as the software vendor of choice for subsequent operational phases once the operator is granted the license. As a result, our consulting revenue is driven as new emerging states pass legislation, and as our client-operators gain licenses. When these services are not combined with subscription revenues as a single unit of account, these revenues are recognized as services are rendered and accepted by the customer. 

 

Other Revenue. Our other revenue is derived primarily from point-of-sale hardware and other non-recurring revenue. We recognize revenue as these products are delivered and title has transferred. 

 

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

 

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


Disaggregation of Revenue

We derive the majority of our revenue from subscription fees paid for access to and usage of our software as a service, or 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.  


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


The following tables summarizes our revenue disaggregation of enterprise offerings and non-enterprise offerings for the following periods (in thousands):


Nine Months Ended September 30,



2022


2021

Enterprise

$

8,478

 


$

2,366


Non-enterprise

9,972

 


11,690


 

$

18,450

 


$

14,056




Nine Months Ended September 30,



2022


2021

United States

$

12,814

 


$

10,272


Canada

5,636

 


3,784


 

$

18,450

 


$

14,056


 

16


 

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 September 30, 2022 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 $23.0 million as of September 30, 2022, of which $12.2 million is expected to be recognized as revenue over the next twelve months.  


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 nine months ended September 30, 2022 (in thousands):

 

 

As of
December 31, 2021

 


Net additions

 


Revenue recognized

 


As of
September 30, 2022

Deferred revenue

$

4,126

 


11,793

 


(13,269

)

$

2,650

 

Of the $18.4 million of revenue recognized in the nine months ended September 30, 2022, $3.8 million was included in deferred revenue at December 31, 2021.

 

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 nine months ended September 30, 2022 (in thousands):



 

As of
December 31, 2021

 


Additions

 


Amortized costs 

 


As of
September 30, 2022

Deferred contract costs

$

261

 


289

 


(276 )

$

274

 

17


Note 5 - Goodwill and Intangible Assets, net 


Impairments

Based on our qualitative assessment of goodwill, we determined it was necessary to perform a quantitative valuation of goodwill as of March 31, 2022 and June 30, 2022. Unchanged from the year ended December 31, 2021, we determined there were two reporting units: the enterprise reporting unit which is comprised of the enterprise software offerings and the non-enterprise reporting unit which is comprised of the non-enterprise software offerings. The valuation of our goodwill was determined with the assistance of an independent valuation firm using the income approach (discounted cash flows method) and the market approach (guideline public company method). Our significant assumptions in these analyses include, but are not limited to, future cash flow projections, the weighted average cost of capital, the discount rate, the implied control premium, the terminal growth rate, and the tax rate. Our estimates of future cash flows are based on current regulatory and economic climates, recent operating results, and planned business strategies. These estimates could be negatively affected by changes in federal, state, or local regulations or economic downturns. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from the Company’s estimates. If our ongoing estimates of future cash flows are not met, we may have to record additional impairment charges in future periods. We also use the Guideline Public Company Method, a form of the market approach (utilizing Level 3 unobservable inputs), which is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. As such, we believe the current assumptions and estimates utilized are both reasonable and appropriate.

Enterprise Reporting Unit

During the six months ended June 30, 2022, due primarily to a continued decline in market valuation from December 31, 2021, we recorded an impairment expense of $12.9 million to goodwill for our enterprise reporting unit. To perform our analysis, we applied a 50% weighting to the market approach and 50% weighted to the income approach. We did not record any impairments during the three months ended September 30, 2022 as well as the three and nine months ended September 30, 2021.

Non-Enterprise Reporting Unit  

During the six months ended June 30, 2022, due primarily due to a continued decline in market valuation from December 31, 2021, we recorded impairment expenses of $23.5 million including impairments of $12.3 million and $11.2 million for each of the three months ended March 31, 2022 and June 30, 2022, respectively, related to our non-enterprise reporting unit. To perform our analysis, we applied a 25% weighting to the income approach and a 75% weighting to the market approach. We did not record any impairments during the three months ended September 30, 2022 as well as the three and nine months ended September 30, 2021.

Finite-lived Intangible Assets, Net

We performed a two step impairment test for the asset groups that had indicators of impairment during the three months ended June 30, 2022 and as a result of these analyses, we recorded impairments of $3.2 million attributable to certain intangible assets and capitalized software associated with one specific business line within the Non-Enterprise Reporting Unit. We did not record any impairments during the three months ended September 30, 2022 as well as the three and nine months ended September 30, 2021.

 

18



Note 6 – Long Term Debt

 

Long-term debt was comprised of the following as of  the dates presented:


September 30, 2022


December 31, 2021

Fair value of debt
14,475,000


17,305,000
Less: Current portion
(9,900,000 )

(13,200,000 )
Noncurrent portion $ 4,575,000

$ 4,105,000

 


Senior Convertible Notes 

On October 5, 2021we entered into the 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 (the “2020 Notes”) and fund our growth initiatives through 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 SPA, from $6.21 per share as a result of the offering of convertible preferred stock on that date (see Note 10). The Senior Convertible Notes are to be repaid in monthly installments, which was deferred to January 1, 2023 in connection with the Convertible Notes Amendment (see below).

In connection with the SPA and the Senior Convertible Notes, we and certain of our subsidiaries entered into an amended Security and Pledge Agreement (the “Security 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 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 Agreement, the Collateral Agent will have certain rights under the Security 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 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 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.

19


On June 30, 2022, we and the holders Senior Convertible Notes entered into the Convertible Notes Amendment and added covenants such that (a) we are subject to a daily cash test of having an available cash balance of at least $7.0 million, which amount shall be reduced by $1.0 million on each of the dates at which the aggregate principal due upon the Senior Convertible Notes is equal to or less than $14.0 million and $11.0 million, subject in all cases to a minimum of $5.0 million, and (b) we established and maintain bank accounts for each holder for an aggregate amount of $7.0 million with such amount to be released from the accounts only upon the written consent of such holder, provided that $1.0 million will automatically release from the accounts upon the occurrence of each of the dates at which the aggregate principal due upon the Senior Convertible Notes is equal to or less than $14.0 million and $11.0 million, subject to certain conditions. Further the holders of the Senior Convertible Notes waived provisions such that (i) no amortization payments are due and payable for any payments previously required to be made from July 1, 2022 through January 1, 2023, (ii) the holders of the Senior Convertible Notes will not accelerate any previously deferred installment amounts until January 1, 2023 and (iii) the terms of the SPA which would provide for reset of the conversion price of the Senior Convertible Notes as a result of the issuance of securities under the 2022 Unit Offering (see Note 10) and instead agree to a reset of the conversion price equal to a per share price of 135% of the 2022 Unit Offering price, or $6.21 per unit, which was subsequently reduced to $4.75 per share on October 4, 2022 as described above.

On September 27, 2022, the holders of the Senior Convertible Notes granted a waiver of the Required Reserve Amount under the Senior Convertible Notes and SPA for a period retroactive from August 30, 2022 until November 30, 2022 conditioned on the Company pursuing the Reverse Stock Split by no later than November 30, 2022, to cure the deficiency.

2020 Notes

We issued 2020 Notes with a principal amount of $17.0 million at a purchase price of $15.0 million on June 9, 2020. The 2020 Notes were paid in full on October 5, 2021 and were replaced by the Senior Convertible Notes. 

Method of Accounting and Activity During the Periods

Upon the dates that they were issued, we made irrevocable elections to apply the fair value option to account for each of the Senior Convertible Notes and the 2020 Notes. Disclosures, including the assumptions used to determine the fair values of these debt instruments, are provided in Note 11. 

During the nine months ended September 30, 2022, we made $5.4 million in principal payments on the Senior Convertible Notes, of which $1.4 million was settled in cash and the remaining $3.9 million was settled in Common Stock. During the nine months ended September 30, 2022, the fair value of the Senior Convertible Notes increased by $2.5 million. Of the adjustment, a decrease of $0.3 million resulted from instrument-specific credit risk and was recognized as other comprehensive income and accumulated in equity and an increase of $2.8 million was recognized in our consolidated statement of operations as a change in fair value of convertible notes. As of September 30, 2022, the fair value of the Senior Convertible Notes on our consolidated balance sheet was $14.5 million. During the nine months ended September 30, 2021, we made $11.6 million in principal payments on the 2020 Notes, of which $1.2 million was settled in cash and the remaining $10.4 million was settled in Common Stock. During the nine months ended September 30, 2021, the fair value of the 2020 Notes increased by $2.0 million. Of the adjustment, an increase of less than $0.1 million resulted from instrument-specific credit risk and was recognized as other comprehensive income and accumulated in equity and an increase of $2.0 million was recognized in our consolidated statement of operations as a change in fair value of convertible notes.  

 

Note 7  - Income Taxes

 

Our effective tax rate was 0.50% and 0.07% for the nine months ended September 30, 2022 and 2021, 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 is impacted by indefinite-lived deferred tax liabilities, resulting primarily from the acquisition of 365 Cannabis, 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 US tax law. Uncertain tax positions related to penalties of less than $0.1 million have been reversed for the three months ended September 30, 2022 as a result of the Internal Revenue Services dismissal of the potential penalties. We paid a total of less than $0.1 million for income taxes, net of refunds received, in certain state and national jurisdictions during each of the nine months ended September 30, 2022 and 2021, respectively.


20


Note 8  - Supplemental Balance Sheet Disclosures

 

Prepaid expenses and other current assets consisted of the following: 

 


As of


As of


September 30,


December 31,


 2022
 
 2021

Software and technology

$
399,824
 
$ 687,740
Professional services, dues and subscriptions              297,106  
             546,126
Insurance              215,762  
             264,097
Deferred contract costs               273,521  
             260,899
Unbilled receivables              841,453  
             506,984
Other                302,366  
               117,918
Total prepaid expenses and other current assets  $      2,330,032  
$        2,383,764


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



As of


As of


September 30,


December 31,


2022


2021

Accounts payable  $ 1,270,695  
$ 1,943,457
Professional fees   234,750  
  319,590
Sales taxes   515,789  
  360,361
Compensation   517,359  
  1,123,467
Contractors   556,766  
  1,288,730
Settlements and legal
1,084,294


681,045
Other   451,028  
  346,870
Total accounts payable, accrued expenses, and other accrued liabilities $ 4,630,681  
$ 6,063,520

 

Note 9 - Commitments and Contingencies

 

Litigation


On December 4, 2020, TechMagic USA LLC (TechMagic) filed suit against our wholly-owned subsidiary, Solo, in the Massachusetts Superior Court, Department Business Litigation, seeking recovery for certain unpaid invoices pursuant to a Master Services Agreement dated February 5, 2018 (the Master Services Agreement) by and between TechMagic and Solo. The suit sought recovery for continued fees under the Master Services Agreement through the end of January 2021. Akerna provided a notice of termination of the Master Services Agreement on November 23, 2020 and the parties disputed the effective date of the termination. Solo disputed the validity of the invoices, in whole or in part. Mr. Ashesh Shah, formerly the president of Solo and currently the holder of less than 5% of our issued and outstanding shares of Common Stock is, to our knowledge, the founder and one of the principal managers of TechMagic. On May 21, 2021, Solo filed suit against two of Solos former directors, Mr. Shah and Palle Pedersen. Solo sought recovery for Mr. Shah’s intentional interference with contractual relations, and the defendant's breaches of various fiduciary duties owed to Solo. Defendant Shah engaged in improper communications with Solos customers with the intent that those customers cease their contractual relations with Solo. The defendants also entered into an improper contract with a contractual counter party with whom the defendants had a conflict of interest. The defendants filed a motion to dismiss, which the court found unpersuasive and denied. In July 2022, we entered into an agreement with TechMagic and the defendants to dismiss all litigation and claims described above. In connection with the settlement agreement, we reversed our previously accrued loss contingency of $0.5 million during the quarter ended June 30, 2022


21



On April 2, 2021, TreCom Systems Group, Inc. (“TreCom”) filed suit against Akerna and our wholly-owned subsidiary, MJ Freeway, LLC, 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 MJ Freeway and TreCom. MJ Freeway provided a notice of termination of the operative Subcontractor Agreement on August 4, 2020. MJ Freeway 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. As of December 31, 2021 and September 30, 2022, we recognized a loss contingency of $0.2 million. 


From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. As of September 30, 2022, 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.


Operating Leases


During the first half of 2022, we began negotiations to terminate the 365 Cannabis office lease in Las Vegas, Nevada. We recorded an obligation and lease termination expense of $0.5 million which is management’s best estimate of the costs to exit our existing lease. The lease termination expense is included within the General and Administrative expense line item on the condensed consolidated statement of operations. 


Note 10 – Equity


Convertible Redeemable Preferred Stock


On October 4, 2022, we completed an offering 400,000 of shares of the Company’s Series A Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), and 100,000 shares of the Company’s Series B Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”, and together with the Series A Preferred Stock, the “Convertible Redeemable Preferred Stock”), at an offering price of $9.50 per share, representing a 5% original issue discount to the stated value of $10.00 per share, for gross proceeds of approximately $4.75 million in the aggregate, before the deduction of the fees and offering expenses of our financial advisor. The aggregate net proceeds (after deducting the fees and expenses of our financial advisor) together with the additional amount to provide for the 105% redemption premium on the Convertible Redeemable Preferred Stock was deposited in an account with an escrow agent. The shares of the Convertible Redeemable Preferred Stock are convertible, at a conversion price of $0.25 per share (subject in certain circumstances to adjustments), into shares of our Common Stock, at the option of the holders and, in certain circumstances, by the Company.


On November 7, 2022, we held a special meeting of stockholders to consider an amendment (the “Amendment”) to our Amended and Restated Certificate of Incorporation (the “Charter”), to effect a reverse stock split of the outstanding shares of Common Stock by a ratio of 20 for 1 as determined by our Board of Directors. The holders of the Convertible Redeemable Preferred Stock agreed to not transfer, offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of the shares of the Convertible Redeemable Preferred Stock until the Reverse Stock Split, voted the shares of the Series A Preferred Stock purchased in the offering in favor of the Amendment and voted the shares of the Series B Preferred Stock purchased in the offering in a manner that “mirrored” the proportions on which the shares of Common Stock (excluding any shares of Common Stock that did not vote), the Company’s special voting share (excluding any proportion of the special voting share that did not vote) and Series A Preferred Stock voted on the Reverse Stock Split. The Reverse Stock Split required the approval of the majority of the issued and outstanding shares entitled to vote on the matter. Because the Series B Preferred Stock was automatically and without further action of the holder voted in a manner that “mirrored” the proportions on which the shares of Common Stock (excluding any shares of Common Stock that were not voted), the Company’s special voting share (excluding any proportion of the special voting share that was not voted) and Series A Preferred Stock voted on the Reverse Stock Split, abstentions by common stockholders did not have any effect on the votes cast by the holders of the Series B Preferred Stock. The Amendment was approved on November 7, 2022 and the Reverse Stock Split was effectuated at 12:01 a.m. Eastern Standard Time on November 8, 2022 (see Note 2 for the effects of the retroactive application of the effects for all of the periods presented herein).  


22



The holders of all of the Convertible Redeemable Preferred Stock redeemed their shares for cash at 105% of the stated value, or $10.50 per share, of such shares on November 9, 2022. Accordingly, we directed the escrow agent to pay $5.25 million on November 10, 2022 to the holders from the escrow account established upon the date of the Convertible Redeemable Preferred Stock offering.


Special Voting Preferred Stock and Exchangeable Shares 


In connection with a prior transaction in which we acquired Ample in exchange for 3,294,580 million 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, including adjustment to reflect the Reverse Stock Split. 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 nine months ended September 30, 2022, several Ample shareholders exchanged a total of 18,094 Exchangeable Shares with a value of $138,419 for 904 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 September 30, 2022, there were a total of 291,192 exchangeable shares remaining as issued and outstanding which could be exchanged for 14,560 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 November 10, 2022, we sold a total of 402,345 shares of Common Stock with an aggregate gross purchase price of $0.9 million under the 2022 ATM Program.


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 have an 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 the Convertible Redeemable Preferred Stock offering, the exercise price of the Common Warrants was reduced to $3.518 per share effective October 5, 2022.

23



We granted the Underwriter a 45-day option from the effective date of the 2022 Unit Offering to purchase from us (i) additional shares of Common Stock and/or (ii) Common Warrants and/or (iii) Pre-Funded Warrants, in any combination thereof solely to cover over-allotments(the “Over-allotment Option”); however, the Over-allotment Option expired unexercised on August 14, 2022. In addition, we issued to the Underwriter warrants to purchase additional shares of Common Stock (the “Underwriter Warrants”). Upon the expiration of the Over-allotment Option, 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 the Convertible Redeemable Preferred Stock offering, the exercise price of the Underwriter Warrants was reduced to $3.518 per share effective October 5, 2022. The Underwriter Warrants may be transferred by the Underwriter without restriction during the same period.

The Unit Offering closed on July 5, 2022 and we received net proceeds of approximately $9.2 million after deducting underwriting discounts and commissions and related expenses including legal and other professional fees. In connection with the Convertible Notes Amendment, a total of $7.0 million of the proceeds were deposited into certain restricted cash accounts. We used the remaining net proceeds from the 2022 Unit Offering for general corporate purposes, including working capital, marketing, product development and capital expenditures. As of September 30, 2022, 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. Accordingly, the net proceeds of $9.2 million were recorded as: (i) an increase to Common Stock of $217 representing the issuance of 1,469,143 shares of Common Stock attributable to the Units and the issuance of 704,770 shares of Common Stock from the exercise of the Pre-funded Warrants, both at their par value of $0.0001 per share and (ii) an increase to Additional Paid-In Capital of $9.2 million for the amounts received over par value less the underwriting discounts and commissions and related expenses including legal and other professional fees.

2019 Warrants

In connection with MTech Acquisition Corp.’s (MTech) initial public offering, MTech sold 287,500 units at a purchase price of $200.00 per unit, inclusive of 37,500 units sold to the underwriters on February 8, 2018, upon the underwriters’ election to fully exercise their over-allotment option. Each unit consisted 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 at an exercise price of $230.00. Concurrently with MTech’s initial public offering, MTech sold 12,187 units at a purchase price of $200.00 per unit on a private offering basis.  Each unit 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 at an exercise price of $230.00.  

 

Upon completion of the mergers between MTech and MJF on June 17, 2019, as contemplated by the Merger Agreement dated October 10, 2018, as amended (“Mergers”), the MTech Public Warrants and the MTech Private Warrants were converted, respectively, at an exchange ratio of one-for-one to a warrant to purchase one share of Akerna’s Common Stock with identical terms and conditions as the MTech Public Warrants (“Public Warrant”) and the MTech Private Warrants (“Private Warrant”, collectively with the Public Warrants, “Warrants”)  In connection with the completion of the Mergers, we also issued 9,468 common stock purchase warrants upon the cashless exercise of a unit purchase option, which warrants have identical terms to the Public Warrants and are included in references to Public Warrants and Warrants herein.   

Outstanding Warrants

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

 

Exercise Price

 

Expiration Date

 

Balance as of December 31, 2021


  Issued

  Exercised 
    Expired
   

Balance as of

September 30,

2022

 
2019 Public Warrants (1)
$ 230.00   6/19/2024     5,813,800    
         
      5,813,800  
2022 Unit Offering 
                 
             
       
 
     Pre-funded Warrants (2)
$ 0.002   6/29/2027        
14,095,400        (14,095,400 )  
      -  
     Common Warrants (3)
$ 4.60   6/29/2027        
43,478,261          
      43,478,261  
     Underwriter Warrants (3)
$ 4.60   6/29/2027        
2,173,913          
      2,173,913  
 
            5,813,800    
59,747,574       (14,095,400 )  
      51,465,974  

(1) 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.

(2) A total of 14,095,400 Pre-funded Warrants were issued and exercised in exchange for 704,770 shares of  Common Stock.

(3) The Common Warrants and Underwriter Warrants are exercisable for a combined amount of 2,282,609 shares of Common Stock at $4.60 per share or a ratio of 20 warrants for one share of Common Stock.

24


 

Note 11 - Fair Value 

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 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 and the  2020 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 September 30, 2022 and September 30, 2021:



Three Months Ended September 30,




2022

2021

Fair value balance at beginning of period 


$ 13,388,000

$ 6,152,000
Payments of principal



(2,344,226 )
Change in fair value reported in the statements of operations 

1,113,000


23,227

Change in fair value reported in other comprehensive loss 



(26,000 )

3,000

Fair value balance at end of period


$ 14,475,000

$ 3,834,001

 



Nine Months Ended September 30,


2022

2021

Fair value balance at beginning of period 
$ 17,305,000

$ 13,398,000
Payments of principal

(5,380,000 )

(11,613,903 )
Change in fair value reported in the statements of operations 

2,840,000


2,030,904
Change in fair value reported in other comprehensive loss  

(290,000 )

19,000
Fair value balance at end of period
$ 14,475,000

$ 3,834,001


The estimated fair values of the Senior Convertible Notes and 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 2020 Notes reflect our assumptions about the assumptions that market participants would use in valuing the Senior Convertible Notes and 2020 Notes as of their issuance dates and subsequent reporting periods. The Convertible Notes Amendment qualified as a troubled debt restructuring (TDR); however, there was no impact on the consolidated balance sheet or in the statement of operations as a result of the TDR as the Senior Convertible Notes are recorded at their fair value.   


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


Fair Value Assumptions - Convertible Notes

 

September 30, 2022

 

 

December 31, 2021

 

Face value principal payable

  

$

14,660,000

  

  

$

20,000,000

  

Original conversion price (1)

 

$

6.2100

 

 

$

81.00

 

Value of Common Stock

 

$

1.80

 

 

$

35.00

 

Expected term (years)

 

 

2.0

 

 

 

2.8

 

Volatility

 

 

92

%

 

 

75

%

Market yield 

 

 

45.3
%

 

 

 37.1

Risk free rate

 

 

4.2

%

 

 

1

%

Issue date

October 5, 2021


October 5, 2021
Maturity date

October 5, 2024


October 5, 2024

(1) 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).

 

25



Fair Value Measurement – Private Warrants
  

For the Private Warrants classified as derivative liabilities, 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 months ended September 30, 2022 and September 30, 2021:

 


Three Months Ended September 30,

2022

2021

Fair value balance at beginning of period

$

11,282



$ 354,247

Change in fair value reported in the statements of operations

 

(2,257

)

(194,046 )

Fair value balance at end of period

$

9,025



$ 160,201

 


Nine Months Ended September 30,

2022

2021
Fair value balance at beginning of period $ 63,178

$ 311,376
Change in fair value reported in the statements of operations 
(54,153 )

(151,175 )
Fair value balance at end of period $ 9,025

$ 160,201

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 record the fair value of the Private Warrants on the consolidated balance sheets under the caption “Derivative liability” and recognize changes to the 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

 

September 30, 2022

 

 

December 31, 2021

 

Number of Private Warrants 

  


225,635

  

  


225,635

  

Original conversion price

 

$

230.00

 

 

$

230.00

 

Value of Common Stock

 

$

1.80

 

 

$

35.00

 

Expected term (years)

 

 

1.71

 

 

 

2.46

 

Volatility

 

 

87.6

%

 

 

85.8

%

Risk free rate

 

 

4.1

%

 

 

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 $ 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 10).


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Note 12 - Earning per Share


During the three and nine months ended September 30, 2022 and 2021, we used the two-class method to compute net loss per share because we issued securities other than common stock that are economically equivalent to a common share in that the class of stock has the right to participate in dividends should a dividend be declared payable to holders of Akerna Common Stock. These participating securities were the Exchangeable Shares issued by our wholly owned subsidiary in exchange for our acquired ownership interest in Ample. The two-class method requires earnings for the period to be allocated between the Common Stock and participating securities based on their respective rights to receive distributed and undistributed earnings. Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current period earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the period’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the Exchangeable Shares have no obligation to fund losses. 


Diluted net loss per common share is calculated under the two-class method by giving effect to all potentially dilutive common stock equivalents, including warrants, restricted stock, restricted stock units, and shares of common stock issuable upon conversion of our Senior Convertible Notes for periods in 2022 and 2020 Notes for periods in 2021. We analyzed the potential dilutive effect of any outstanding convertible securities under the if-converted method, in which it is assumed that the outstanding Exchangeable Shares and, in 2022, the Senior Convertible Notes, in 2021, the 2020 Notes, are converted to shares of Common Stock at the beginning of the period or date of issuance, if later. We report the more dilutive of the approaches (two-class or if-converted) as the diluted net loss per share during the period. The dilutive effect of unvested restricted stock and restricted stock units is reflected in diluted loss per share by application of the treasury stock method and is excluded when the effect would be anti-dilutive.  


The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include the effect of potential outstanding common shares that would have been anti-dilutive for the period.


The table below details potentially outstanding shares on a fully diluted basis that were not included in the calculation of diluted earnings per share: 



As of September 30,

 

2022




2021

 

Shares issuable upon exchange of Exchangeable Shares
14,560


19,297

Shares of common stock issuable upon conversion of convertible notes (1)





63,921
Warrants






2019 Public Warrants

290,690




290,690
2022 Unit Offering - Common Warrants
2,173,913



2022 Unit Offering - Underwriter Warrants

 

108,696




 

Unvested restricted stock units

 

14,599




42,993

 

Unvested restricted stock awards

 

334




1,620

 

Total

 

2,602,792




418,521

 

 (1) Amounts for shares of common stock issuable upon conversion of convertible notes were excluded for the 2022 period due to the waiver of the Required Reserve Amount (see Note 6).


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2022, and the related notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).  


Akerna Corp., herein referred to as “we”, “us”, “our,” the  Company or “Akerna”, through our wholly-owned subsidiaries MJ Freeway, LLC, Trellis Solutions, Inc., Ample Organics, Inc., solo sciences, inc., Viridian Sciences Inc., and The NAV People, Inc. d.b.a. 365 Cannabis.

Forward-Looking Statements

This Quarterly Report on Form 10-Q including all exhibits hereto contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding future events or our future results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management. In some cases, forward-looking statements can be identified because they contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “likely,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements are based on information available to our management as of the date of this Quarterly Report and our managements good faith belief as of such date with respect to future events and are subject to a number of risks, uncertainties, and assumptions that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements, in particular the substantial risks and uncertainties related to the ongoing COVID-19 pandemic. Important factors that could cause such differences include, but are not limited to:

 


our ability to continue as a going concern and manage our cash flow;

our ability to manage our history of losses;

 

our ability to sustain our revenue growth rate, to achieve or maintain profitability, and to effectively manage our anticipated growth;

 

our dependence on the commercial success of our clients, the continued growth of the cannabis industry and the regulatory environment in which the cannabis industry operates

 

our ability to attract new clients on a cost-effective basis and the extent to which existing clients renew and upgrade their subscriptions;

 

the timing of our introduction of new solutions or updates to existing solutions;

 

our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content;

 

our ability to respond to changes within the cannabis industry, including legal and regulatory changes;

 

the effects of adverse changes in, or the enforcement of, federal laws regarding our clients’ cannabis operations or our receipt of proceeds from such operations;

 

our ability to manage unique risks and uncertainties related to government contracts;

 

our ability to manage and protect our information technology systems;

our ability to maintain and expand our strategic relationships with third parties;

our ability to deliver our solutions to clients without disruption or delay;

our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance;


our ability to expand our international reach;

 


our ability to retain or recruit officers, key employees, and directors;

 

our ability to raise additional capital or obtain financing in the future;

 

our ability to successfully integrate acquired businesses with Akerna’s business within anticipated timelines and at their expected costs;

 

our ability to complete planned acquisitions on time or at all due to failure to obtain stockholder approval or governmental or regulatory clearances, or the failure to satisfy other conditions to completion, or the failure of completion for any other reason;

 


our response to adverse developments in the general market, business, economic, labor, regulatory, and political conditions, including worldwide demand for cannabis and the spot price and long-term contract price of cannabis;

 

our response to competitive risks;

our ability to protect our intellectual property;

the market reaction to negative publicity regarding cannabis;

our ability to manage the requirements of being a public company;

our ability to implement effective disclosure controls and procedures and internal control over financial reporting;

our ability to service our convertible debt and meet ongoing covenants under our convertible notes;

our accounting treatment of certain of our private warrants;

our ability to effectively manage any disruptions to our business and/or any negative impact to our financial performance caused by the economic and social effects of the COVID-19 pandemic and measures taken in response; and

 

other factors discussed in other sections of this Quarterly Report on Form 10-Q, including the sections of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Part II, Item 1A. “Risk Factors” and in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission, or the SEC, on March 31, 2022, under Part I, Item 1A, “Risk Factors.” 

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Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated, or expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation to revise subsequently any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We qualify all the forward-looking statements contained in this Quarterly Report by the foregoing cautionary statements.

 

Business Overview


Akerna is a leading provider of software solutions within the cannabis industry. Cannabis businesses face significant complexity due to the stringent regulations and restrictions that shift based on regional, state, and national governing bodies. As the first to market more than ten years ago, Akerna’s family of software platforms help to enable regulatory compliance and inventory management across the entire supply chain. When the legal cannabis market started to grow, we identified a need for organic material tracking and regulatory compliance software as a service (SaaS) solution customized specifically for the unique needs of the industry. By providing an integrated ecosystem of applications and services that help our clients enable compliance, regulation, consumer safety and taxation, Akerna is building the technology backbone of the cannabis industry. While designed specifically for the unique needs of the cannabis market, our solutions are adaptable for other industries requiring government regulatory oversight, or where the tracking of organic materials from seed or plant to end products is desired.

 

Executing upon our expansion strategy, we acquire complementary software brands that service the cannabis industry to grow the scope of Akerna’s cannabis ecosystem. Since 2019, we have integrated nine new brands into the Akerna product and service offering. Our first acquisition, Solo Sciences (Solo), was initiated in the fall of 2019, with the full acquisition completed in July 2020. We added Trellis Solutions (Trellis) to our portfolio on April 10, 2020 and finalized the acquisition of Ample Organics (Ample) and Last Call Analytics (Last Call) on July 7, 2020. On April 1, 2021 we completed our acquisition of Viridian Sciences Inc. (Viridian), a cannabis business management software system built on SAP Business One, followed by the acquisition of The NAV People, Inc. d.b.a 365 Cannabis (365 Cannabis), a cannabis business management software system built on Microsoft Business Central, on October 1, 2021. Through our growing family of companies, Akerna provides highly versatile platforms that equip our clients with a central data management system for tracking regulated products. Our solutions also provide clients with integrated security, transparency, and scalability capabilities, all while helping maintaining compliance with their governing regulations.

 

On the commercial side, our products help state-licensed businesses operate in compliance with applicable regional laws. Our integrated ecosystem provides integrations with third-party vendors and add-ons that enhance the capabilities of our commercial software platforms. On the regulatory side, we provide track and trace solutions that allow state governments to monitor compliance of licensed cannabis businesses.  To date, our software has helped monitor the compliance of more than $30 billion in legal cannabis. While our software facilitates the success of legal cannabis businesses, we do not handle any cannabis-related material, do not process cannabis sales transactions within the United States (U.S.), and our revenue is generated from a fixed-fee based subscription and professional services model and is not related to the type or amount of sales made by our clients. 

 

We drive revenue growth through the development of our product line, our acquisitions and from continued expansion of our software and consulting offerings within the cannabis, hemp, and cannabidiol (CBD) industry. Businesses across the regulated cannabis industry use our solutions. The brand recognition of our existing products, our ability to provide services in all areas of the seed-to-sale life cycle, and our wealth of relevant experience attracts cultivation, manufacturing, and dispensary clients who are seeking comprehensive business optimization solutions. Our software solutions are designed to be scalable, and while mid-market and smaller customers have historically been our primary target segment, we are focused on extending our customer reach to address the needs of the emerging enterprise level operator. We believe these larger multi-state/multi-vertical operations represent significant long-term future growth opportunities as the cannabis industry continues to consolidate at a rapid rate. The sophistication of our platform accommodates the complexities of both multi-vertical and multi-state business needs, making us critical partners and allowing us to cultivate long-term, successful relationships with our clients.

 

Our platforms provide licensed businesses with a true enterprise solution for managing their inventory and compliance and allow government regulators to engage in accurate and real-time compliance monitoring. Key capabilities of our technology infrastructure include: 


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Seed-to-Sale Tracking allows the tracking of products from cultivation, through harvest and processing and manufacturing, to the monitoring of the final sale to the patient or consumer. Our traceability technology captures every step in an individual plant’s life, providing visibility into the supply chain from any measurement of finished product dispensed to a patient or customer, back to the plant it came from, and all activity, transportation, and transactions that happen in between. While we do not provide payment processing, and never take, own, or handle any product or cash transaction, our platform records all sales as part of state and jurisdictional compliance Track-and-Trace processes. The data gathered throughout all of these processes is captured, and provides the insights and information needed to run an efficient and streamlined cannabis business. Seed-to-Sale software operates in a complementary relationship with state-mandated Track-and-Trace systems, replicating the reporting functionality and eliminating the need for operators to duplicate their compliance data into two disparate systems. Track-and-Trace systems are designed solely for government regulators to maintain compliance and do not have the sophistication or functionality to provide cannabis business owners with the insights and tools for effective business management. Our seed-to-sale platforms integrate with the state Track-and-Trace compliance system, reporting in the mandated data along the supply chain while also providing business owners with the capabilities to make informed business decisions based on the fully overview of their operations.


Track-and-Trace is the compliance reporting system used by regulatory bodies in most states. In order to adhere to their state-specific compliance regulations, cannabis operators are required to enter specific data points along the supply chain into the state-mandated track-and-trace system. By doing so, regulators can track the movement of cannabis inventory through the full supply chain, even when it moves between facilities or operators. The aggregated view that Track-and-Trace software seeks to ensure that the end product being sold has been grown, harvested, processed, transferred and sold compliantly, and provides assurance of safety to consumers.

 

Single System Integration allows state-licensed clients to manage inventory, customer records, and staff in one tracking system. MJ Platform and Leaf Data Systems platforms can be fully integrated with one another to create a streamlined Seed-to-Sale/Track-and-Trace solution. Additionally, our platforms can also be integrated with systems of numerous third-party suppliers. We have certified integrations with world class accounting solutions, including Sage, SAP, Microsoft and Netsuite. 

 

Anti-Counterfeiting Technology. Solo sciences provides next-generation anti-counterfeiting technology fused with a direct communication system between brands and consumers. The solo sciences mission is to build confidence and establish trust among consumers, while enabling retailers and distributors to close the loop with creators and producers.

 

Cannabis Market Insights are curated using the anonymized data aggregated through our Seed-to-Sale platform for key industry intelligence. With over $30 billion in cannabis sales tracked over the past twelve years, we have cultivated a substantial legal cannabis dataset across 30+ states and multiple countries. This data provides a detailed overview of key industry trends, giving us the ability to provide banks, investors, researchers, cannabis businesses, and non-cannabis businesses with cannabis market intelligence and comparison data.


Enterprise Resource Planning (ERP) software is a business process management software that manages and integrates a company’s financials, manufacturing, inventory, supply chain, operations, commerce, and reporting activities. ERP systems improve an operators efficiency and effectiveness by eliminating disparate systems, consolidating business critical information in a single location, reducing double entry data, and streamlining operations. ERP software solutions built for cannabis operators combine traditional accounting, manufacturing, inventory, and supply chain management with cannabis-specific track and trace and compliance functionality.

 

Using our years of experience, proprietary databases, and resources to identify trends and predict changes in the cannabis industry we evolve our products and better assist our clients in operating in compliance with the applicable laws of their jurisdictions and capitalizing on commercial opportunities within the applicable regulatory framework, with accuracy, efficiency, and geographic specificity. We have worked with clients and governments across the globe to create customized solutions that fit their specific regulatory and commercially compliant needs. While the majority of our clients are in the U.S. and Canada, our solutions allow cannabis businesses to operate efficiently in this fast-changing industry and comply with state, local, and federal (in countries such as Canada, Italy, Macedonia, and Colombia). Akerna and our family of companies is well-positioned to provide compliance solutions for the expanding national and international legal cannabis market.

 

 

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Key Developments


The following general business developments had or may have a significant impact on our results of operations, financial position and cash flows.


Preferred Stock Offering and Reverse Stock Split

On October 4, 2022, we completed an offering 400,000 of shares of the Company’s Series A Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), and 100,000 shares of the Company’s Series B Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”, and together with the Series A Preferred Stock, the “Convertible Redeemable Preferred Stock”), at an offering price of $9.50 per share, representing a 5% original issue discount to the stated value of $10.00 per share, for gross proceeds of approximately $4.75 million in the aggregate, before the deduction of the fees and offering expenses of our financial advisor. The aggregate net proceeds (after deducting fees and offering expenses of our financial advisor) together with the additional amount to provide for the 105% redemption premium on the Convertible Redeemable Preferred Stock was deposited in an account with an escrow agent. The shares of the Convertible Redeemable Preferred Stock are convertible, at a conversion price of $0.25 per share (subject in certain circumstances to adjustments), into shares of our common stock, par value $0.0001 per share (“Common Stock”), at the option of the holders and, in certain circumstances, by the Company.


On November 7, 2022, we held a special meeting of stockholders to consider an amendment (the “Amendment”) to our Amended and Restated Certificate of Incorporation (the “Charter”), to effect a reverse stock split of the outstanding shares of Common Stock by a ratio of 20 for 1 (the “Reverse Stock Split”) as determined by our Board of Directors. The Amendment was approved and the Reverse Stock Split was effectuated at 12:01 a.m. Eastern Standard Time on November 8, 2022 (see Note 2 for the effects of the retroactive application of the effects for all of the periods presented herein)


ATM Offering Program


On September 28, 2022, we entered into a new agreement with A.G.P./Alliance Global Partners (“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, capital expenditures and merger and acquisition activities. Through November 10, 2022, we sold a total of 402,345 shares of Common Stock with an aggregate gross purchase price of $0.9 million under the 2022 ATM Program.


Convertible Notes Amendment

On June 30, 2022, we and the holders that are parties to the securities purchase agreement (the “SPA”) associated with our 2021 Senior Convertible Notes (the “Senior Convertible Notes”) entered into an amendment and waiver agreement (the Convertible Notes Amendment) that added covenants such that (a) we are subject to a daily cash test of having an available cash balance of at least $7.0 million, which amount shall be reduced by $1.0 million on each of the dates at which the aggregate principal due upon the Senior Convertible Notes is equal to or less than $14.0 million and $11.0 million, subject in all cases to a minimum of $5.0 million, and (b) we established and maintain bank accounts for each holder for an aggregate amount of $7.0 million with such amount to be released from the accounts only upon the written consent of such holder, provided that $1.0 million will automatically release from the accounts upon the occurrence of each of the dates at which the aggregate principal due upon the Senior Convertible Notes is equal to or less than $14.0 million and $11.0 million, subject to certain conditions. Further the holders of the Senior Convertible Notes waived provisions such that (i) no amortization payments are due and payable for any payments previously required to be made from July 1, 2022 through January 1, 2023, (ii) the holders of the Senior Convertible Notes will not accelerate any previously deferred installment amounts until January 1, 2023 and (iii) the terms of the SPA which would provide for reset of the conversion price of the Senior Convertible Notes as a result of the issuance of securities under our offering of Common Stock and warrants (the “2022 Unit Offering”) and instead agree to a reset of the conversion price equal to a per share price of 135% of the 2022 Unit Offering price, or $6.21 per unit, which was subsequently reduced to $4.75 per share on October 4, 2022 in connection with the offering of the Convertible Preferred Stock.


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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 shareThe Common Warrants accompanying each of the Units and Pre-funded Units were issued separately and are immediately tradeable separately upon issuance. The Common Warrants have an 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 the Convertible Redeemable Preferred Stock offering, the exercise price of the Common Warrants was reduced to $3.518 per share effective October 5, 2022.

We granted the Underwriter a 45-day option from the effective date of the 2022 Unit Offering to purchase from us (i) additional shares of Common Stock and/or (ii) Common Warrants and/or (iii) Pre-Funded Warrants, in any combination thereof solely to cover over-allotments (the “Over-allotment Option”); however, the Over-allotment Option expired unexercised on August 14, 2022. In addition, we issued to the Underwriter warrants to purchase additional shares of Common Stock (the “Underwriter Warrants”). Upon the expiration of the Over-allotment Option, 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, which was the public offering price per unit. In connection with the Convertible Redeemable Preferred Stock offering, the exercise price of the Underwriter Warrants was reduced to $3.518 per share effective October 5, 2022. The Underwriter Warrants may be transferred by the Underwriter without restriction during the same period.

The Unit Offering closed on July 5, 2022 and we received net proceeds of approximately $9.2 million after deducting underwriting discounts and commissions and related expenses including legal and other professional fees. In connection with the Convertible Notes Amendment, a total of $7.0 million of the proceeds were deposited into certain restricted cash accounts. We used the remaining net proceeds from the 2022 Unit Offering for general corporate purposes, including working capital, marketing, product development and capital expenditures. As of September 30, 2022, 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.

Restructuring


In May 2022, we implemented a corporate restructuring initiative (the “Restructuringas approved by our board of directors. The Restructuring resulted in a reduction of the Companys workforce by 59 employees, or approximately 33 percent of the Company. We incurred costs of approximately $0.6 million in severance benefits, including employee insurance, associated payroll taxes and legal costs in connection with the Restructuring. Of the total amount incurred, $0.3 million was included in Sales and marketing costs, $0.3 million was recorded in Product development and less than $0.1 million was included in Cost of revenue and General and administrative expenses, respectively. All amounts directly attributable to the severed employees were settled in cash through the period ended September 30, 2022. Accordingly, we have no material obligations remaining associated with the Restructuring. In addition to the reduction in force, the Companys executive leadership team agreed to a temporary 25 percent reduction in salary, subject to certain conditions. 


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Financial Results of Operations

 

Revenue

 

We generate revenue from two primary sources: (1) software and (2) consulting services. Revenue from software comprised approximately 96% and 91% of our revenue for the nine months ended September 30, 2022 and 2021, respectively.  Revenue from consulting services comprised approximately 3% and 8% of our revenue for nine months ended September 30, 2022 and 2021, respectively. 

 

Software. Our software is solutioned for our key markets, small and medium-sized business (SMB) and enterprise customers. Our SMB customers become a natural funnel for our larger, more robust enterprise offerings built on SAP and Microsoft. In either market, software revenue is generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform, Ample, Trellis, Viridian, and 365 Cannabis, our government regulatory platform, Leaf Data Systems, and the sale of business intelligence, data analytics and other software related services. Software contracts are generally quarterly, annual, or three-year long contracts paid monthly, quarterly, or annually in advance of service and cancellable upon 30 or 90 days’ notice, although we do have many multi-year commercial software contracts. Leaf Data Systems contracts are generally multi-year contracts payable annually or quarterly in advance of service. Commercial software and Leaf Data Systems contracts generally may only be terminated early for breach of contract as defined in the respective agreements. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term

 

 

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


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


Cost of Revenue and Operating Expenses


Cost of Revenue

 

Our cost of revenue is derived from direct costs associated with operating our commercial and government regulatory software platforms and providing consulting services. The cost of revenue for our commercial and government regulatory platforms relates primarily to hosting and infrastructure costs and subcontractor expenses incurred in connection with certain government contracts. Consulting cost of revenue relates primarily to our employees’ and consultants’ salaries and other related compensation expenses. We record the cost of revenue using the direct cost method. This method requires the allocation of direct costs including support services and materials to the cost of revenue. 


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Product Development Expenses

 

Our product development expenses include salaries and benefits, nearshore contractor expenses, technology expenses, and other overhead related to the ongoing maintenance of our commercial and government regulatory software platforms and planning for new software development. Product development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. Capitalized software development costs consist primarily of employee-related costs. We devote substantial resources to enhancing and maintaining our technology infrastructure, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology.


Sales and Marketing Expenses


Sales and marketing expense is primarily salaries and related expenses, including commissions, for our sales, marketing, and client service staff. We also categorize payments to partners and marketing programs as sales and marketing expenses. Marketing programs consist of advertising, events, such as trade shows, corporate communications, brand building, and product marketing activities. We plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new clients, and sponsoring additional marketing events. The timing of these marketing events will affect our marketing costs in a particular quarter.  


We defer the portion of sales commissions that is considered a cost of obtaining a new contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit, currently one year. We expense the remaining sales commissions as incurred. The rates at which sales commissions are earned varies depending on a variety of factors, including the nature of the sale (new, renewal, or add-on service offering), the type of service or solution sold, and the sales channel. 


General and Administrative Expenses

 

Our general and administrative expenses include salaries and benefits and other costs of departments serving administrative functions, such as executives, finance and accounting, human resources, public relations and investor relations. In addition, general and administrative expense includes non-personnel costs, such as professional fees and other supporting corporate expenses not allocated to cost of revenue, product and development or sales and marketing.


Other (Expense) Income, Net

 

Other (expense) income, net consists of interest income on cash and cash equivalents, interest expense on our debt, quarterly remeasurement of the fair value of our convertible notes and derivative liability, foreign currency gains and losses, and other non-operating gains and losses.


Critical Accounting Policies and Estimates


Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. Since the date of the Annual Report, there have been no material changes to our critical accounting policies.

 

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Results of Operations for the Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2022


The following table highlights our operating revenues and expenses for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021:


 

Nine Months Ended September 30

 


Change


 

2022

 

 

2021

 


Period over Period


Revenues:

 

 

 

 

 


 

 


 


         Software

$

17,756,272

 

 

$

12,809,841

 


$

4,946,431

 


 

39

%

         Consulting

 

618,809

 

 

 

1,135,033

 


 

(516,224

)

 

(45

)%

         Other

 

74,443

 

 

 

111,540

 


 

(37,097

)

 

(33

)%

Total revenue

 

18,449,524

 

 

 

14,056,414

 


 

4,393,110

 


 

31

%

 

 

 

 

 

 

 

 


 

 

 


 

 


Cost of revenues

 

6,091,511

 

 

 

5,339,929

 


 

751,582

 


 

14 %

Gross profit

 

12,358,013

 

 

 

8,716,485

 


 

3,641,528

 


 

42

%

      Gross profit margin

 

67

%

 

 

62


 

 

 


 

 


 

 

 

 

 

 

 

 


 

 

 


 

 


Operating expenses:

 

 

 

 

 

 

 


 

 

 


 

 


         Product development:

5,240,922




4,517,836


723,086


16 %
         Sales and marketing
8,304,411


5,564,519


2,739,892


49 %

         General and administrative

 

6,812,617

 

 

 

8,306,417

 


 

(1,493,800

)

 

(18

)%
         Depreciation and amortization
6,094,963


3,605,435


2,489,528


69 %
Impairment of long-lived assets
39,600,587





39,600,587


nm
Change in fair value of contingent consideration 
(3,000,000 )




(3,000,000 )

nm


Total operating expenses

 

63,053,500

 

 

 

21,994,207

 


 

41,059,293

 


 

nm


















Loss from operations

$

(50,695,487

)

 

$

(13,277,722

)

$

(37,417,765

)

 

nm



nm – percentage change not meaningful


Revenue


Software Revenue


Total software revenue increased to $17.8 million for the nine months ended September 30, 2022 from $12.8 million for the nine months ended September 30, 2021, for an increase of $4.9 million, or 39%. Software revenue related to our enterprise offerings, Viridian and 365 Cannabis, for the nine months ended September 30, 2022 were $8.4 million, compared to $1.9 for the nine months ended September 30, 2021 and software revenue related to our non-enterprise offerings, which include MJ Platform, Ample, Trellis, Solo, and Leaf Data Systems, declined to $8.7 million for the nine months ended September 30, 2022 compared to $9.7 million for the nine months ended September 30, 2021. There was also a decrease in partnership and data revenue which was $0.6 million for the nine months ended September 30, 2022 compared to $1.2 million during the same period in the prior year. Software revenue accounted for 96% and 91% of total revenue for the nine months ended September 30, 2022 and 2021, respectively. As indicated above, the increase in software revenue during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was attributable to revenue generated from our enterprise offerings sourced primarily from 365 Cannabis which was acquired during the fourth quarter of 2021. Also contributing to the increase was $0.4 million of non-recurring contract termination fees attributable to two customers.


35


 

Consulting Revenue


Consulting revenue includes revenue generated from consulting services delivered to prospective and current cannabis, hemp and CBD businesses and business operators. Our consulting revenue was $0.6 million for the nine months ended September 30, 2022 compared to $1.1 million for the nine months ended September 30, 2021, a decrease of $0.5 million, or 45%Consulting revenue was 3% and 8% of total revenue for the nine months ended September 30, 2022 and 2021, respectively. Due to the nature of consulting revenue, our dependence on emerging market activity and the ongoing pandemic as a driver of demand, the percentage of consulting revenue over total revenue has varied from period to period depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations.


Other Revenue


Other revenue includes retail/resale revenue, which is generated from point-of-sale hardware, and other non-recurring revenues. Other revenue was less than $0.1 million and $0.1 million for the nine months ended September 30, 2022 and 2021, respectively. 

 

Cost of Revenue


Our cost of revenue was $6.1 million for the nine months ended September 30, 2022,compared to $5.3 million for the nine months ended September 30, 2021, an increase of $0.8 million, or 14%. Total cost of revenue increased primarily as a result of an increase in software application and hosting expenses of $0.4 million and fees for Microsoft licenses in the amount of $1.2 million related to our acquisitions of Viridian and 365 Cannabis. These increases were partially offset by the reversal of  a litigation contingency of approximately $0.5 million (see Note 7 – Commitments and Contingencies to the consolidated financial statements for further discussion of the reversal of the litigation reserves) and lower platform license fees of  $0.3 million. 


Gross Profit


Gross profit was $12.4 million for the nine months ended September 30, 2022, compared to $8.7 million for the nine months ended September 30, 2021, an increase of $3.6 million or 42%. The gross profit margin increased to 67% for the nine months ended September 30, 2022 from 62% for the nine months ended September 30, 2021.  

 

Operating Expenses

 

Product Development


Product development expense was $5.2 million for the nine months ended September 30, 2022compared to $4.5 million for the nine months ended September 30, 2021, an increase of $0.7 million, or 16%. Product development expense increased due primarily to the Viridian and 365 Cannabis acquisitions, which resulted in a $0.8 million increase in salary-related and contractor expenses for the nine months ended September 30, 2022 compared to the same period in the prior year as well as higher software and application costs and severance benefit costs associated with the Restructuring partially offset by lower recruiting and share-based compensation costs.


Sales and Marketing


Sales and marketing expense was $8.3 million for the nine months ended September 30, 2022, compared to $5.6 million for the nine months ended September 30, 2021, an increase of $2.7 million, or 49%. The increase in sales and marketing expense is primarily related to the acquisitions of Viridian and 365 Cannabis which resulted in an increase of $2.7 million in salary-related and contractor expenses for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. In addition, the 2022 period included higher software application costs of $0.1 million and approximately $0.3 million of severance benefits associated with the Restructuring. These increases in the 2022 period were partially offset by lower recruiting and share-based compensation costs of $0.4 million.

 

36



General and Administrative


General and administrative expense was $6.8 million for the nine months ended September 30, 2022, compared to $8.3 million for the nine months ended September 30, 2021, a decrease of $1.5 million, or 18%. The period in 2022 and 2021 include charges associated with office lease terminations and, in the case of 2021, the associated write-off of certain leasehold improvements. During the 2022 period, we terminated our Las Vegas office space which resulted in a restructuring charge of $0.5 million while the 2021 period reflected charges of $2.4 million associated with the exit from our former Toronto office. We also experienced lower acquisition-related costs of $0.3 million during the 2022 period as there was no significant in activity during 2022 as compared to 2021 which included the Viridian and 365 Cannabis acquisitions. Finally, we experienced lower stock-based compensation costs and lower occupancy costs in the 2022 period due primarily to the office closures and the reduction in employee headcount. These decreases were partially offset by higher bad debt expenses and board of director compensation costs of $0.1 million as well as $0.4 million of incremental professional fees and proxy-related expenses associated with the meetings to consider the Reverse Stock Split as well as for the nine months ended September 30, 2022 compared to the same period in the prior year. 


Depreciation and Amortization

 

Depreciation and amortization expense increased to $6.1 million for the nine months ended September 30, 2022 from $3.6 million for the nine months ended September 30, 2021, an increase of $2.5 million, or 69%. The increase in amortization expense is primarily attributable to the acquired intangible assets from our Viridian and 365 Cannabis acquisitions in the amount of $1.0 million, which both occurred after September 30, 2021, as well as an increase in capitalized software in the amount of $1.5 million.  


Impairment of Long-lived Assets


Due to a continued decline in market conditions from December 31, 2021, we recorded impairment charges of $36.4 million including $23.5 million attributable to goodwill associated with the non-enterprise reporting unit and $12.9 million associated with the goodwill of the enterprise reporting unit during the first half of 2022, compared to no impairment charge for the nine months ended September 30, 2021. In addition, we recorded impairments of $3.2 million attributable to certain intangible assets and capitalized software associated with one specific business line within the non-enterprise reporting unit during the nine months ended September 30, 2022 (see Note 5 – Goodwill and Intangible Assets, Net to the consolidated financial statements for further discussion on the impairments recorded).


Change in Fair Value of Contingent Consideration 


In connection with our acquisition of 365 Cannabis in October 2021, we provided for contingent consideration to be paid in cash or Common Stock or any combination thereof in the event certain revenue targets, as specified in the underlying stock purchase agreement, were achieved within a defined assessment period subsequent to the date of acquisition. The contingent consideration was initially measured at a fair value of $6.3 million. Upon the completion of the assessment period associated with the revenue targets, the fair value of the contingent consideration was reduced to $3.3 million as of September 30, 2022.  


37


Results of Operations for the Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

 

The following table highlights our operating revenues and expenses for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021:


 

Three Months Ended September 30

 


Change


 

2022

 

 

2021

 


Period over Period


Revenues:

 

 

 

 

 


 

 

 


         Software

$

5,326,830

 

 

$

4,557,960

 


$

768,870

 

 

17

%

         Consulting

 

76,500

 

 

 

551,402

 


 

(474,902

)

 

(86

)%

         Other

 

9,472

 

 

 

26,140

 


 

(16,668

)

 

(64 )%

Total revenue

 

5,412,802

 

 

 

5,135,502

 


 

277,300

 

 

5

%

 

 

 

 

 

 

 

 


 

 

 

 

 


Cost of revenues

 

2,051,862

 

 

 

1,971,382

 


 

80,480

 

4 %

Gross profit

 

3,360,940

 

 

 

3,164,120

 


 

196,820

 

 

6

%

      Gross profit margin

 

62

%

 

 

62


 


 

 



 

 

 

 

 

 

 

 


 

 

 

 

 


Operating expenses:

 

 

 

 

 

 

 


 

 

 

 

 


         Product development:

1,374,133




1,566,478


(192,345 )
(12 )%
         Sales and marketing
1,882,980


2,002,461


(119,481 )
(6 )%

         General and administrative

 

1,823,076

 

 

2,077,474

 


 

(254,398

)

 

(12

)%
         Depreciation and amortization
2,118,739


1,238,420


880,319

71 %
Impairment of long-lived assets








nm
Change in fair value of contingent consideration 
(3,000,000 )




(3,000,000 )
nm

Total operating expenses

 

4,198,928

 

 

 

6,884,833

 


 

(2,685,905

)

 

nm

)















Loss from operations

$

(837,988

)

 

$

(3,720,713

)

$

2,882,725

 

nm

 

nm – percentage change not meaningful


Revenue


Software Revenue


Total software revenue increased to $5.3 million for the three months ended September 30, 2022 from $4.6 million for the three months ended September 30, 2021, for an increase of $0.8 million, or 17%. Software revenue related to our enterprise offerings, Viridian and 365 Cannabis, for the three months ended September 30, 2022 were $2.6 million, compared to $0.9 for the three months ended September 30, 2021 and software revenue related to our non-enterprise offerings, which include MJ Platform, Ample, Trellis, Solo, and Leaf Data Systems, were $2.5 million for the three months ended September 30, 2022 compared to $3.1 million for the three months ended September 30, 2021. There was also a decrease in partnership and data revenue which was $0.2 million for the three months ended September 30, 2022 compared to $0.6 million during the same period in the prior year. Software revenue accounted for 98% and 89% of total revenue for the three months ended September 30, 2022 and 2021, respectively. As indicated above, the increase in software revenue during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 was attributable to revenue generated from our enterprise offerings. 

 

38


 

Consulting Revenue


Consulting revenue includes revenue generated from consulting services delivered to prospective and current cannabis, hemp and CBD businesses and business operators. Our consulting revenue was $0.1 million for the three months ended September 30, 2022 compared to $0.6 million for the three months ended September 30, 2021, a decrease of $0.5 million, or 86%Consulting revenue was 1% and 11% of total revenue for the three months ended September 30, 2022 and 2021, respectively. Due to the nature of consulting revenue, our dependence on emerging market activity and the ongoing pandemic as a driver of demand, the percentage of consulting revenue over total revenue has varied from period to period depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations.


Other Revenue 


Other revenue includes retail/resale revenue, which is generated from point-of-sale hardware, and other non-recurring revenuesOther revenue was less than $0.1 million for each of the three months ended September 30, 2022 and 2021, respectively. 


Cost of Revenue


Our cost of revenue was $2.1 million for the three months ended September 30, 2022, compared to $2.0 million for the three months ended September 30, 2021, an increase of $0.1 million, or 4%. The total cost of revenue increased primarily as a result of an increase in Microsoft licenses in the amount of $0.4 million related to our acquisitions of Viridian and 365 Cannabis partially offset by lower SAP platform license and hosting service costs of approximately $0.3 million.


Gross Profit


Gross profit was $3.4 million for the three months ended September 30, 2022, compared to $3.2 million for the three months ended September 30, 2021, an increase of $0.2 million or 6%. The gross profit margin was flat at 62% for each of the three  months ended September 30, 2022

 

Operating Expenses

 

Product Development


Product development expense was $1.4 million for the three months ended September 30, 2022compared to $1.6 million for the three months ended September 30, 2021, a decrease of $0.2 million, or 12%. Product development expense decreased primarily due to the effects of the headcount reductions from the Restructuring which lowered overall salary and benefits costs as well as stock-based compensation costs and lower recruiting expenses. 


Sales and Marketing


Sales and marketing expense was $1.9 million for the three months ended September 30, 2022, compared to $2.0 million for the three months ended September 30, 2021, a decrease of $0.1 million, or 6%. The decrease is due primarilythe effects of the headcount reductions from the Restructuring which lowered the overall salary and benefits costs run rate and also reduced stock-based compensation costs. In addition, we incurred lower trade show and promotional expenses in the 2022 period. These decreases were partially offset by am increase on contractor and consulting costs.

 

39



General and Administrative


General and administrative expense was $1.8 million for the three months ended September 30, 2022, compared to $2.1 million for the three months ended September 30, 2021, a decrease of $0.3 million, or 12%. The decrease was due primarily to lower financing and acquisition-related costs as well as lower stock-based compensation and franchise tax costs in the 2022 period partially offset by higher bad debt expenses and board of director compensation costs as well as proxy-related expenses associated with the meetings to consider the Reverse Stock Split when compared to the 2021 period.


Depreciation and Amortization


Depreciation and amortization expense increased to $2.1 million for the three months ended September 30, 2022 from $1.2 million for the three months ended September 30, 2021, an increase of $0.9 million, or 71%. The increase in amortization expense is primarily attributable to the acquired intangible assets from our Viridian and 365 Cannabis acquisitions in the amount of $0.2 million, which both occurred after September 30, 2021, as well as an increase in capitalized software in the amount of $0.7 million. 


Impairment of Long-lived Assets


There were no impairment charges recognized in the three months ended September 30, 2022 and 2021.


Change in Fair Value of Contingent Consideration 


In connection with our acquisition of 365 Cannabis in October 2021, we provided for contingent consideration to be paid in cash or Common Stock or any combination thereof in the event certain revenue targets, as specified in the underlying stock purchase agreement, were achieved within a defined assessment period subsequent to the date of acquisition. The contingent consideration was initially measured at a fair value of $6.3 million. Upon the completion of the assessment period associated with the revenue targets, the fair value of the contingent consideration was reduced to $3.3 million as of September 30, 2022.


40



Non-GAAP Financial Measures 


In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP.


Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Other companies, including companies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison.  We attempt to compensate for these limitations by providing specific information regarding the GAAP items excluded from these non-GAAP financial measures.


Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures and not rely on any single financial measure to evaluate our business. 


EBITDA and Adjusted EBITDA


We believe that EBITDA and Adjusted EBITDA, when considered with the financial statements determined in accordance with GAAP, are helpful to investors in understanding our performance and allows for comparison of our performance and credit strength to our peers. EBITDA and Adjusted EBITDA should not be considered alternatives to net loss as determined in accordance with GAAP as indicators of our performance or liquidity.


We define EBITDA as net loss before interest income and expense, changes in fair value of convertible notes, changes in fair value of derivative liabilities, provision for income taxes, and depreciation and amortization. We calculate Adjusted EBITDA as EBITDA further adjusted to exclude the effects of the following items for the reasons set forth below:



impairment of long-lived assets, as this is a non-cash, non-recurring item, which effects the comparability of results of operations and liquidity;


stock-based compensation expense, because this represents a non-cash charge and our mix of cash and share-based compensation may differ from other companies, which effects the comparability of results of operations and liquidity;

cost incurred in connection with business combinations and mergers that are required to be expensed as incurred in accordance with GAAP, because business combination and merger related costs are specific to the complexity and size of the underlying transactions as well as the frequency of our acquisition activity these costs are not reflective of our ongoing operations;

costs incurred in connection with non-recurring financing, including fees incurred as a direct result of electing the fair value option to account for our debt instruments;

restructuring charges, which includes severance costs to terminate employees in functions that have been eliminated, costs to terminate a lease and the related write-off of leasehold improvements and furniture, as we believe these costs are not representative of operating performance;

gain on forgiveness of PPP loan, as this is a one-time forgiveness of debt that is not recurring across all periods and we believe inclusion of the gain is not representative of operating performance;

equity in losses of investees because our share of the operations of investees is not representative of our own operating performance and may not be monetized for a number of years;


changes in the fair value of contingent consideration because these adjustments are not recurring across all periods and we believe these costs are not representative of operating performance; and

other non-operating expenses which includes items such as a one-time gain on debt extinguishment and one-time loss on disposal of fixed assets, which effects the comparability of results of operations and liquidity.


41



The reconciliation of net loss to EBITDA and Adjusted EBITDA is as follows: 




Nine Months Ended September 30,


 

 

2022

 


2021

Net loss

 

$

(53,822,928

)
$ (14,116,401 )

Adjustments:

 

 

 

 





Interest expense (income)

609,746     

1,175,789
Change in fair value of convertible notes

2,840,000


2,030,904
Change in fair value of derivative liability

(54,153 )

(151,175 )
Income tax expense (benefit)

(268,152 )

10,570

Depreciation and amortization

 

 

6,094,963

 



3,605,435

EBITDA

 

$

(44,600,524

)
$ (7,444,878 )
Impairment of long-lived assets

39,600,587



Stock-based compensation expense

 

 

648,439

 



1,502,339

Business combination and merger related costs (income)

 

 

5,425



290,357

Non-recurring financing fees

 

 

424,675




410,362
Restructuring charges

1,127,038


2,453,776
Change in fair value of contingent consideration

(3,000,000 )


Gain on forgiveness of PPP Loan




(2,234,730 )
Equity in losses of investee




7,564

 Adjusted EBITDA

 

$

(5,794,360 )
$ (5,015,210 )

 




Three Months Ended September 30,


 

 

2022

 


2021

Net loss

 

$

(2,304,088

)
$ (1,553,447 )

Adjustments:

 

 

 

 





Interest expense (income)

396,022     

238,283
Change in fair value of convertible notes

1,113,000


23,227
Change in fair value of derivative liability

(2,256 )

(194,046 )
Income tax expense (benefit)

(40,666 )


Depreciation and amortization

 

 

2,118,739

 



1,238,420

EBITDA

 

$

1,280,751


$ (247,563 )
Impairment of long-lived assets





Stock-based compensation expense

 

 

203,384

 



477,625

Business combination and merger related costs (income)

 

 



182,631

Non-recurring financing fees

 

 

71,192




280,768
Restructuring charges

59,094



Change in fair value of contingent consideration

(3,000,000 )


Gain on forgiveness of PPP Loan




(2,234,730 )
Equity in losses of investee





Adjusted EBITDA

 

$

(1,385,579 )
$ (1,541,269 )


42


 

 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 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 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.


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 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 effectuated the Reverse Stock Split to address the bid price deficiency and we believe that we will be in 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 Restructuring that we announced in May 2022 which resulted in a reduction in workforce and related operating costs, (ii) entering into the Convertible Notes Amendment on June 30, 2022 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 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 the 2022 Unit Offering, 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 the 2022 ATM Program for short-term liquidity needs, (vi) addressing the potential liquidity of our Common Stock and increasing the viability of our 2022 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 2022 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.


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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 2022 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.


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Cash Flows

 

Our cash and restricted cash balance was $9.5 million as of September 30, 2022. Cash flow information is as follows:

 

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

Cash (used in) provided by:

 

 

 

 

 

 

Operating activities

 

$

(10,450,906

)

 

$

(5,077,544

)

Investing activities

 

 

(2,951,412

)

 

 

(3,365,988

)

Financing activities

 

 

8,494,699

 

 

225,856

Effect of change in exchange rates on cash and restricted cash

(35,984 )

(5,915 )

Net decrease in cash and restricted cash

 

$

(4,943,603

)

 

$

(8,223,591

)

 

Operating Activities


Our largest source of operating cash is cash collections from our customers for subscriptions to our products. Our primary uses of cash in operating activities are for employee-related expenditures, marketing expenses and third-party hosting costs. Net cash used in operating activities is impacted by our net loss adjusted for certain non-cash items, including depreciation and amortization expenses, impairments of long-lived assets, change in fair value of convertible notes, derivative liabilities and contingent consideration obligations, stock-based compensation, deferred income taxes, as well as the effect of changes in operating assets and liabilities. 


Net cash used in operating activities increased to $10.5 million during the nine months ended September 30, 2022 due primarily to the use of cash during the 2022 period associated with the businesses that were acquired in 2021 particularly 365 Cannabis which became operational during the fourth quarter of 2021.

 

Investing Activities


Our primary investing activities have consisted of capitalization of internal-use software necessary to deliver significant new features and functionality in our platform which provides value to our customers. As our business grows, we expect our capital expenditures to continue to increase. Other investing activities include cash outflows related to purchases of property and equipment, and from time-to-time, the cash paid for asset and business acquisitions.


Net cash used in investing activities totaled $3.0 million during the nine months ended September 30, 2022, as a result of cash outflows for the development of our software products partially offset by a return of working capital from the 365 Cannabis acquisition. Net cash used by investing activities during the nine months ended September 30, 2021, was $3.4 million which was also related to our software development.


Financing Activities


Our financing activities consist primarily of proceeds from issuance of our common stock, including those through the 2022 Unit Offering and our ATM Program, issuances and repayments attributable to the Senior Convertible Notes and the value of shares withheld from the vesting of certain stock-based compensation awards.


During the nine months ended September 30, 2022, we received net proceeds of $9.2 million from the 2022 Unit Offering and $0.8 million from the issuance of 90,809 shares of Common Stock through the ATM Program, which were partially offset by principal payments of $1.4 million on the Senior Convertible Notes. Net cash provided by financing activities during the nine months ended September 30, 2021 included $1.8 million from the issuance of 27,819 shares of Common Stock through the ATM Program partially offset by principal payments of $1.2 million on the 2020 Notes. During the nine months ended September 30, 2022 and 2021, the value of shares withheld for income taxes from the vesting of stock-based compensation awards was less than $0.1 million and $0.4 million, respectively.


Contractual Obligations


For information concerning our contingent consideration, convertible debt, and operating lease obligations, see Notes 3, 6 and 9, respectively, to our condensed consolidated financial statements. 


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

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Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures


We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the Security and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.


We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of September 30, 2022 with the participation, and under the supervision, of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2022, our disclosure controls and procedures were ineffective in ensuring that: (i) information required to be disclosed by us in reports that we file or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

  

Material Weakness


A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. Pursuant to our management’s review of disclosure controls and procedures and internal control over financial reporting, management determined that the following material weakness in our internal control over financial reporting and prevented management from determining that our disclosure controls and procedures and internal control over financial reporting were effective as of the end of the period covered by this report:

  

 

·  

The Company’s internal control over financial reporting pertaining to certain key process areas of financial reporting were not properly designed and/or operating effectively.


46


 

Remediation Efforts

 

We are in the process of executing our remediation plans to address the material weakness described above. As of  September 30, 2022, we have:



· Hired additional experienced resources with the appropriate skills to fill key accounting functions.

· Engaged an outside firm to assist in the overall evaluation and documentation of the design and operating effectiveness of our internal controls over financial reporting and have remediated past deficiencies in the design of our internal control framework for certain key process areas including revenue, capitalized software, business combinations, intangibles, goodwill, stock-based compensation, general financial reporting, and information technology.

· Developed a long-term plan to both (i) complete the remediation of the design of our internal control over financial reporting for our remaining process areas, and (ii) begin the remediation of the deficiencies in operating effectiveness of our internal controls over financial reporting across all process areas. 

 

We believe these actions and the improvements we expect to achieve, when fully implemented, will strengthen our internal control over financial reporting and remediate the material weaknesses. However, the material weaknesses will not be considered fully remediated until the applicable controls operate for a sufficient period of time for management to test the results for operating effectiveness. While no assurance can be provided, the Company believes it will make further progress in remediating these material weaknesses during 2022. 


Notwithstanding the material weakness, management has concluded that the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with GAAP.  

 

Changes in Internal Control over Financial Reporting

 

During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Inherent Limitations on Effectiveness of Controls

 

Management recognizes that a control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.  


47


PART II - Other Information

 

Item 1. Legal Proceedings.

 

From time to time, we may be subject to legal proceedings arising in the ordinary course of business. Regardless of the outcome of any existing or future litigation, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

The information required with respect to this item can be found under “Commitments and Contingencies” in Note 9 to our condensed consolidated financial statements included elsewhere in this Form 10-Q and is incorporated by reference into this Item 1.

 

Item 1A. Risk Factors.

Except for the additional risk factors set forth below, there have been no material changes to our Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 31, 2022 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, as filed with the SEC on August 12, 2022.


Risks Related to Our Common Stock

 

Warrants are exercisable for our common stock, which could increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.


Currently, there are warrants to purchase 290,690 shares of our common stock at $230.00 per share and warrants to purchase 2,282,609 shares of our common stock at $4.60 per share. To the extent such warrants are exercised, additional shares of common stock will be issued, which will result in dilution to the then-existing holders of common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our common stock.

 

48


If our common stock is delisted from Nasdaq, the liquidity and price of our common stock could decrease and our ability to obtain financing could be impaired.

 

On May 24, 2022, we received a notification letter from The Nasdaq Stock Market stating that we are not in compliance with the Minimum Bid Price Requirement, which requires our listed securities to maintain a minimum bid price of $1.00 per share. The notification stated that we have a compliance period of 180 calendar days, or until November 21, 2022, to regain compliance with the Minimum Bid Price Requirement. If at any time during this 180-day compliance period the closing bid price of our common stock is at least $1.00 per share for a minimum of ten consecutive business days, then the Nasdaq Stock Market will provide us with written confirmation of compliance and the matter will be closed.

 

If compliance cannot be demonstrated by November 21, 2022, we may be eligible for additional time. To qualify, we will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards on the Nasdaq Capital Market (except the bid price requirement). In addition, we would be required to provide written notice of our intention to cure the minimum bid price deficiency during this second 180-day compliance period by effecting a reverse stock split, if necessary. If we are not granted an additional 180-day compliance period, then Nasdaq will provide written notification that our securities will be subject to delisting. At that time, we may appeal the determination to delist our securities to a Nasdaq hearings panel.


On November 8, 2022, we effectuated the Reverse Stock Split to address the bid price deficiency and we believe that we will regain compliance with the Minimum Bid Price Requirement on November 21, 2022. There can be no assurance that we will regain compliance with the Minimum Bid Price Requirement or otherwise maintain compliance with the other listing requirements.



49



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Except as previously reported in our Current Report on Form 8-K, we did not undertake any unregistered sales of our equity securities during the quarter ended September 30, 2022.

 

During the quarter ended September 30, 2022, the Company did not repurchase any of its Common Shares. 

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None. 

50


Item 6. Exhibits

 

1.1
Underwriting Agreement dated June 30, 2022 with A.G.P./Alliance Global Partners (incorporated by reference to Exhibit 1.1 to our Form S-1/A filed with the Commission on July 1, 2022).
3.1
Amended and Restated Articles of Incorporation for Akerna Corp.
3.2
Amended and Restated Bylaws of Akerna Corp.
3.3
Certificate of Designation of Preference, Rights and Limitations of Series A Convertible Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 to Akernas Current Report on Form 8-K filed with the Commission on October 3, 2022).
3.4
Certificate of Designation of Preference, Rights and Limitations of Series B Convertible Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 to Akernas Current Report on Form 8-K filed with the Commission on October 3, 2022).
3.5
Certificate of Designation of the Special Voting Share (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Akerna on July 8, 2020).
4.1
Waiver dated September 27, 2022 by and between Akerna Corp. and the Holders in accordance with the Securities Purchase Agreement dated October 5, 2021.
10.1
Common Stock Sales Agreement dated September 28, 2022 by and between Akerna Corp. and A.G.P./Alliance Global Partners (incorporated by reference to Exhibit 10.1 to Akerna Corp.s Current Report on Form 8-K as filed with the Commission on September 28, 2022).
10.2
Offer Letter from Akerna Corp. to Scott Sozio dated August 18, 2022.
10.3
Employment Offer Letter from Akerna Corp. to L. Dean Ditto dated August 18, 2022.

31.1

 

Section 302 Certification of Principal Executive Officer.

31.2

 

Section 302 Certification of Principal Financial Officer.

32.1

 

Section 906 Certification of Principal Executive Officer

32.2

 

Section 906 Certification of Principal Financial Officer.

101

 

XBRL (Extensible Business Reporting Language). The following materials from Akerna Corp’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022, tagged in XBRL: (i) condensed consolidated balance sheets; (ii) condensed consolidated statements of operations; (iii) condensed consolidated statements of comprehensive income; (iv) condensed consolidated statements of cash flows; and (v) notes to condensed consolidated financial statements. 


51


SIGNATURES

In accordance with the requirements of Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  

         


By:

/s/ Jessica Billingsley

 

 

Jessica Billingsley,

Chief Executive Officer and Director

(Principal Executive Officer)

 

 

 

 

 

November 14, 2022

 

 

 

 

By:

/s/ L. Dean Ditto

 

 

L. Dean Ditto,

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

 

 

 

 

November 14, 2022


52