AKERNA CORP.

	March 31,			December 31,
	2021			2020
Assets	(unaudited)
Current assets:
Cash	$	15,426,759		$	17,840,640
Restricted cash		500,000			500,000
Accounts receivable, net		1,887,093			1,753,547
Prepaid expenses and other current assets		2,095,614			2,458,727
Total current assets		19,909,466			22,552,914

Fixed assets, net		1,139,689			1,193,433
Investment, net		229,883			233,664
Capitalized software, net		4,201,065			3,925,739
Intangible assets, net		6,974,546			7,388,795
Goodwill		41,874,527			41,874,527
Total Assets	$	74,329,176		$	77,169,072

Liabilities and Equity

Current liabilities
Accounts payable, accrued expenses and other accrued liabilities	$	3,060,746		$	3,188,576
Deferred revenue		1,105,869			843,900
Current portion of long-term debt		8,781,302			11,707,363
Derivative liability		487,372			311,376
Total current liabilities		13,435,289			16,051,215

Long-term debt, less current portion		1,127,843			3,895,237

Total liabilities		14,563,132			19,946,452

Commitments and contingencies (Note 8)

Equity:
Preferred stock, par value $0.0001; 5,000,000 shares authorized, none are issued and outstanding at March 31, 2021 and December 31, 2020		—			—
Special voting preferred stock, par value $0.0001; 1 share authorized, issued and outstanding as of March 31, 2021 and December 31, 2020, with $1.00 preference in liquidation; exchangeable shares, no par value, 1,647,287 and 2,667,349 shares issued and outstanding as of March 31, 2021 and December 31, 2020 respectively See Note 4		12,601,744			20,405,219
Common stock, par value $0.0001; 75,000,000 shares authorized, 23,067,517 and 19,901,248 issued and outstanding at March 31, 2021 and December 31, 2020, respectively		2,306			1,990
Additional paid-in capital		110,903,949			94,086,433
Accumulated other comprehensive loss		(104,727	)		(91,497	)
Accumulated deficit		(63,637,228	)		(57,179,525	)
Total equity	$	59,766,044		$	57,222,620
Total liabilities and equity	$	74,329,176		$	77,169,072

September 30, June 30,
2019 2019
(unaudited)
Assets

Current assets
Cash $ 22,429,931 $ 21,867,289
Restricted cash 500,000 500,000
Accounts receivable, net 2,512,682 1,257,274
Prepaid expenses and other assets 869,946 577,674
Total current assets $ 26,312,559 $ 24,202,237

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable $ 1,599,164 $ 1,317,566
Accrued liabilities 493,518 500,550
Deferred revenue 902,595 624,387
Total current liabilities 2,995,277 2,442,503

Commitments and contingencies (Note 6)

Stockholders’ equity:
Preferred stock, par value $0.0001; 5,000,000 shares authorized, none are issued and outstanding at September 30, 2019 and June 30, 2019 - -
Common stock, par value $0.0001; 75,000,000 shares authorized, 10,958,656 issued and outstanding at September 30, 2019, and 10,589,746 shares authorized, issued and outstanding at June 30, 2019 1,096 1,059
Additional paid-in capital 51,729,003 47,325,421
Accumulated deficit (28,412,817 ) (25,566,746 )
Total stockholders’ equity 23,317,282 21,759,734

Total liabilities and stockholders’ equity $ 26,312,559 $ 24,202,237

~~See~~The accompanying notes toare an integral part of these condensed consolidated financial ~~statements.~~statements

1

AKERNA CORP.

Condensed Consolidated Statements of Operations

(unaudited)

	For the Three Months Ended
	March 31,
	2021			2020
Revenues
Software	$	3,795,153		$	2,346,310
Consulting		172,747			692,584
Other		46,124			31,652
Total revenues		4,014,024			3,070,546
Cost of revenues		1,454,167			1,396,219

Gross profit		2,559,857			1,674,327

Operating expenses
Product development		1,424,100			874,787
Sales and marketing		1,735,915			2,040,751
General and administrative		1,852,962			3,457,262
Depreciation and amortization		1,052,883			180,229
Total operating expenses		6,065,860			6,553,029

Loss from operations		(3,506,003	)		(4,878,702	)

Other (expense) income:
Interest expense		(776,181	)		—
Interest income		1,801			33,522
Change in fair value of convertible notes		(1,991,272	)		—
Change in fair value of derivative liability		(175,996	)		236,917
Other expense, net		—			(124	)
Total other (expense) income		(2,941,648	)		270,315

Net loss before income taxes and equity in losses of investee		(6,447,651	)		(4,608,387	)
Income tax expense		(6,270	)		—
Equity in losses of investee		(3,782	)		—

Net loss		(6,457,703	)		(4,608,387	)
Net loss attributable to noncontrolling interest in consolidated subsidiary		—			101,175
Net loss attributable to Akerna shareholders	$	(6,457,703	)	$	(4,507,212	)

Basic and diluted weighted average common stock outstanding		22,209,072			12,469,737
Basic and diluted net loss per common share	$	(0.29	)	$	(0.36	)

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

2

AKERNA CORP

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

	For the Three Months Ended
	March 31,
	2021			2020
Net loss	$	(6,457,703	)	$	(4,608,387	)
Other comprehensive (loss) income:
Foreign currency translation		(230	)		—
Unrealized loss on convertible notes		(13,000	)		—
Comprehensive loss	$	(6,470,933	)	$	(4,608,387	)

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 Months Ended March 31, 2021

(unaudited)

For the Three Months Ended
September 30,
2019 2018
Revenues
Software $ 2,304,480 $ 1,879,262
Consulting 831,363 370,083
Other 57,047 50,054
Total revenues 3,192,890 2,299,399

Cost of revenues 1,397,361 1,063,135

Gross profit 1,795,529 1,236,264

Operating expenses
Product development 1,130,880 801,472
Selling, general, and administrative 3,583,815 2,147,492
Total operating expenses 4,714,695 2,948,964

Loss from operations (2,919,166 ) (1,712,700 )

Other income (expense)
Interest 73,382 17,628
Other (287 ) (611 )
Total other income 73,095 17,017

Net loss $ (2,846,071 ) $ (1,695,683 )

Basic and diluted weighted average common stock outstanding 10,879,112 5,489,835
Basic and diluted net loss per common share $ (0.26 ) $ (0.31 )

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

Balance – January 1, 2021	2,667,349		$	20,405,219			19,901,248		$	1,990		$	94,086,433		$	(91,497	)	$	(57,179,525	)	$	57,222,620
Conversion of Exchangeable Shares to common stock	(1,020,062	)		(7,803,475	)		1,020,062			102			7,803,373			—			—			—
Settlement of convertible debt	—			—			2,080,140			208			8,467,292			—			—			8,467,500
Shares withheld for withholding taxes	—			—			(48,948	)		(5	)		(333,842	)		—			—			(333,847	)
Stock-based compensation	—			—			—			—			503,379			—			—			503,379
Settlement of liabilities with shares	—			—			101,705			10			377,315			—			—			377,325
Restricted stock vesting	—			—			13,978			1			(1	)		—			—			—
Forfeitures of restricted shares	—			—			(668	)		—			—			—			—			—
Foreign currency translation adjustments	—			—			—			—			—			(230	)		—			(230	)
Unrealized loss (gains) on convertible notes	—			—			—			—			—			(13,000	)		—			(13,000	)
Net loss	—			—			—			—			—			—			(6,457,703	)		(6,457,703	)
Balance – March 31, 2021	1,647,287		$	12,601,744			23,067,517		$	2,306		$	110,903,949		$	(104,727	)	$	(63,637,228	)	$	59,766,044

~~See~~The accompanying notes toare an integral part of these condensed consolidated financial ~~statements.~~statements

4

AKERNA CORP.

~~AKERNA CORP.~~

Condensed Consolidated Statements of Changes in ~~Stockholders’~~ Equity

For the ~~three months ended September 30, 2019~~Three Months Ended March 31, 2020

(unaudited)

Common Additional
Paid-In Accumulated Total
Stockholders’
Shares Amount Capital Deficit Equity

Balance – July 1, 2019 10,589,746 $ 1,059 $ 47,325,421 $ (25,566,746 ) $ 21,759,734

Stock-based compensation - - 161,165 - 161,165

Cash received in connection with exercise of warrants 368,910 37 4,242,417 - 4,242,454

Net loss - - - (2,846,071 ) (2,846,071 )

Balance – September 30, 2019 10,958,656 $ 1,096 $ 51,729,003 $ (28,412,817 ) $ 23,317,282

	Common					Additional Paid-In		Accumulated Other Comprehensive		Accumulated			Total Shareholders'			Noncontrolling Interests in Consolidated		Total
	Shares		Amount			Capital		Income		Deficit			Equity			Subsidiary		Equity

Balance – January 1, 2020	10,921,485		$	1,093		$	51,060,652	$	—	$	(31,288,614	)	$	19,773,131		$	—	$	19,773,131
Common shares issued in exchange for interest in consolidated subsidiary	1,950,000			195			17,549,805		—		—			17,550,000			—		17,550,000
Noncontrolling interests in acquired subsidiary	—			—			—		—		—			—			4,863,433		4,863,433
Stock-based compensation	—			—			301,948		—		—			301,948			—		301,948
Forfeitures of restricted shares	(15,813	)		(2	)		2		—		—			—			—		—
Net loss	—			—			—		—		(4,507,212	)		(4,507,212	)		(101,175)		(4,608,387	)
Balance – March 31, 2020	12,855,672		$	1,286		$	68,912,407	$	—	$	(35,795,826	)	$	33,117,867		$	4,762,258	$	37,880,125

~~See~~The accompanying notes toare an integral part of these condensed consolidated financial ~~statements.~~statements

5

AKERNA CORP.

~~Condensed Consolidated Statements of Changes in Stockholders’ Equity~~

~~For the three months ended September 30, 2018~~

~~(unaudited)~~

Common Additional
Paid-In Accumulated Total
Stockholders’
Shares Amount Capital Deficit Equity

Balance – July 1, 2018 4,922,650 $ 492 $ 14,563,102 $ (13,163,531 ) $ 1,400,063

Issuance of shares in exchange for cash 1,099,376 110 9,999,890 - 10,000,000

Net loss - - - (1,695,683 ) (1,695,683 )

Balance – September 30, 2018 6,022,026 $ 602 $ 24,562,992 $ (14,859,214 ) $ 9,704,380

~~See notes to condensed consolidated financial statements.~~

~~AKERNA CORP.~~

Condensed Consolidated Statements of Cash Flows

AKERNA CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 - Description of Business, Liquidity and Capital Resources

Description of Business

Akerna Corp. ~~(the “Company”~~, herein referred to as we, us our or ~~“Akerna”),~~Akerna, through ~~its wholly-owned subsidiary~~our wholly owned subsidiaries MJ Freeway, LLC, ~~(“MJF”) is a~~or MJF, Trellis Solutions, Inc., or Trellis, Ample Organics, Inc, or Ample, and solo sciences, inc, or Solo, provides enterprise software solutions that enable regulatory compliance and inventory ~~management technology company. The Company’s~~management. Our proprietary, ~~software platform is~~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. ~~The Company developed~~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. ~~The Company provides its~~We provide our commercial software platform, MJ Platform^®and Trellis^® to state-licensed businesses, and our regulatory software platform, Leaf Data ~~Systems®~~Systems^®, to state government regulatory ~~agencies,~~agencies. Through Solo, we provide an innovative, next-generation solution for state and ~~its commercial software platform,~~national governments to securely track product and waste throughout the supply chain with solo*TAG™. The integration of MJ ~~Platform®,~~Platform^® and solo*CODE™ results in technology for consumers and brands that brings a consumer-facing mark designed to ~~state-licensed businesses.~~highlight the authenticity and signify transparency.

~~The accompanying financial statements~~We consult with clients on a wide range of areas to help them successfully maintain compliance with state laws and ~~related notes reflect the historical results of MJF prior~~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 ~~mergers completed~~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 ~~June 2019 (“~~emerging markets that are seeking consultation on newly introduced licensing regimes and assistance with the ~~Mergers”) with MTech Acquisition Corp. (“MTech”) and other related entities, which resulted in the combined company, and do not include the historical results~~regulatory compliant build-out of ~~MTech prior to the completion of the Mergers.~~operations.

Liquidity and Capital Resources

Since ~~its inception, the Company has~~our inception, we have incurred recurring operating losses, used cash from operations, and relied on capital raising transactions to continue ongoing operations. ~~Although~~During the three months ended March 31, 2021, we incurred a loss from operations of $3.5 million and used cash in operations of $1.4 million. As of March 31, 2021, we had cash of $15.4 million, excluding restricted cash, and working capital of $6.5 million.

During 2020, we implemented a number of cost reduction initiatives reducing costs and identifying cost savings that we expect to result in annual savings of an additional $3.0 million to $4.0 million, primarily a result of a reduction in workforce. On December 23, 2020, we entered into waivers with all the holders of our outstanding senior secured convertible notes. We may now elect, to pay installment amounts under the Notes prior to April 1, 2021, by issuing shares of common stock pursuant to installment conversions or by paying cash. On February 2, 2021, we agreed, in connection with the Company’s installment notice for the February 1, 2021 installment amount, to increase the installment amount for February 1, 2021, in the aggregate, by $4,400,000. From February 11, 2021 through March 10, 2021, we issued shares of common stock of Akerna to the holders of Akerna’s convertible notes upon conversion of installment amounts. As of March 31, 2021, the principal balance of the senior secured convertible notes was $7.5 million, which we can settle in cash or by issuing shares at the company's election.

After considering all available evidence, we determined that, due to our current positive working capital, our ability to repay our senior secured convertible note with shares of our common stock, and our initiatives to reduce operating expenditures, that we have ~~continuing negative cash flow from operations, the Company anticipates that its current cash will be~~ sufficient ~~to meet the~~ working capital ~~requirements~~to sustain operations for a period of at least twelve months from the ~~next twelve months.~~ date that our March 31, 2021 financial statements were issued. Management will continue to evaluate our liquidity and capital resources.

From time to time, we may pursue various strategic business opportunities. These opportunities may include investment in or ownership of additional technology companies through direct investments, acquisitions, joint ventures, and other arrangements. We ~~are currently exploring such opportunities and have entered into three non-binding letters of intent. We~~ can provide no assurance that we will successfully identify such opportunities or that, if we identify and pursue any of these opportunities, any of them will be consummated. Consequently, ~~the Company~~we may raise additional equity or debt capital or enter into arrangements to secure the necessary financing to fund the completion of such strategic business opportunities, although no assurance can be provided that we will be successful in completing a future capital raise. The sale of additional equity could result in additional dilution to ~~the Company’s~~our existing stockholders, and financing arrangements may not be available to us, or may not be available in sufficient amounts or on acceptable terms. Our future operating performance will be subject to future economic conditions and to financial, business, and other factors, many of which are beyond our control. ~~See “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 for a discussion of the risks related to our liquidity and capital structure.~~

7

6

~~AKERNA CORP.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

~~These~~The accompanying unaudited condensed consolidated financial statements have been prepared ~~following~~in accordance with the ~~requirements~~instructions to Form 10-Q and Article 8 of ~~the Securities and Exchange Commission (“SEC”), for interim reporting. As permitted under those rules, certain~~Regulation S-X. Certain footnotes and other financial information ~~that are~~ normally required by accounting principles generally accepted in the United States of America, ~~(“U.S. GAAP”) can be~~or GAAP, have been condensed or ~~omitted.~~ omitted in accordance with such rules and regulations. In management’s opinion, these condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and notes thereto and include all adjustments, consisting of normal recurring items, considered necessary for the fair presentation. The operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021.

The condensed consolidated balance sheet as of and for the ~~year~~period ended ~~June 30, 2019 was~~December 31, 2020, has been derived from ~~the Company’s~~our audited financial statements at that date but does not include all disclosures and financial information required by ~~U.S. GAAP.~~GAAP for complete financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with ~~the~~our consolidated financial statements and notes thereto ~~of the Company~~ for the ~~year~~period ended ~~June 30, 2019~~December 31, 2020, which were included in ~~the annual~~our report on Form 10-K filed ~~by the Company~~ on ~~September 23, 2019.~~March 31, 2021.

Principles of Consolidation

~~In the opinion of management, these~~Our accompanying condensed consolidated financial statements include the accounts of Akerna, our wholly owned subsidiaries and those entities in which we otherwise have a controlling financial interest. All significant intercompany balances and transactions have been ~~prepared~~eliminated in consolidation.

We evaluate our ownership interests, contractual rights, and other interests in entities to determine if the entities are variable interest entities, or VIEs, when we have a variable interest in those entities. Generally, a VIE is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. These evaluations can be complex and involve judgment and the use of estimates and assumptions based on available historical information.

If we determine that we hold a variable interest in a VIE and we are the ~~same basis as~~primary beneficiary of the ~~annual~~VIE, we must consolidate the VIE in our financial statements. In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and the similarity with and significance to our business activities and the business activities of the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of these VIE’s operations and general market conditions. We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and reassess our status on an ongoing basis.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes ~~thereto~~thereto. We base our estimates on assumptions that we believe to be reasonable under the circumstances, the results of which form a basis for making judgments about the ~~Company~~carrying value of assets and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the three months ended September 30, 2019liabilities that are not ~~necessarily indicative of the operating~~readily available from other sources. Actual results ~~for the year ending June 30, 2020, or any other interim or future periods.~~

~~Accounts Receivable, Net~~

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from ~~the amounts estimated in determining the allowance. The allowance for doubtful accounts was $357,419 as September 30, 2019 and $190,088 as of June 30, 2019.~~those estimates under different assumptions or conditions; however, we believe that our estimates are reasonable.

Concentrations of Credit Risk

~~The Company grants~~We grant credit in the normal course of business to ~~its customers. The Company~~customers in the United States. We periodically ~~performs~~perform credit analysis and ~~monitors~~monitor the financial condition of ~~its~~our customers to reduce credit risk.

During the three months ended ~~September 30, 2019,~~March 31, 2021 and 2020, one ~~customer~~government client accounted for ~~24% of total revenues. At September 30, 2019, the same customer accounted for 63% of net accounts receivable. During the three months ended September 30, 2018, two customers accounted for 35%~~12% and ~~10%~~25% of total revenues, respectively. ~~There were no~~As of March 31, 2021 and December 31, 2020, two government clients accounted for a total of 34% and 36% of net accounts receivable, ~~outstanding as of September 30, 2018.~~respectively.

8

Foreign Currency Translation

~~Revenue Recognition~~

The ~~Company recognizes revenue only when all~~functional currency of the ~~following criteria have been met: persuasive evidence~~Company's non-U.S. operations is the local currency. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Non-monetary assets and liabilities are translated at the historical rates in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated into U.S. dollars using the average rates of ~~an arrangement exists, delivery has occurred or services have been performed, the fee for the arrangement is fixed or determinable, and collectability is reasonable assured.~~

The Company’s software-as-a-service fees are earned through arrangements in which customers pay the Company a recurring subscription fee based upon the terms of their respective contracts. The Company’s software revenues generated from government customers totaled $1,089,395 and $1,020,392 of total revenuesexchange prevailing during the ~~three months ended September 30, 2019 and 2018, respectively. Total costs of government revenues incurred by the Company, which~~period. Translation gains or losses are included as a component of accumulated other comprehensive loss in ~~cost of revenues on the statements of operations, were $665,303~~stockholders' equity. Gains and ~~$528,270 during the three months ended September 30, 2019 and 2018, respectively.~~

~~The Company also offers various software consulting services to its customers, including implementation services, business planning, support, and~~losses resulting from foreign currency transactions are recognized as other customer services. From time to time, the Company purchases equipment for resale to customers. Such equipment is generally drop-shipped to the Company’s customers. The Company recognizes revenue as the services are~~performed or products are delivered, or in the case of up-front implementation fees, over the longer of the contract term or estimated customer life.~~ income (expense).

~~AKERNA CORP.~~Reclassifications and Revisions

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~In most arrangements, the Company bills the customer prior to performing services, which requires the Company to record deferred revenue on the accompanying balance sheets.~~

~~Reclassifications~~

Certain prior year financial statement amounts have been reclassified for consistency with the current year presentation.

~~Recently Issued Accounting Pronouncements~~Segment Reporting

~~ASU 2014-09,~~~~Revenue from Contracts with Customers (Topic 606),~~ ~~supersedes~~Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance and information for different revenue streams is not evaluated separately. As such, the Company has one operating segment, and the ~~revenue recognition requirements and industry-specific guidance under~~~~Revenue Recognition (Topic 605)~~~~. Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects~~decision-making group is the consideration the entity expects to be entitled to in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. As an Emerging Growth Company, ASU No. 2014-09 is effective for the Company’s fiscal 2020 annual reporting period and for interim periods thereafter, with early adoption permitted, and allows for either full retrospective or modified retrospective adoption. The Company is evaluating the impact of adoption of the new standard on its consolidated financial statements.senior executive management team.

In ~~January 2016,~~ the ~~FASB issued ASU No. 2016-01,~~following table, we disclose our long-lived assets by geographical location (in thousands):

	As of March 31, 2021		As of December 31, 2020
Long-lived assets:
United States	$	10,969	$	9,994
Canada		5,615		5,074
Total	$	16,584	$	15,068

~~Financial Instruments - Overall: Recognition and Measurement~~Warrant Liabilities

We classify private placement warrants as liabilities. At the end of ~~Financial Assets and Financial Liabilities, which requires certain equity investments to be measured at fair value with~~each reporting period, changes in fair value during the period are recognized ~~in net income,~~within the condensed consolidated statements of operations and comprehensive loss. We will continue to ~~record~~adjust the warrant liability for changes in ~~instrument-specific credit risk for financial liabilities measured under~~ the fair value ~~option in other comprehensive income.~~until the earlier of a) the exercise or expiration of the warrants or b) the redemption of the warrants, at which time the warrants will be reclassified to additional paid-in capital.

Recent Accounting Pronouncements

The FASB has issued new guidance related to the accounting for leases. The new standard is expected to reduce diversity in practice. The new standard is effective for the Company’s fiscal 2020 annual reporting period and for interim periods thereafter. The Company is evaluating the impact of adoption of the new standard on its consolidated financial statements.

~~In February 2016, the FASB issued ASU No. 2016-02,~~~~Leases~~~~. The new standard, as subsequently amended,~~ establishes a right-of-use model that 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 will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. ~~The~~Following our change in fiscal year effective on December 31, 2020, the new standard is effective for us beginning with our fiscal year ending December 31, 2022 and in interim periods thereafter. We have limited assets subject to operating lease and therefore expect the ~~Company~~adoption of the new standard to result in the recognition of right of use assets and lease liabilities for any office or vehicle leases in effect at that date, we do not expect a significant impact to our results of operations.

The FASB has issued guidance to introduce a new model for recognizing credit losses on financial instruments based on estimated current expected credit losses, or CECL. Under the new standard, an entity is required to estimate CECL on trade receivables at inception, based on historical information, current conditions, and reasonable and supportable forecasts. Following our change in fiscal year-end effective December 31, 2020, the new guidance is effective for us beginning ~~July~~on January 1, ~~2020 with early adoption permitted. The Company is~~2023. We are evaluating the impact of adoption of the new standard on ~~its~~our consolidated financial statements.

~~In June 2016, the~~The FASB has issued ~~ASU No. 2016-13,~~~~Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments~~. Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The new standard is effective for the Company beginning July 1, 2021 with early adoption permitted. The Company is evaluating the impact of adoption of the new standard on its consolidated financial statements.

~~In June 2018, the FASB issued ASU No. 2018-07,~~~~Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting~~, which eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees. Under the new guidance nonemployee share-based payment transactions are measured at the grant-date fair value and are no longer remeasured at the then-current fair values at each reporting date until the share options have vested. The amended guidance is effective for the Company’s fiscal 2020 annual reporting period and for interim periods thereafter, with early adoption permitted. The Company is evaluating the impact of adoption of the new standard on its consolidated financial statements.

~~In August 2018, the FASB issued ASU No. 2018-15~~~~, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~~~, which broadens the scope of existing guidance applicable to~~regarding whether internal-use software development ~~costs. The update requires~~ costs toshould be capitalized or ~~expensed based~~charged to expense. Depending upon on the nature of the costs and the project stage in which they are ~~incurred~~incurred. Capitalized development costs are subject to amortization and impairment guidance consistent with existing internal-use software development cost guidance. ~~The~~Following our change in fiscal year end effective December 31, 2020, the guidance is applicable for us for the ~~Company beginning July 1, 2021~~year ending December 31, 2020 and in interim periods thereafter, with early adoption permitted, including adoption in an interim period. ~~The Company is~~We are evaluating the impact of adoption of the new standard on ~~its~~our financial statements.

~~AKERNA CORP.~~

~~Notes~~The FASB has issued guidance clarifying the interactions between various standards governing investments in equity securities. The new guidance addresses accounting for the transition into and out of the equity method and measurement of certain purchased options and forward contracts to ~~Condensed Consolidated~~ acquire investments. The standard is effective for us for annual and interim periods beginning on January 1, 2022, with early adoption permitted. Adoption of the standard requires changes to be made prospectively. We do not anticipate a significant impact to our financial statements as a result of this new guidance.

Note 3 – Revenue

Financial ~~Statements~~Statement Impact of Adopting ASC 606, "Revenue from Contracts with Customers"

~~(Unaudited)~~

On July 1, 2020, we adopted ASC 606 using the modified retrospective transition method and applied this method to all contracts that were not complete as of the date of adoption. The reported results as of March 31, 2021 and December 31, 2020, and three months ended March 31, 2021 in the accompanying consolidated financial statements are presented under ASC 606, while prior period results have not been adjusted and are reported in accordance with historical accounting guidance in effect for those periods.

The most significant impacts of this standard relate to the timing of revenue recognition of fixed fees under our contracts, as well as the accounting for costs to obtain contracts. Under ASC 606, revenue recognition for subscription and implementation fees begins on the launch date and is recognized over time through the term of the contract. We then recognized the remaining balance of the fixed fees ratably over the remaining term of the contract. Additionally, under ASC 606, we now defer recognition of expense for sales commissions ("contract costs"). These contract costs are amortized to expense over the expected period of benefit. Before the adoption of ASC 606, we expensed these contract costs as incurred.

Revenue Recognition Policies for the three months ended March 31, 2020

We derive our revenues primarily from the following sources: software revenues, which are primarily comprised of subscription fees from government and commercial customers accessing our enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and consulting services provided to operators interested in integrating our platform into their respective operations, such services include: assessing compliance requirements, monitoring systems and readiness; assisting with the application process; and evaluating the operator’s inspection readiness and business plan.

We commence revenue recognition when there is persuasive evidence of an arrangement, the service has been or is being provided to the customer, the collection of the fees is reasonably assured, and the amount of fees to be paid by the customer is fixed or determinable.

Software Revenue

Software revenue primarily consists of subscription revenue that is recognized ratably over the term of the contract, beginning when access to the applicable software is provided to the customer. 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.

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 Services Revenue

Consulting services revenue consists of contracts with fixed terms and fee structures based upon the volume and activity or fixed-price contracts for consulting and strategic services. When these services are not combined with subscription revenues as a single unit of account, as discussed below, these revenues are recognized as services are rendered and accepted by the customer.

Other Revenues

We sell solo*TAG’s and solo*CODEs to customers by the roll of printed labels or as a digital code that allows customers to directly print their packing. When customers active a solo*TAGor solo*CODE, we receive an activation fee, which is recognized upon activation by the customer. From time to time, we may purchase equipment for resale to customers. Such equipment is generally drop-shipped to our customers. We recognize revenue as these products are delivered.

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.

10

Deferred Revenue

Deferred revenue consists of payments received in advance of revenue recognition from subscription 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 a current liability on the accompanying consolidated balance sheets.

Revenue Recognition Policies for the three months ended March 31, 2021

In accordance with ASC 606, revenue is recognized when a customer obtains the benefit of promised services, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those services. In determining the amount of revenue to be recognized, the Company performs 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) the Company satisfies each performance obligation.

Disaggregation of Revenue

The Company derives the majority of its revenue from subscription fees paid for access to and usage of its SaaS solutions for a specified period of time, typically one year. 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. The Company's contracts typically have a one-year term. The Company's 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 the Company's software at any time.

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

The following table summarizes revenue disaggregation by product for the following periods (in thousands):

	For the Three Months Ended March 31,
	2021		2020 ⁽¹⁾
Government	$	1,053	$	1,118
Non-government	2,961		1,953
	$	4,014	$	3,071

(1) As noted above, prior periods have not been adjusted for the adoption of ASC 606 and are presented in accordance with historical accounting guidance in effect for those periods.

	For the Three Months Ended March 31,
	2021		2020 ⁽¹⁾
United States	$	2,659	$	3,071
Canada	1,355		—
	$	4,014	$	3,071

Software. Our software revenue is generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform, Ample and Trellis, our government regulatory platform, Leaf Data Systems, and the sale of business intelligence, data analytics and other software related services. Software contracts are generally annual contracts paid monthly in advance of service and cancellable upon 30 days’ notice after the first year, although we do have some 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.

11

Consulting Services. 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 continue to grow 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.

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 Company's 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

ASC 606 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 the Company typically enters into contracts with customers for a twelve-month subscription term, substantially all of its performance obligations that have not yet been satisfied as of March 31, 2021 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 $1.1 million as of March 31, 2021, of which $0.8 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 year. Deferred revenue is included in the accompanying consolidated balance sheets under Total current liabilities, net of any long-term portion that is included in Other long-term liabilities.

The following table summarizes deferred revenue activity for the three months ended March 31, 2021 (in thousands):

	As of December 31, 2020			Net additions		Revenue recognized		As of March 31, 2021
Deferred revenue	$	844		3,752		(4,014	)	$	582

Of the $4.0 million of revenue recognized in the three months ended March 31, 2021, $0.5 million was included in deferred revenue at December 31, 2020.

Costs to Obtain Contracts

In accordance with ASC 606, we now 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 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 year based on the estimated customer relationship period.

The following table summarizes deferred contract cost activity for the three months ended March 31, 2021 (in thousand):

	As of December 31, 2020			Additions		Amortized costs (1)		As of March 31, 2021
Deferred contract costs	$	228		105		(119	)	$	214

(1) Includes contract costs amortized to sales and marketing expense during the period.

12

Note 4 – Significant Transactions

Ample Organics

On July 7, 2020, we completed the acquisition of Ample Organics (“Ample”), Ample provides a seed-to-sale platform to clients in Canada, which offers tracking, reporting, and compliance tools to cannabis cultivators, processors, sellers, and clinics. We acquired 100% of the stock of Ample Organics for 3.3 million exchangeable shares of one of our wholly-owned subsidiaries. The exchangeable shares may be exchanged, at the option of the holder, for shares of Akerna common stock on a one-for-one basis, therefore the exchangeable shares issued were valued at $7.65 per share, the closing price of an equivalent share of Akerna common stock, $30.7 million was the aggregate value of the exchangeable shares. In addition to the stock consideration, we paid $5.5 million in cash, which was used to settle all of Ample's then outstanding debt. In addition to the stock and cash consideration, the agreement provides for contingent consideration of up to CAD$10,000,000, payable in exchangeable shares, payable if Ample's Recurring Revenue recognized during the 12 months after the acquisition date is CAD$9,000,000 or more. The contingent consideration amount is reduced by an amount equal to the product of CAD$6.67 multiplied by the difference between CAD$9,000,000 and the amount of Recurring Revenue realized during the 12 months following the acquisition.The contingent consideration will be recorded as the estimated fair value on the acquisition date and adjusted to estimated fair value in each subsequent reporting period until settlement.

	Preliminary Fair Value
Exchangeable shares issued	$	25,203
Cash		5,724
Contingent consideration		604
Total preliminary fair value of consideration transferred	$	31,531

The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):

	Preliminary Fair Value
Cash	$	445
Accounts receivable		917
Prepaid expenses and other current assets		595
Acquired technology		850
Customer relationships		2,660
Acquired trade name		285
Goodwill		25,806
Furniture, fixtures and equipment		1,327
Accounts payable and accrued expenses		(805	)
Deferred revenue		(549	)
Net assets acquired	$	31,531

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. The fair values assigned to identifiable assets acquired and liabilities assumed are based on management’s estimates and assumptions.

13

Pro Forma Financial Information

The following unaudited pro forma financial information summarizes the combined results of operations for Akerna, Trellis, Solo, and Ample as though the companies were combined as of the beginning of our fiscal 2020 (in thousands):

	Three Months Ended March 31
		2020
Revenue	$	4,773
Net loss	$	(6,717	)

The pro forma financial information for all periods presented above has been calculated after adjusting the results of Solo, Trellis, and Ample 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 Company’s fiscal year 2019. The Akerna historical condensed consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination and factually supportable. 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 Company’s fiscal 2019.

Special Voting Preferred Stock and Exchangeable Shares

In connection with the Ample acquisition, we entered into agreements with our wholly-owned subsidiary and the Ample shareholder representative that resulted in the issuance of a single share of our 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, following the registration of the Akerna shares issuable upon exchange of the Exchangeable Shares under the Securities Act of 1933, ensuring that each Exchangeable Share is exchangeable on a one-for-one basis for a share of Akerna common stock, subject to certain limitations. As a result of these agreements and the issuance of the special voting preferred stock, each holder of Exchangeable Shares effectively has the ability to cast votes along with holders of Akerna common stock. Additionally, these agreements grant exchange rights to the holders of exchangeable shares upon the event of our liquidation, dissolution or winding up.

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 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 not votes attached to it, the share shall be automatically cancelled. The exchangeable shares do not have a par value.

During the three months ended March 31, 2021, several Ample shareholders exchanged a total of 1,020,062 exchangeable shares with a value of $7,803,475 for the same number of shares of Akerna common stock. The exchange was accounted for as an equity transaction and we did not recognize a gain or loss on this transaction. As of March 31, 2021, there were a total of 1,647,287 exchangeable shares issued and outstanding.

14

Note 35 - Balance Sheet Disclosures

Prepaid expenses ~~consist~~and other current assets consisted of the following:

						As of		As of
	September 30,		June 30,			March 31,		December 31,
	2019		2019			2021		2020
Software and technology	$	321,432	$	237,930	$	505,679	$	480,651
Professional services		428,348		169,804
Professional services, dues and subscriptions						653,104		826,195
Insurance		68,241		159,940		118,762		243,222
Deposit		51,925		10,000
	$	869,946	$	577,674
Deferred contract costs						214,036		227,718
Unbilled receivables						549,730		612,446
Other						54,303		68,495
Total prepaid expenses and other current assets					$	2,095,614	$	2,458,727

Accounts payable and accrued liabilities consisted of the following:

		As of		As of
		March 31,		December 31,
		2021		2020
Accounts payable	$	495,819	$	513,610
Professional fees		512,419		333,709
Sales taxes		294,029		216,367
Compensation		266,086		311,379
Contractors		1,172,404		1,281,857
Other		319,989		531,654
Total accounts payable and accrued liabilities	$	3,060,746	$	3,188,576

15

Note 6 - Fair Value

Fair Value Option Election – Convertible Notes

We issued Convertible Notes with a principal amount of $17.0 million at a purchase price of $15.0 million on June 9, 2020. We have elected to account for the Convertible Notes using 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 ~~Company deferred approximately $164,000~~change in ~~professional services costs related~~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 income (expense) in our condensed consolidated statement of operations under the caption, change in fair value of convertible notes.

For the Convertible Notes, which are measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from December 31, 2020 to March 31, 2021:

Fair value balance as of December 31, 2020	$	13,398,000
Payments on Convertible Notes		(7,697,727	)
Change in fair value reported in the statements of operations		1,991,272
Change in fair value reported in other comprehensive loss		13,000
Fair value balance as of March 31, 2021	$	7,704,545

The estimated fair value of the Convertible Notes as of March 31, 2021 and December 31, 2020, was computed using a Monte Carlo simulation, 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 Convertible Notes reflect our assumptions about the assumptions that market participants would use in valuing the Convertible Notes as of the issuance date and subsequent reporting period.

We estimated the fair value by using the following key inputs to the ~~contract with the State of Utah. These costs will be recognized at the same time as the related revenue is recognized, under the matching principle.~~Monte Carlo Simulation Model:


Fair Value Assumptions - Convertible Notes	March 31, 2021				December 31, 2020
Face value principal payable (in thousands)	$	7,475,000			$	15,172,272
Original conversion price	$	11.50			$	11.5
Value of Common Stock	$	4.94			$	3.24
Expected term (years)		2.17				2.3
Volatility		86		%		77		%
Market yield		26.4%	to 26.6	%		27.1%	to 27.2	%
Risk free rate		0.2		%		0.1		%

16

Fair Value Measurement – Warrants

~~Accrued liabilities consist~~In connection with MTech Acquisition Corp.'s ("MTech") initial public offering, MTech sold 5,750,000 units at a purchase price of $10.00 per unit, inclusive of 750,000 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 $11.50. Concurrently with MTech’s initial public offering, MTech sold 243,750 units at a purchase price of $10.00 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 $11.50.

Upon completion of the ~~following:~~

September 30, June 30,
2019 2019
Professional fees $ 85,000 $ 49,205
Sales taxes 41,104 36,358
Compensation 298,585 354,724
Leaf Data Systems contractors 19,557 19,557
Other 49,272 40,706

$ 493,518 $ 500,550

~~The accrued compensation~~mergers between MTech and MJF on June 17, 2019, as ~~of June 30, 2019, and September 30, 2019, includes approximately $215,000 of accrued bonus earned~~contemplated by the ~~Company’s Chief Executive Officer~~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 ~~respect~~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 189,365 common stock purchase warrants upon the cashless exercise of a unit purchase option, which warrants have identical terms to ~~fiscal year 2019. The balance was paid~~the Public Warrants and are included in ~~October, 2019.~~references to Public Warrants and Warrants herein.

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 is a reconciliation of the fair values from December 31, 2020 to March 31, 2021:

Fair value balance as of December 31, 2020
$
311,376

Change in fair value reported in the statements of operations

175,996

Fair value balance as of March 31, 2021
$
487,372

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 in the consolidated balance sheets under the caption “derivative liabilities” 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

March 31, 2021

December 31, 2020

Number of Private Warrants


225,635


$
225,635

Original conversion price

$
11.50

$
11.50

Value of Common Stock

$
4.94

$
3.24

Expected term (years)

3.21

3.46

Volatility

95.4
%

102.3
%
Risk free rate

0.4
%

0.2
%

17

Note 47 - Loss Per Share

~~Basic~~During the three months ended March 31, 2021, we used the two-class method to compute net loss per share because we issued securities other than common stock that is ~~calculated~~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 interest in Ample. The two-class method requires earnings for the period to be allocated between common stock and participating securities based on their respective rights to receive distributed and undistributed earnings. Under the ~~weighted-average~~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 ~~in accordance~~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 ~~ASC Topic 260, Earnings per Share.~~ a net loss, as the holders of the Exchangeable Shares have no obligation to fund losses.

Diluted net loss per common share is calculated ~~based on~~under the two-class method by giving effect to all potentially dilutive common stock, including warrants, restricted stock awards, restricted stock units, and shares of common stock issuable upon conversion of our Convertible Notes. 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 Convertible 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 awards 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 ~~common stock outstanding plus~~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 ~~dilutive issuances of common stock. When the Company reports~~outstanding shares on a ~~net loss,~~fully diluted basis that were not included in the calculation of diluted ~~net loss~~earnings per common stock excludes issuances of common stock as the effect would be anti-dilutive. For the three months ended September 30, 2019, 6,029,268 potentially dilutive issuances of shares of common stock have been excluded from the computation of diluted weighted average shares outstanding because the effect would be anti-dilutive. Of the total securities excluded, 5,814,205 shares of common stock are underlying outstanding warrants to purchase common stock and 215,063 were related to the unvested shares of restricted common stock. For the three months ended September 30, 2018, 5,993,750 potentially dilutive issuances of shares of common stock all related to warrants to purchase shares of common stock have been excluded from the computation of diluted weighted average shares of common stock outstanding because the effect would be anti-dilutive.share:

	As of March 31,
	2021		2020
Shares issuable upon exchange of Exchangeable Shares		1,647,287	—
Shares of common stock issuable in upon conversion of Convertible Notes		612,609	—
Warrants		5,813,804	5,813,804
Unvested restricted stock units		664,258	325,121
Unvested restricted stock awards		33,062	75,654
Total		8,771,020	6,214,579

9

18

~~AKERNA CORP.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

Note ~~5 - Stockholders’ Equity~~

~~Issuances for Cash~~

In August 2018, MJF issued 4,115,042 Series C Preferred Units (1,099,376 shares of common stock after retroactively applying the exchange ratio) for cash consideration of $10,000,000. Following the Mergers, all the Units were converted into Akerna’s common stock.

~~Restricted Shares~~

Prior to the Mergers, MJF had in place a Profit Interest Incentive Plan (the “Profits Interest Plan”) whereby it could grant profit interest units (“PIUs”) to employees or consultants and other independent advisors of the Company. PIUs granted under the Profits Interest Plan would generally vest once a year over four years commencing on the date granted, or based on specified performance targets. MJF had the right, but not the obligation, to repurchase vested PIUs from holders upon their termination of employment. Unvested PIUs were to be forfeited upon termination of employment. If the holder was terminated for cause, as defined, all vested and unvested units would be forfeited. PIUs repurchased or canceled or forfeited by the award recipient were available for reissuance. Upon completion of the Mergers in June 2019, the non-vested PIUs were exchanged for restricted shares of common stock (“Restricted Shares”) subject to restricted stock agreements with varying vesting terms that reflect the vesting conditions applicable to PIUs of the applicable MJF equity holders at the time of the Mergers.

During the three months ended September 30, 2018, 185,324 PIUs were granted (which were exchanged for 49,519 Restricted Shares in the Mergers) and 30,000 PIUs (which would equate to 8,016 Restricted Shares after applying the exchange ratio) were forfeited.

~~At September 30, 2019, there were 498,147 Restricted Shares outstanding, of which 215,063 were vested. During the three months ended September 30, 2019, no Restricted Shares were forfeited.~~

For the three months ended September 30, 2019, stock-based compensation expense related to the ratable amortization of the unvested Restricted Shares was $161,165. Approximately $2.6 million of total unrecognized costs related to Restricted Shares will be ratably recognized over an estimated weighted average remaining vesting period of 1.17 years.

~~Warrants~~

~~A summary of the status of outstanding warrants to purchase common stock at September 30, 2019 and the changes during the three months then ended, is presented in the following table:~~

Shares issuable upon exercise of warrants Weighted average exercise price Weighted average remaining life
Outstanding at July 1, 2019 6,183,115 $ 11.50 3.72
Issued - - -
Exercised (368,910 ) 11.50 -
Expired/cancelled - - -
Outstanding at September 30, 2019 5,814,205 $ 11.50 3.40

~~There was no aggregate intrinsic value for the warrants outstanding as of September 30, 2019.~~

~~Note 6~~8 - Commitments and Contingencies

~~Operating Leases~~Litigation

~~The Company leases facilities, equipment, and vehicles under non-cancelable operating leases. Rent expense~~On December 4, 2020, TechMagic USA LLC filed suit against our wholly-owned subsidiary, Solo, in Massachusetts Superior Court, Department Business Litigation, seeking recovery of up to approximately $1.07 million for ~~the three months ended September 30, 2019 and 2018 was $35,247 and $43,475, respectively.~~

~~On September 30, 2019, t~~he Company entered into an office service agreement (the “Office Lease”) effective and commencing February 1, 2020 and expiring January 31, 2022, unless earlier terminated by either party in accordance with the terms of the Office Lease. The Office Lease relates to new office space located at 1630 Welton Street, Denver, Colorado, 80202. The Company was required to pay a security deposit equalunpaid invoices pursuant to a ~~one-month payment~~Master Services Agreement dated February 5, 2018 by and ~~initial set-up fees~~between TechMagic and Solo. The invoices set forth services that TechMagic USA LLC purports to have provided to Solo regarding development of ~~$43,925. The monthly payments will be in the amount of $41,925 subject to a 4% annual indexation increase at each anniversary of the commencement date during the term of the Office Lease~~.

~~Future minimum lease payments to be made pursuant to the Office Lease~~mobile software applications for MJF and ~~the current leases are~~Solo between March and November 2020 totaling approximately ~~$276,000 for the remainder of the~~$787,000. During our fiscal year ended June 30, 2020, we received invoices totaling an aggregate amount of approximately ~~$530,000 for the~~$392,000. After our year ended June 30, 2020, through December 31, 2020, we have received invoices totaling an aggregate amount of approximately $395,000. The suit seeks 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 dispute the effective date of the termination. Solo disputes the validity of the invoices, in whole or in part, and intends to defend the suit vigorously. Mr. Ashesh Shah, formerly the president of Solo and currently the holder of 5.1% of our issued and outstanding shares of common stock is, to our knowledge, the founder and one of the principal managers of TechMagic USA LLC. As of March 31, 2021 and ~~approximately $316,000~~December 31, 2020, we recognized a loss contingency of $0.6 million.

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 million for services allegedly provided pursuant to a Subcontractor Agreement between MJ Freeway and TreCom. After our year ended June 30, ~~2022.~~

~~AKERNA CORP.~~

~~Notes~~2020, through April 30, 2021, we have received invoices totaling an aggregate amount of approximately $497,354.70. The suit seeks continued fees through the end of April, 2025. 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 ~~Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~Letter-of-Credit~~

the court. Akerna intends to defend the suit vigorously. As of ~~September 30, 2019, the Company had~~March 31, 2021, we recognized a ~~standby letter-of-credit with a bank in the amount~~loss contingency of $500,000, which was classified as restricted cash on the balance sheets. The beneficiary of the letter-of-credit is an insurance company. Upon its termination on June 22, 2019, the letter-of-credit was renewed with the required balance reduced to $500,000. Accordingly, the restricted cash on the balance sheet as of September 30, 2019 is $500,000. The letter-of-credit will expire on June 22, 2020.$0.5 million.

~~Litigation~~

From time to time, ~~the Company~~we may be involved in litigation relating to claims arising out of ~~its~~our operations in the normal course of business. ~~The Company~~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, 2019,~~March 31, 2021, and through the date these financial statements were issued, there were no other legal proceedings requiring recognition or disclosure in the financial statements.

Note 79 – Revisions of Previously Issued Financial Statements

On June 17, 2019, we completed the Mergers with MTech. Prior to the Mergers, MTech was a special purpose acquisition company and had completed an initial public offering in October 2018, which included the issuances of the MTech Private Warrants in a simultaneous private placement transaction. The MTech Private Warrants were exchanged for our Private Warrants as part of the Mergers and our Private Warrants remain outstanding as of March 31, 2021. We previously accounted for these outstanding Private Warrants as components of equity rather than as derivative liabilities. In light of the Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) issued by the staff of the SEC on April 12, 2021 (the “SEC Staff Statement”), the Company’s management further evaluated our outstanding warrants under Accounting Standards Codification 815-40, Contracts in Entity’s Own Equity (“ASC 815-40”), which addresses equity versus liability treatment and classification of equity-linked financial instruments, including warrants, and states that a warrant may be classified as a component of equity only if, among other things, the warrant is indexed to the issuer’s common stock.

~~During~~Based on management’s evaluation and in consultation with the ~~course~~Audit Committee, we concluded that the Company’s Private Warrants are not indexed to the Company’s common stock in the manner contemplated by ASC Section 815-40. As a result, these warrants are precluded from equity classification and should be recorded as derivative liabilities remeasured to fair value at each reporting period. We assessed the materiality of ~~preparing~~these errors on prior periods’ financial statements and concluded that the errors were not material to any prior annual or interim periods. However, we are revising the prior periods’ financial statements when they are next issued in these condensed consolidated financial statements and we are reclassifying the Private Warrants as derivative liabilities measured at their estimated fair values at the end of each reporting period and recognizing changes in the estimated fair value of the derivative instruments from the prior period in the Company’s operating results for the current period. See Item. 4 of Part I, Controls, and Procedures.

The Company's change in accounting for the Private Warrants from components of equity to derivative liabilities has no impact on the Company's current or previously reported cash position.

19

The tables below disclose the effects on the financial statements included in this Quarterly Report on Form 10-Q for the three months ended September 30, 2019, the Company identified certain previously duplicated revenues, which resulted in the overstatement of total assets and revenue during the periods outlined below, and the understatement of net losses for the periods outlined below. Additionally, during the course of preparing its Annual Report on Form 10-K for the fiscal year ended June 30, 2019, the Company identified certain costs of revenue related to consulting services previously being recorded in operating expenses, which resulted in the overstatement of the gross profit for each of the quarters during the fiscal year ended June 30, 2019.

June 30, 2018
As reported Adjustment As revised
Consolidated Balance Sheet
Total assets $ 3,017,731 $ (223,766 ) $ 2,793,965
Total liabilities 1,393,902 - 1,393,902
Total stockholders’ equity 1,623,829 (223,766 ) 1,400,063

September 30, 2018
As reported Adjustment As revised
Condensed Consolidated Balance Sheet
Total assets 12,090,810 (296,267 ) 11,794,543
Total liabilities 2,090,163 - 2,090,163
Total stockholders’ equity 10,000,647 (296,267 ) 9,704,380

Condensed Consolidated Statements of Operations
Total revenue 2,371,900 (72,501 ) 2,299,399
Cost of revenue 956,123 107,012 1,063,135
Gross profit 1,415,777 (179,513 ) 1,236,264
Operating expenses 3,055,976 (107,012 ) 2,948,964
Net loss (1,623,182 ) (72,501 ) (1,695,683 )
Net loss per share (0.30 ) (0.31 )

December 31, 2018
As reported Adjustment As revised
Condensed Consolidated Balance Sheet
Total assets 9,836,178 (320,434 ) 9,515,744
Total liabilities 2,205,735 - 2,205,735
Total stockholders’ equity 7,630,443 (320,434 ) 7,310,009

Condensed Consolidated Statements of Operations
Total revenue 2,598,079 (24,167 ) 2,573,912
Cost of revenue 1,198,911 122,084 1,320,995
Gross profit 1,399,168 (146,251 ) 1,252,917
Operating expenses 3,826,539 (122,084 ) 3,704,455
Net loss (2,370,204 ) (24,167 ) (2,394,371 )
Net loss per share (0.39 ) (0.40 )

~~AKERNA CORP.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

March 31, 2019
As reported Adjustment As revised
Condensed Consolidated Balance Sheet
Total assets 8,199,718 (320,434 ) 7,879,284
Total liabilities 3,059,378 - 3,059,378
Total stockholders’ equity 5,140,340 (320,434 ) 4,819,906

Condensed Consolidated Statements of Operations
Total revenue 2,327,880 - 2,327,880
Cost of revenue 1,042,403 124,079 1,166,482
Gross profit 1,285,477 (124,079 ) 1,161,398
Operating expenses 3,788,644 (124,079 ) 3,664,565
Net loss (2,490,103 ) - (2,490,103 )
Net loss per share (0.41 ) (0.41 )

June 30, 2019
As reported Adjustment As revised
Consolidated Balance Sheet
Total assets 24,522,671 (320,434 ) 24,202,237
Total liabilities 2,442,503 - 2,442,503
Total stockholders’ equity 22,080,168 (320,434 ) 21,759,734

Consolidated Statements of Operations
Total revenue 10,919,785 (96,668 ) 10,823,117
Cost of revenue 4,633,844 - 4,633,844
Gross profit 6,285,941 (96,668 ) 6,189,273
Operating expenses 18,701,619 - 18,701,619
Net loss (12,306,547 ) (96,668 ) (12,403,215 )
Net loss per share (2.04 ) (2.05 )

In accordance with SEC Staff Accounting Bulletin No 108, the Company has evaluated these errors, based on an analysis of quantitative and qualitative factors, as to whether it was material to the condensed consolidated statements of operations for the three months ended September 30, 2018, December 31, 2018, and March 31, 2019, and consolidated statements of operations for the year ended June 30, 2019, as well as to the consolidated balance sheets as of June 30, 2019 and 2018, condensed consolidated balance sheets as of September 30, 2018, December 31, 2018, and March 30, 2019, and as to whether amendments of previously filed financial statements ~~with the SEC are required. The Company has determined that quantitatively and qualitatively, the errors have no material impact~~yet to ~~the above mentioned financial statements.~~be reissued:

	Year Ended June 30, 2019
	As reported			Adjustment			As revised
Consolidated Statements of Operations
Change in fair value of derivative liability	$	—		$	(2,015,812	)	$	(2,015,812	)
Net loss		(12,403,215	)		(2,015,812	)		(14,419,027	)
Net loss per share		(2.05	)		—			(2.39	)

	Three Months Ended March 31, 2020
	As reported			Adjustment		As revised
Condensed Consolidated Statements of Operations
Change in fair value of derivative liability	$	—		$	236,917	$	236,917
Net loss		(4,744,129	)		236,917		(4,507,212	)
Net loss per share		(0.38	)		—		(0.36	)

	Year Ended June 30, 2020
	As reported			Adjustment		As revised
Consolidated Statements of Operations
Change in fair value of derivative liability	$	—		$	1,962,034	$	1,962,034
Net loss attributable to Akerna shareholders		(15,534,345	)		1,962,034		(13,572,311	)
Net loss per share		(1.31	)		—		(1.14	)

	Three Months Ended September 30, 2020
	As reported			Adjustment		As revised
Condensed Consolidated Statements of Operations
Change in fair value of derivative liability	$	—		$	762,646	$	762,646
Net loss attributable to Akerna shareholders		(4,741,876	)		762,646		(3,979,230	)
Net loss per share		(0.34	)		—		(0.28	)

	Six Months Ended December 31, 2020
	As reported			Adjustment		As revised
Consolidated Statements of Operations
Change in fair value of derivative liability	$	—		$	746,852	$	746,852
Net loss attributable to Akerna shareholders		(16,957,334	)		746,852		(16,210,482	)
Net loss per share		(1.06	)		—		(1.01	)

	As of June 30, 2019
	As reported			Adjustment			As revised
Consolidated Balance Sheet
Derivative liability	$	—		$	(3,042,000	)	$	(3,042,000	)
Total liabilities		(2,442,503	)		(3,042,000	)		(5,484,503	)
Additional paid-in capital		47,325,421			(1,026,188	)		46,299,233
Accumulated deficit		(25,566,746	)		(2,015,812	)		(27,582,558	)

20

	As of June 30, 2020
	As reported			Adjustment			As revised
Consolidated Balance Sheet
Derivative liability	$	—		$	(1,058,228	)	$	(1,058,228	)
Total liabilities		(21,955,213	)		(1,058,228	)		(23,013,441	)
Additional paid-in capital		72,906,924			(1,004,450	)		71,902,474
Accumulated deficit		(41,101,091	)		(53,778	)		(41,154,869	)

	As of December 31, 2020
	As reported			Adjustment			As revised
Consolidated Balance Sheet
Derivative liability	$	—		$	(311,376	)	$	(311,376	)
Total liabilities		(19,635,076	)		(311,376	)		(19,946,452	)
Additional paid-in capital		95,090,883			(1,004,450	)		94,086,433
Accumulated deficit		(57,872,599	)		693,074			(57,179,525	)

Note 810 - Subsequent Events

~~Appointment~~On April 1, 2021, Akerna acquired Viridian Sciences Inc. (“Viridian”), a cannabis business management software system built on SAP Business One in an all-stock deal worth $6.0 million.

Because the acquisition occurred after March 31, 2021, no results of ~~Chief Revenue Officer~~

~~On October 1, 2019,~~operations of Viridian are included in our condensed consolidated statements of operations for the ~~Company entered into~~three months ended March 31, 2021. It is currently impractical to disclose a ~~letter agreement with Nina Simosko pursuant to which Ms. Simosko will serve as the Company’s Chief Revenue Officer effective~~preliminary purchase price allocation or pro forma financial information combining both companies as of ~~September 23, 2019. The letter agreement provides for an at-will employment relationship. Ms. Simosko will receive an annual base salary~~the earliest period presented in these financial statements as Viridian is currently in the process of ~~$200,000~~closing their books and Ms. Simosko may be eligible for a bonus. On October 7, 2019, Ms. Simosko was granted 125,156 of Restricted Stock Units, which will vest as to 25% on the first anniversary of the grant date, as to the next 25% on the second anniversary of the grant date, as to the next 25% on the third anniversary of the grant date and as to the remaining 25% on the fourth anniversary of the grant date. In accordance with the terms of the letter agreement, upon a change of control transaction, Ms. Simosko’s unvested restricted stock units or any other equity interests that she may be granted, will immediately vest. If Ms. Simosko’s employment is terminated by the Company without cause or by her with good reason, she is entitled to her base salary through the date of termination and the immediate vesting of 33% of the restricted stock units that are unvested on the date of termination.records.

21

~~AKERNA CORP.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~License Agreement with Zol Solutions, Inc.~~

The Company entered into a license agreement with Zol Solutions, Inc. (“ZolTrain”), effective October 24, 2019, to provide ZolTrain’s online cannabis training platform as a co-branded integration option into the Company’s MJ Platform and Leaf Data Systems.

The Company and ZolTrain will share subscription-based revenue generated from the Company’s customers. The share of revenue for each of the Company and ZolTrain will be based on the number of training modules accessed by a customer and which of the Company and ZolTrain created the accessed content. Preceding the entry into the license agreement, on October 7, 2019, the Company participated in a series seed preferred stock purchase offering of ZolTrain along with other investors. The Company purchased approximately 203,000 shares of preferred stock for a purchase price of $250,000, which represents a minority investment in ZolTrain. The definitive agreements provide the Company with rights of first refusal with respect to newly issued securities of ZolTrain as well as issued and outstanding securities of ZolTrain that are offered to third parties. In connection with the investment, Nina Simosko, our Chief Revenue Officer, was appointed as a member of ZolTrain’s board of directors. In the event that Ms. Simosko or any other representative of the Company is not a member of ZolTrain’s board of directors, the Company is entitled to consult with and advise ZolTrain’s management on significant business issues.

~~Compensation Agreement with Jessica Billingsley~~

On November 11, 2019, the Compensation Committee of the Board of Directors of the Company established the terms on which Ms. Billingsley, the Company’s Chief Executive Officer, may earn a bonus for the fiscal year ended June 30, 2020. The Compensation Committee determined that Ms. Billingsley will be eligible for a bonus derived from the same targets with respect to her bonuses in fiscal year 2019, which were as follows:

The annual bonus was determined based upon the following four (4) budget components, each of which scales linearly between achieving 75% to 100%, and greater than 100% with respect to platform recurring revenue and government recurring revenue budget components respectively, of the applicable fiscal year’s budget for each such component (with 50% of the target bonus payable upon achievement of 75% of budget, 100% of the target bonus payable upon achievement of budget (and, with respect to the platform recurring revenue and government recurring revenue budget components, with 200% of each weighted portion of the target bonus payable upon achievement of 125% of the corresponding component of budget (the “Accelerator”), with linear interpolation between points)).

~~However, during fiscal year 2020 the Accelerator may be paid at the sole discretion of the Compensation Committee in cash, stock, or a combination thereof.~~

In addition, the Compensation Committee determined that, during fiscal year 2020, Ms. Billingsley is eligible to earn a performance based incentive of $250,000, payable in stock, whereby (a) 50% of the bonus is automatically granted if the Company’s stock price/shareholder return increases by 15% (measuring point starts at $10 per share) with respect to the consecutive 20-day volume weighted average price prior to and including June 30, 2020, and (b) the remaining 50% of the bonus may be paid at the sole discretion of the Compensation Committee.

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

~~The Management’s Discussion and Analysis of the Financial Condition and Results of Operations should be read together with the~~ 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 ~~Audited Consolidated Financial Statements~~three months ended March 31, 2021, and the related notes thereto, which have been prepared in ~~Akerna Corp. (“Akerna”) and subsidiaries’ (the “Company,” “us,” “our” or “we”) Annual Report on Form 10-K for~~accordance with generally accepted accounting principles in the ~~fiscal year ended June 30, 2019.~~United States.

Forward-Looking ~~Statements~~Statements

This Quarterly Report on Form 10-Q ~~contains statements which constitute forward-looking statements~~including all exhibits hereto contain “forward-looking statements” within the meaning of ~~Section 27A of~~ the Private Securities Litigation Reform Act of ~~1933, as amended,~~1995, including statements regarding future events or our future results of operations, financial condition, business, strategies, financial needs, and ~~Section 21E of~~ the ~~Securities Exchange Act of 1934, as amended. These forward-looking statements generally relate to our strategies,~~ plans and objectives ~~for~~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 management’s good faith belief as of such date with respect to future ~~operations~~events and are ~~based upon management’s current plans~~subject to a number of risks, uncertainties, and beliefs or estimates of future results or trends. Forward-looking statements also involve risks and uncertainties, including, but not restricted to, the risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2019, whichassumptions that could cause actual performance or results to differ materially from those ~~contained~~expressed in ~~any~~or suggested by the forward-looking ~~statement. Many~~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 sustain our revenue growth rate, to achieve or maintain profitability, and to effectively manage our anticipated growth;
	●	our short operating history makes it difficult to evaluate our business and future prospects;
	●	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;
	●	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 service our convertible debt;
	●	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, 2021, under Part I, Item 1A, “Risk Factors.”

22

Should one or more of these ~~factors are beyond our ability~~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 ~~control or predict.~~

~~You should not~~ place undue reliance on any such forward-looking statements, which ~~are based on current expectations. Further, forward-looking statements~~ speak only as of the date ~~they are made, and we will not update these~~made. We disclaim any obligation to revise subsequently any forward-looking statements ~~even if our situation changes~~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 future. We caution the reader that a number of important factors discussed herein, and in other reports filed with the Securities and Exchange Commission, could affect our actual results and cause actual results to differ materially from those discussed in forward-lookingforegoing cautionary statements.

Business Overview

~~We are a regulatory compliance and inventory management technology company. Our proprietary~~Akerna is the leading provider of enterprise software platform is 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. Ten years ago, we identified a need for organic material tracking and regulatory compliance software a service (“SaaS”) solutions in the growing cannabis and hemp industry. We developed 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 regulatory software platform, Leaf Data Systems^®~~, to government regulatory agencies, and our business software platform, MJ Platform~~^®, to state and federally-licensed businesses. Although we have helped monitor legal compliance for more than $16 billion in cannabis sales to date, we do not handle any cannabis related material, do not process sales transactions within the ~~United States,~~cannabis industry. By providing an integrated ecosystem of applications and ~~our revenue generation~~services that enables compliance, regulation, consumer safety and taxation, Akerna is ~~not related to~~building the ~~type or amount~~technology backbone of ~~sales made by our clients, as revenues are generated by us on a fixed-fee based subscription model.~~

the cannabis industry. Our core products, Leaf Data Systems and MJ Platform, are highly-versatile platforms that provide our clients with a central data management system for tracking regulated products – from seed to initial plant growth to product – throughout the complete supply chain, using a global unique identifier method. Our platforms alsosolutions provide clients with integrated security, transparency, and scalability ~~capabilities. These~~ capabilities, allow our state-licensed clients to control inventory, operate efficiently in a fast-changing industry and comply with state, local, and federal (in countries such as Canada, Italy, Macedonia and Colombia) regulation at all ~~times, and allows our government regulatory clients to effectively and cost-efficiently monitor licensees and ensure that commercial businesses are complying~~while maintaining compliance with their ~~states’~~governing regulations.

We ~~generate revenue in three principal areas:~~intend to leverage our scale and capital markets access to pursue additional growth through organic initiatives and to pursue our ecosystem strategy which leverages integrations, partnerships, and inorganic growth. We believe having a scaled ecosystem gives us more opportunities to leverage our footprint and increase wallet share by providing more value to our clients through having what we believe is the most robust cannabis technology suite available. We intend to pursue additional growth through organic initiatives, including increased marketing personnel and resources, acquisitions, and strategic relationships. We will continue scaling our platform for continued growth, adding new features and functionality, supporting new products and content types, and improving the user experience.

	●	Government Regulatory Software – Leaf Data Systems is our SaaS product for government agencies. Leaf Data Systems is a compliance tracking system designed to give regulators visibility into the activity of licensed cannabis businesses in their jurisdictions. We have been serving two clients for Leaf Data Systems, the State of Washington and the Commonwealth of Pennsylvania. As described below, we recently signed a third Leaf Data Systems client, the state of Utah.

	●	Commercial Software – MJ Platform is our SaaS offering for state and federally-licensed businesses. MJ Platform is an ERP (Enterprise Resource Planning) compliance system specific to the cannabis industry, including state-legal marijuana and hemp CBD industry. MJ Platform is comprised of integrated modules designed to meet the regulations and inventory management needs of cannabis and hemp CBD cultivators, manufacturers, distributors and retailers, but has applications in other industries.

●

Consulting Services – We provide consulting services to cannabis industry operators interested in entering the cannabis industry and in integrating our platforms into their respective operations and systems. We consult with clients on a wide range of areas to help them successfully operate in the cannabis industry in compliance with state law. We work with clients to efficiently comply with state requirements in connection with the launch and operations of their cannabis businesses. Our management team and key personnel have broad experience gained form working with numerous cannabis operations. Our consulting team has experience in most aspects of cannabis operations in most verticals (~~e.g.~~, cultivation, processing, distribution, manufacturing and retail). Our service providers understand the intricacies of the varying regulations governing cannabis in each jurisdiction and, to the extent necessary, modify the professional services based on the jurisdiction.

We provide project-focused consulting services to clients that are initiating or expanding their cannabis businesses 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 in newly legal states

We ~~also resell~~offer our software solutions to our customers as a ~~limited number~~subscription-based service. Subscription fees are based upon the chosen package which includes differentiated platform capabilities, support and user accounts. As customers recognize the value of ~~printers for printing compliance product labels and scales that are National Type Evaluation Program (“NTEP”) certified legal for trade. Revenue from these resale activities was approximately 2%~~our platform, we increasingly engage with them to facilitate broad adoption across other parts of ~~total revenue in each of the three months ended September 30, 2019, and September 30, 2018, and is not expected to become a significant generator of revenue.~~their business.

~~Our commercial software revenue~~In order to accelerate customer growth, ~~is driven by leveraging our reputation~~we intend to pursue additional initiatives, including increased marketing personnel and ~~continued cannabis, hemp~~resources, acquisitions, and ~~Cannabidiol (CBD) industry growth.~~strategic relationships. We believe we are ~~well known~~underpenetrated in ~~these industries~~the overall market and ~~can leverage~~have significant opportunity to expand our ~~reputation, brand recognition,~~customer base over time.

We have invested in professional services, customer support and ~~wealth of relevant experience~~customer success functions to ~~attract existing cultivation, manufacturing~~support our sales force by helping customers successfully deploy our platform. We actively engage with our customers to assess whether they are satisfied and ~~dispensary customers, and attract new market entrants. We believe that~~fully realizing the ~~reputation~~benefits of our ~~existing products~~platform. While these efforts often require a substantial commitment and upfront costs, we believe our ~~ability~~investment in product, customer support, customer success and professional services will create opportunities to ~~provide services~~expand our customer relationships over time.

We plan to continue to make investments in ~~all~~ areas of ~~the seed~~our business to ~~sale life cycle will attract customers from competitors that are seeking more comprehensive services~~continue to expand our platform functionality to enhance current offerings and ~~will attract~~build new customers as they enter into existing markets and markets that become newly legalized. We also experience revenue growth in mature, established states and countries by providing a solution to operators seeking to vertically integrate their operations and improve their operations. We provide not only a vertically integrated solution across the cannabis, hemp, and CBD supply chain, but also have the business intelligence capture which allows operators to run their businesses in a more informed and efficient manner. This business intelligence capture is derived from the suite of services provided by us and sets us apart from competitors.features.

~~Through~~In April 2021, we completed our acquisition ~~strategy, we are expanding the features available to new and existing customers~~ of MJ Platform and Leaf Data Systems, including the ability to track organic matter from seed-to-consumer, with an interactive consumer product experience. We believe that such features create further value by providing additional add-ins that should enhance utilization and the experience of our new and existing customers. For example : (i) our agreement with Netsuite will provide tax planning services to our customers in Canada; (ii) our license with ZolTrain will provide our MJ Platform customers with training modules to educate them and improve their experience by pairing education with product information at the point of sale; (iii) our Leaf Data System and Trace Seed to Sale Solution specifically customized for the State of Utah to include an electronic verificationViridian Sciences Inc. (“Viridian”), a cannabis business management software system and inventory control system, will utilize solo sciences’ solo*TAG™, the world’s first cryptographically-secure, cannabis product authentication system, exclusively for governments as an alternative to RFID tracking; and (iv) our agreement with Isolocity enables cannabis enterprises to pursue international expansion by providing a QMS framework to support local and national compliance needs and by leveraging such QMS, MJ Platform can support GMP certification requirements, including the stricter EU-GMP standard required for the export of medical cannabis into Europe and Asia.built on SAP Business One.

Financial Results of Operations

Revenue

We generate revenue from two primary sources: (1) software and (2) consulting services. Revenue from software comprised approximately 94.5% and 76.4% of our revenue for the three months ended March 31, 2021 and 2020, respectively. Revenue from consulting services comprised approximately 4.3% and 22.6% of our revenue for three months ended March 31, 2021 and 2020, respectively.

Software. Our software revenue is ~~derived~~generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform, Ample and Trellis, our ~~SaaS enterprise resource planning tool offering for state-licensed businesses, and~~government regulatory platform, Leaf Data Systems, ~~our track-and-trace product for government agencies. MJ Platform~~and the sale of business intelligence, data analytics and other software related services. Software contracts are generally annual contracts paid monthly in advance of service and cancellable upon 30 days’ notice after the first year, although we do have some multi-year ~~MJ Platform~~commercial software contracts. ~~We defer recognition of revenue from these payments until services have been provided.~~ Leaf Data Systems contracts are generally multi-year contracts payable annually or ~~quarterly. A percentage retainer or holdback fees (generally ranging from 10% to 30%) are common until all initial deliverables are complete. MJ Platform~~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 consulting~~Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is ~~derived throughout~~recognized on a straight-line basis over the ~~life cycle~~service term of ~~a customer. Our other revenue~~the arrangement beginning on the date that our solution is ~~derived primarily from point~~made available to the customer and ending at the expiration of ~~sale hardware and labels.~~the subscription term.

23

Consulting Services. Consulting services revenue ~~growth~~ is ~~driven~~generated by ~~numerous factors. In new emerging states, we provide~~providing solutions for ~~aspiring~~ 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 services are provided to post operational licensees to consult during the setup and buildout phases as they open and begin operating their businesses. We also provide business optimization services for established businesses that can benefit from consulting to increase efficiencies as they expand and grow.

15

~~We contract our consulting services through Statements of Work (SOW) for businesses or entrepreneurs interested in developing operations in the cannabis, hemp and CBD industries. SOW issued and~~projects completed during the pre-application phase generally solidify us as the ~~contractor~~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 continue to grow as more states emerge with legalization ~~reforms, such as Missouri, New Jersey, Illinois~~reforms.

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

Cost of Revenue and Operating Expenses

Cost of Revenue

Our cost of revenue is derived from direct costs ~~derived~~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 ~~from government contract subcontractor expenses in addition~~ to hosting and infrastructure costs ~~associated~~and subcontractor expenses incurred in connection with ~~operating MJ Platform and Leaf Data Systems. We record~~certain government contracts. Consulting cost of revenue ~~based on~~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. ~~Consulting cost of revenue is primarily determined as a result of our employees’ salaries and other related compensation expenses.~~

Product ~~and~~ Development Expenses

Our product ~~and~~ development expenses include salaries and benefits, nearshore contractor expenses, technology expenses, and other ~~overhead. These~~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 ~~have grown over time, and we expect these expenses to continue to increase with our growth.~~

~~Selling, General and Administrative Expenses~~

Our selling, general and administrative expenses include salaries and benefits, sales and marketing expenses, public relations and investor relations fees, outage expenses, professional fees, and other overhead. These expenses have grown over time, and we expect these expenses to continue to increase with our growth.

~~Marketing and sales expenses~~qualifying for capitalization, are ~~our largest cost and~~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 ~~marketing staff, including commissions, as well as~~client service staff. We also categorize payments to partners and marketing ~~programs.~~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 ~~customers,~~clients, and sponsoring additional marketing events. The timing of these marketing events will affect our marketing costs in a ~~quarter.~~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. These expenses have grown over time, due to our investments in personnel, technology and other infrastructure as we continue to position ourselves for growth both organically and through strategic acquisitions. Additionally, there is a cost of compliance as a publicly traded company, which we expect to continue.

Total Other (Income) Expense, Net

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

Critical Accounting Policies and Estimates

~~The Company’s significant~~Our critical accounting policies are disclosed in ~~Note 2- Summary of Significant Accounting Policies in the Company’s Annual~~our Transition Report on Form 10-K for the ~~years~~six-month period ended ~~June 30, 2019 and 2018.~~December 31, 2020. Since the date of the ~~Annual~~Transition Report, there have been no material changes to ~~the Company’s significant~~our critical accounting ~~policies, except as disclosedabove.~~policies.

24

Results of Operations for the Three ~~months ended September 30, 2019 compared~~Months Ended March 31, 2021 Compared to ~~three months ended September 30, 2018~~Three Months Ended March 31, 2020

The following table highlights the various sources of revenues and expenses for the three months ended ~~September 30, 2019~~March 31, 2021 as compared to the three months ended ~~September 30, 2018:~~March 31, 2020:

	Three months ended September 30,						Three Months Ended March 31,						Change
	2019			2018			2021			2020			Period over Period
Revenues:
Software	$	2,304,480		$	1,879,262		$	3,795,153		$	2,346,310		$	1,448,843		62	%
Consulting		831,363			370,083			172,747			692,584			(519,837	)	(75)	%
Other		57,047			50,054			46,124			31,652			14,472		46	%
Total Revenue		3,192,890			2,299,399
Total revenue								4,014,024			3,070,546			943,478		31	%

Cost of revenues		1,397,361			1,063,135			1,454,167			1,396,219			57,948		4	%
Gross Profit		1,795,529			1,236,264
Gross profit								2,559,857			1,674,327			885,530		53	%
Gross profit margin								64	%		55	%

Operating expenses:
Product development:		1,130,880			801,472			1,424,100			874,787			549,313		63	%

Selling, general and administrative		3,583,815			2,147,492

Sales and marketing								1,735,915			2,040,751			(304,836	)	(15)	%
General and administrative								1,852,962			3,457,262			(1,604,300)		(46)	%
Depreciation and amortization								1,052,883			180,229			872,654		nm
Total operating expenses		4,714,695			2,948,964			6,065,860			6,553,029			(487,169	)	(7)	%

Other income		73,095			17,017
Net loss	$	(2,846,071	)	$	(1,695,683	)
Loss from operations							$	(3,506,003	)	$	(4,878,702	)	$	(1,372,699)		28	%

nm – percentage change not meaningful

25

~~Total Revenue~~

Software Revenue

~~Total~~

Our total software revenue increased to ~~approximately $3.2~~$3.8 million for the fiscal three months ended March 31, 2021 from $2.3 million for the three months ended ~~September 30, 2019 from approximately $2.3~~March 31, 2020, for ~~the three months ended September 30, 2018,~~ an increase of ~~approximately $0.9~~$1.4 million, or ~~39%~~62%. The increase in total revenue was driven primarily by growth achieved across our commercial software business, MJ Platform, in addition to our consulting business. The revenues from our government regulatory software business, Leaf Data Systems, have had a slight increase as well.

Software ~~Revenue~~

Our total software revenue increased to approximately $2.3 million for the three months ended September 30, 2019 from $1.9 million for the three months ended September 30, 2018, an increase of approximately $0.4 million, or 23%. Total software revenue accounted for ~~72%~~95% and ~~82%~~76% of total revenue for the three months ended ~~September 30, 2019~~March 31, 2021 and ~~2018,~~2020, respectively. The increase in software revenue during the three months ended March 31, 2021 was primarily ~~driven by total~~attributable to revenue ~~growth~~generated from our acquisition of ~~MJ Platform of approximately $0.3 million, or 39%.~~ Ample and Trellis.

Software revenues generated from government ~~customers under Leaf Data Systems increased to approximately~~clients totaled $1.1 million during the three months ended March 31, 2021 and 2020, respectively.

Consulting Revenue

Our consulting revenue was $0.2 million for the three months ended ~~September 30, 2019 from approximately $1.0~~March 31, 2021 compared to $0.7 million for the three months ended ~~September 30, 2018, for an increase~~March 31, 2020, a decrease of ~~approximately $0.1~~$0.5 million, or 7%75%.

~~While our revenues from Leaf Data Systems from our contracts with the State of Washington and the State of Pennsylvania declined for the three months ended September 30, 2019 compared~~ This decrease is mainly due to the ~~three months ended September 30, 2018 by approximately $0.2 million as a result~~impact of ~~the completion of software enhancements, we recorded revenue of approximately $0.2 million from our contract with the State of Utah, which commenced in August 2019.~~

~~Consulting Revenue~~

Our consulting revenue includes revenue generated from consulting professional services delivered to prospective and current cannabis, hemp and CBD businesses and business operators. Our consulting revenue was approximately $0.8 million for the three months ended September 30, 2019 compared to approximately $0.4 million for the three months ended September 30, 2018, for an increase of approximately $0.4 million, or 125%. The result was driven by a higher volume of consulting activities and engagements during the quarter. We delivered approximately 30 operational license applications on behalf of Missouri-based clients during the month of August alone, and we continue to experience strong demand for our consulting services in other emerging states. Further, we signed and have begun servicing an $894,000 contract with an Illinois-based client for the preparation, completion and delivery of operational license applications for a portfolio of recreational retail facilities. The Illinois Department of Financial and Professional Regulation announced the applications will be accepted by the department starting on December 10, 2019 and must be submitted by January 2, 2020.COVID-19. Consulting services are correlated to state legalizations and other regulatory expansion activity. As a result, individual ~~period-over-period~~year-over-year comparisons ~~may experience~~experienced variability depending on the timing of recent legislative changes. During the COVID-19 pandemic and resulting shut-down, state legislatures have turned their focus to the pandemic and tabled work on cannabis legislation, which resulted in delays in our providing consulting services. However, many state ballot initiatives were passed for new medical or adult-use marijuana laws in the November 2020 elections. We expect, despite the slowing of our consulting activity experienced during the pandemic, we expect increased demand for our services in the second half of calendar 2021.

Consulting revenue was ~~26%~~4% and ~~16%~~23% of total revenue for the three months ended ~~September 30, 2019~~March 31, 2021 and ~~2018,~~2020, respectively. Due to the nature of consulting revenue, ~~and~~ our dependence on emerging market activity as well as the ongoing pandemic as a driver of demand, the ~~months~~quarters in which we recognize consulting revenue has varied from ~~period~~year to ~~period~~year depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations.

Other Revenue

~~Our~~Other revenue includes retail/resale revenue, ~~represents revenue~~which was generated from ~~point of sale hardware and labels. Retail/resale~~point-of-sale hardware. Other revenue ~~increased to approximately $57,000~~was less than $0.1 million for the three months ended ~~September 30, 2019 from approximately $50,000 for the three months ended September 30, 2018, an increase of approximately $7,000, or 14%. Retail/resale~~March 31, 2021 and 2020. Other revenue was 2%1% and 1% of total revenue for the three months ended ~~September 30, 2019~~March 31, 2021 and ~~September 30, 2018.~~2020.

26

Cost of Revenue and Gross ~~Margin~~Profit

Our cost of revenue was $1.5 million,or 36.2% of total revenue, for the three months ended ~~September 30, 2019 was approximately $1.4 million, an increase of approximately $0.3~~March 31, 2021 compared to $1.4 million, or ~~31%, as compared to cost~~45.5% of total revenue, for the three months ended ~~September 30, 2018~~March 31, 2020. The decrease in cost of ~~approximately $1.1 million. The increase compared to the prior three-month period~~revenue as a percentage of total revenue was primarily due to the acquisition of Ample, which has a higher direct labor costs of approximately $0.1 million associated with providing our consulting services and higher hosting and infrastructure costs of approximately $0.1 million incurred to support our Software business. Hosting and infrastructure costs grew from approximately $0.4 million to $0.5 million, an increase of approximately $0.1 million, or 26%, as we continued to increase Amazon Web Services usage as part of the growth of MJ Platform. In addition, the cost of revenue from the contract with the State of Utah was approximately $0.3 million.gross margin.

The overall increase in cost of revenue was partially offset by a decrease of $0.1 million in third-party subcontractor costs associated with servicing our contract with the Commonwealth of Pennsylvania. SinceBecause the applications and services available through the Leaf Data ~~System~~Systems are provided through relationships with third-party service providers ~~the~~at higher costs ~~are higher~~ than those ~~allocated~~ from our ~~employees’ salaries to support our MJ Platform and consulting contracts. Therefore,~~commercial software platform contracts, the gross profit margins from the government contracts are generally lower than those from our commercial software clients. Total costs of government revenues incurred by us, which are included in the cost of revenues on the statement of operations, ~~was approximately $0.7~~were $0.4 million and ~~$0.5~~$0.6 million during the three months ended ~~September 30, 2019~~March 31, 2021 and ~~2018,~~2020, respectively. The decrease in the cost of government revenues incurred by us was due to the lower customer requests of our contracts with the state of Utah and Pennsylvania, and a higher volume of ongoing support and maintenance services provided by subcontractors in connection with the contracts with Pennsylvania and Washington.

Operating Expenses

~~The following table presents operating~~Product development expense ~~line items~~was $1.4million for the three months ended ~~September 30, 2019~~March 31, 2021, compared to $0.9million for the three months ended March 31, 2020, an increase of $0.5 million, or63%. Product development expense increased primarily as a result of the acquisitions of Ample and ~~2018~~Trellis and ~~the period-over-period dollar~~an increase in stock-based compensation expense, partially offset by reduced usage of third-party contractors associated with software development.

Sales and ~~percentage changes for those line items:~~

Three months ended September 30,
2019 % of
revenue 2018 % of
revenue Change
Period over Period
Operating expenses:
Product development $ 1,130,880 35 % $ 801,472 35 % $ 329,408 41 %
Selling, general and administrative 3,583,815 112 % 2,147,492 93 % 1,436,323 67 %

Total operating expenses $ 4,714,695 148 % $ 2,948,964 128 % $ 1,765,731 60 %

~~Our operating expenses increased to approximately $4.7~~marketing expense was $1.7 million for the three months ended ~~September 30, 2019 from approximately $2.9~~March 31, 2021, compared to $2.0 million for the three months ended ~~September 30, 2018, an increase~~March 31, 2020, a decrease of ~~approximately $1.8~~$0.3 million, or ~~60%~~15%. ~~The increase~~Sales and marketing decreased primarily due to a reduction in ~~operating expenses was driven by higher product development expenses, an increase~~customer event spend due primarily to cancelling all in-person customer activities and events as a result of ~~approximately $0.3 million, or 41%, in addition to higher selling, general~~the COVID-19 pandemic.

General and administrative ~~expenses, an increase of approximately $1.4~~expense was $1.9 million ~~or 67%. The overall increase in operating expenses~~ for the three months ended ~~September 30, 2019 was primarily driven by increases in salary expenses across Engineering, Sales and Marketing and Administrative functions as we continued~~March 31, 2021, compared to ~~add headcount in order to support our growth.~~

~~Salary expenses~~$3.5 million for ~~Product Development functions increased by approximately $0.4~~the three months ended March 31, 2020, a decrease of $1.6 million, or ~~55%~~46%. ~~Salary expenses for Sales and Marketing and Administrative functions increased by approximately $0.9~~This decrease was primarily due to $1.0 million ~~or 95%. Approximately $0.2 million of salaries~~ in ~~the current three-month period were incurred in the form of non-cash stock-based compensation. No non-cash stock-based compensation expense was~~transactional costs we incurred during the three months ended ~~September 30, 2018.~~

~~Non-payroll related expenses within Selling, General~~March 31, 2020 in connection with our acquisition of Ample and ~~Administrative functions~~Trellis. Bad debt expense also ~~increased for~~decreased by $0.2 million, during the three months ended ~~September 30, 2019 by approximately $0.5 million. These are primarily comprised of Sales and Marketing expenses related~~March 31, 2021, as compared to 2020, due to our ~~marketing initiatives including payments to partners~~improvement in the overall quality of our revenue and client portfolio, enhancement of our sales and marketing programs. Marketing programs consist of advertising, events, 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 customers, and sponsoring additional marketing events. The timing of these marketing events will affect our marketing coststeam has resulted in a ~~quarter. Non-payroll related expenses within Product development functions decreased by approximately $50,000 for~~steady decline in the number and amount of delinquent accounts resulting in bad debt expense since the three months ended ~~September 30, 2019, primarily driven~~March 31, 2021. During the three months ended March 31, 2021, we also had a decrease of $0.3 million in salaries and overhead as a direct result of cost-saving measures placed into service during 2020.

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 ~~fewer professional fee expenses incurred.~~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.

18

27

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 expense, interest income changes in fair value of convertible notes, provision for income taxes, 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:

	●	share-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 that are required to be expensed as incurred in accordance with GAAP, because business combination 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 debt issuance when we elect the fair value option to account for the debt instrument because if we had not elected the fair value option such costs would be recognized as an adjustment to the effective interest and excluded from EBITDA;
	●	Changes in the fair value of derivative liability as the fair value of these instruments changes period over period on the basis of factors not reflective of operating results, which effects the comparability of results of operations and liquidity;
	●	restructuring costs because we believe these costs are not representative of operating performance;
	●	equity in earnings (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; and
	●	other non-operating expenses which include a one-time gain on asset sale, which effects the comparability of results of operations and liquidity.

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

	Three Months Ended March 31,
	2021			2020
Net loss	$	(6,457,703	)	$	(4,608,387	)
Adjustments:
Interest expense		776,181			—
Interest income		(1,801	)		(33,522	)
Change in fair value of convertible notes		1,991,272			—
Change in fair value of derivative liability		175,996			(236,917	)
Income tax expense		6,270			—
Depreciation and amortization		1,052,883			180,229
EBITDA	$	(2,456,902	)	$	(4,698,597	)
Stock-based compensation expense		503,379			301,948
Business combination and merger related costs		43,991			1,218,432
Non-recurring financing fees		17,884			—
Restructuring charges		47,187			—
Equity in losses of investee		3,782			—
Adjusted EBITDA	$	(1,840,679	)	$	(3,178,217	)

28

Liquidity and Capital Resources

~~Liquidity and Capital Resources~~

~~As of September 30, 2019,~~Since our inception, we had cash of approximately $22.4 million, excluding restricted cash. We had a working capital balance of approximately $23.3 million as of September 30, 2019, as compared to $21.8 million as of June 30, 2019.

~~Since its inception, the Company has~~have incurred recurring operating losses, used cash ~~from~~in operations, and relied on capital raising transactions to continue ongoing operations. ~~Although~~During the three months ended March 31, 2021, we ~~have continuing negative cash flow~~incurred a loss from operations of $3.5 million and used cash in operations of $1.4 million. As of March 31, 2021, we had cash of $15.4 million, excluding restricted cash, and working capital of $6.5 million.

During 2020 we implemented a number of cost reduction initiatives reducing costs and identifying cost savings that we expect to result in annual savings of an additional $3.0 million to $4.0 million, primarily a result of a reduction in workforce. On December 23, 2020, we entered into waivers with all the holders of our outstanding senior secured convertible notes. We may now elect, to pay installment amounts under the Notes prior to April 1, 2021, by issuing shares of common stock pursuant to installment conversions or by paying cash. On February 2, 2021, we agreed, in connection with the Company’s installment notice for the February 1, 2021 installment amount, to increase the installment amount for February 1, 2021, in the aggregate, by $4,400,000. From February 11, 2021 through March 10, 2021, we issued shares of common stock of Akerna to the holders of Akerna’s convertible notes upon conversion of installment amounts. As of March 31, 2021, the principal balance of the senior secured convertible notes was $7.5 million, which we can continue to pay by issuing shares.

During the three months ended March 31, 2021, the Company ~~anticipates~~incurred a number of one-time, non-recurring expenses of approximately $0.1 million. These expenses include business combination expenses, restructuring, and other non-recurring charges. We expect that our current working capital is sufficient to fund our operations and commitments for a period of at least twelve months from the date these financial statements are issued.

In the event the Company requires additional liquidity, the Company can further reduce or defer expenses. More specifically, the Company could implement certain discretionary cost reduction initiatives relating to our spending on employee travel and entertainment, consulting costs and marketing expenses, negotiate deferred salary arrangements, furlough employees or reduce headcount or negotiate extensions of payments of rent and utilities. The Company also believes it has access to capital through future debt or equity offerings and could be successful in renegotiating the maturity dates or conversion option relating to its current ~~cash~~outstanding notes payable, although no assurance can be provided that we would be successful in these efforts. Further, the potential continues to exist that our $2 million PPP loan could be forgiven. Management will ~~be sufficient~~continue to meet the working capital requirements for the next twelve months. See “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 for a discussion of the risks related toevaluate our liquidity and capital ~~structure.~~resources.

~~The industry in which~~After considering all available evidence, we ~~participate is highly fragmented,~~determined that, due to our current positive working capital, our ability to repay our senior secured convertible note with ~~many small and thinly-capitalized competitors. As part~~shares of our ~~growth strategy,~~common stock, and our initiatives to reduce operating expenditures, that we ~~may seek~~have sufficient working capital to ~~acquire assets or companies~~sustain operations for a period of at least twelve months from the date that ~~are synergistic with~~ our ~~business.~~March 31, 2021 financial statements were issued. Management will continue to evaluate our liquidity and capital resources.

29

Cash Flows

Our cash and restricted cash ~~balance~~balances were ~~approximately $22.9~~$15.9 million and ~~$22.4~~$14.8 million as of ~~September 30, 2019~~March 31, 2021 and ~~June 30, 2019,~~2020, respectively. Cash flow information for the three months ended ~~September 30, 2019~~March 31, 2021, and ~~2018~~2020 is as follows:

	Three months ended September 30,						Three Months Ended March 31,
	2019			2018			2021			2020
Cash provided by (used in):
Cash (used in) provided by:
Operating activities	$	(3,679,812	)	$	(967,287	)	$	(1,373,818	)	$	(3,913,769	)
Investing activities		-			-			(704,637	)		(557,132	)
Financing activities		4,242,454,			10,000,000			(333,847	)		—
Net increase in cash	$	562,642		$	9,032,713
Effect of change in exchange rates on cash and restricted cash								(1,579	)		—
Net decrease in cash and restricted cash							$	(2,413,881	)	$	(4,470,901	)

Sources and Uses of Cash for the three months ended March 31, 2021 and 2020

Net cash used in operating activities ~~increased~~decreased to ~~approximately $3.7~~$1.4 million during the three months ended ~~September 30, 2019,~~March 31, 2021, from ~~approximately $1.0~~$3.9 million during the three months ended ~~September 30, 2018, an increase~~March 31, 2020, a decrease of ~~approximately $2.7~~$2.5 million. ~~Cash~~The decrease in cash used in operating activities was primarily ~~driven by~~due to improvements in cash flows from working capital changes.

Net cash used in investing activities totaled $0.7 million during the ~~net loss~~three months ended March 31, 2021, as a result of ~~approximately $2.7,~~amounts invested in ~~addition to an increase in outstanding receivables and prepaid expenses.~~

Nothe development of our software products. Net cash ~~was provided~~used by investing activities during the three months ended ~~September 30, 2019 and September 30, 2018.~~March 31, 2020,was $0.6 million as a result of amounts invested in the development of our software products.

Net cash ~~provided by~~used in financing activities totaled ~~approximately $4.2~~$0.3 million during the three months ended ~~September 30, 2019 as a result~~March 31, 2021 and represents cash paid for the value of ~~warrants~~shares withheld for tax withholdings on restricted stock units that ~~were exercised. Net~~vested. We did not have any cash ~~provided by~~ financing activities ~~totaled approximately $10 million~~ during the three months ended ~~September 30, 2018~~March 31, 2020.

Warrant Liability and Financial Statement Revisions

As discussed in Note 9 to the accompanying financial statements, during the course of preparing this report, we determined that our Private Warrants, previously recorded in stockholders’ equity, were not properly classified as derivative liabilities, which resulted in primarily the overstatement of net losses attributable to Akerna’s shareholders for each of the reporting periods identified in that note. We assessed the materiality of these errors on prior periods’ financial statements and concluded that the errors were not material to any prior annual or interim periods, but the cumulative adjustments necessary to correct the errors would be material if we recorded the corrections in the period in which the errors were identified. In accordance with GAAP, we are revising the prior periods’ financial statements when they are next issued.

30

As a result of ~~proceeds raised~~the revisions to prior period financial statements, certain items discussed in “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our ~~Series C financing in August 2018. Upon~~previously filed Form 10-KT for the ~~consummation~~six-month transition period ended December 31, 2020 have been revised. Our net loss for the year ended June 30, 2019 was revised from $12,403,215 to $14,419,027. Our net loss for the year ended June 30, 2020 was revised from $15,534,345 to $13,572,311. Our net loss for the six-month period ended December 31, 2020 was revised from $16,957,334 to $16,210,482. In each case, the revision was due solely to the inclusion of the ~~Business Combination,~~fair value of derivative liability for the ~~Series C Preferred Units issued in connection with the transaction were converted into shares of our common stock.~~Private Warrants. The revisions had no impact on revenue, gross profit, operating expenses or losses from operations.

Item 3. Quantitative and Qualitative Disclosures About Market ~~Risk.~~Risk.

Not applicable.

31

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 ~~properly~~processed, recorded, summarized, and ~~timely~~ 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.

An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error and circumvention or overriding of controls and therefore can provide only reasonable assurance with respect to reliable financial reporting. Furthermore, effectiveness of an internal control system in future periods cannot be guaranteed because the design of any system of internal controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time certain controls may become inadequate because of changes in business conditions, or the degree of compliance with policies and procedures may deteriorate. As such, misstatements due to error or fraud may occur and not be detected.

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, 2019~~March 31, 2021 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, 2019,~~March 31, 2021, our disclosure controls and procedures were ~~ineffective.~~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 Weaknesses

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 weaknesses 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:

1)

We lacked formally documented system policies and procedures to demonstrate that our system of internal control over financial reporting is designed effectively, including a lack of documentation surrounding our information technology policies and procedures.

2)

We lacked documentation necessary to demonstrate the controls in place are operating effectively, including controls related to the enforcement of segregation of duties in key areas of financial reporting.

On April 12, 2021, the staff of the SEC (the “SEC Staff”) issued a public statement entitled “Staff Statement on Accounting and Reporting Considerations for Warrants issued by Special Purpose Acquisition Companies (“SPACs”)” (the “SEC Staff Statement”). In the SEC Staff Statement, the SEC Staff expressed its view that certain terms and conditions common to SPAC warrants may require the warrants to be classified as liabilities on the SPAC’s balance sheet as opposed to equity. In light of the SEC Staff Statement, the Company’s management reevaluated the terms of the Public Warrants and Private Warrants and determined that the Private Warrants should be classified as liabilities measured at fair value upon issuance, with subsequent changes in fair value reported in earnings each reporting period. As a result of this reevaluation, management identified a new material weakness in our internal control over financial reporting related to our improper evaluation of accounting for complex instruments.

32

Remediation:

The Company has contracted an outside consultant to assist with remediating past reported disclosure control weaknesses and to assist in the overall evaluation of design and operating effectiveness of its internal controls over financial reporting.

~~The Company has~~We have hired additional experienced resources to fill accounting functions and expects to add further ~~resources.~~resources, including those to assist in evaluating the appropriate accounting for complex financial instruments. In addition, ~~the Company has~~we have identified upgraded IT, accounting and finance systems, which ~~the Company expects~~we expect will automate critical control functions and improve operational effectiveness and efficiencies.

~~The Company believes that~~We have contracted an outside consultant to assist in the overall evaluation and documentation of the design and operating effectiveness of our internal controls over financial reporting.

We believe these actions will remediate the control weaknesses. However, the 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. Once implemented, ~~the Company intends~~we intend to continue periodic testing and reporting of the internal controls to ensure continuity of compliance.

Changes in Internal Control over Financial Reporting

During the most recently completed fiscal quarter, ~~except as described above in our remediation efforts,~~ 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.~~reporting, as described above in our remediation efforts. Further, subsequent to the end of the fiscal quarter we determined we had an additional material weakness related to the improper evaluation of accounting for complex instruments, as described above.

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.

33

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 8 to our condensed financial statements included elsewhere in this Form 10-Q and is incorporated by reference into this Item 1.

Item 1A. Risk Factors.

20Except as set forth below, there have been no material changes to our Risk Factors as disclosed in our Transition Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 31, 2021.

~~PART II~~Certain of our warrants are accounted for as a warrant liability and are recorded at fair value upon issuance with any changes in fair value each period reported in our statement of operations, which may have an adverse effect on the market price of our securities.

We had 225,635 warrants that were issued in private placements that occurred concurrently with the initial public offering of MTech, our successor (the "private warrants"). These private warrants and the shares of Company common stock issuable upon the exercise of the private warrants are exercisable for cash or on a cashless basis, at the holder's option, and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the private warrants are held by someone other than the initial purchasers or their permitted transferees, the private warrants will be redeemable by the Company and exercisable by such holders on the same basis as the warrants included in the units sold in the initial public offering, in which case the 225,635 private warrants could be redeemed by the Company for $2,256.35. Under U.S. GAAP, the Company is required to evaluate contingent exercise provisions of these warrants and then their settlement provisions to determine whether they should be accounted for as a warrant ~~- Other Information~~liability or as equity. As a result of the provision that the private warrants, when held by someone other than the initial purchasers or their permitted transferees, will be redeemable by the Company, the requirements for accounting for these warrants as equity are not satisfied. Therefore, the Company is required to account for these private warrants as a warrant liability and record (a) that liability at fair value and (b) any subsequent changes in fair value as of the end of each period for which earnings are reported. The impact of changes in fair value on earnings may have an adverse effect on the market price of our common stock.

~~Item 1. Legal Proceedings.~~We may face additional risks, including regulatory, litigation, stockholder or other actions and negative impacts on our stock price, as a result of the material weakness in our internal control over financial reporting and revisions to our financial statements.

As a result of our material weaknesses in internal control over financial reporting, the change in accounting for certain warrants, and the related revisions to our prior financial statements or that may in the future be raised by the SEC, we face potential additional risks, including regulatory, litigation, stockholder or other actions and negative impacts on our stock price, which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the material weakness in our internal control over financial reporting and the preparation of our financial statements. As of the date of this report, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition.

~~To the knowledge of our management, there is no litigation currently pending or contemplated against us, any of our officers or directors in their capacity as such or against any of our properties.~~

Item ~~1A. Risk Factors.~~

~~Not applicable~~

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

During the quarter ended March 31, 2021, all sales of Common Shares that were not registered under the Securities Act of 1933 were previously reported on Form 8-K.

During the quarter ended March 31, 2021, the Company did not repurchase any of its Common Shares.

Item 3. Defaults Upon Senior Securities.

None.

Item ~~3. Defaults Upon Senior Securities.~~

~~None.~~

~~Item~~ 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

~~Compensation Agreement with Jessica Billingsley~~None.

34

On November 11, 2019, the Compensation Committee of the Board of Directors of the Company established the terms on which Ms. Billingsley, the Company’s Chief Executive Officer, may earn a bonus for the fiscal year ended June 30, 2020. The Compensation Committee determined that Ms. Billingsley will be eligible for a bonus derived from the same targets with respect to her bonuses in fiscal year 2019, which were as follows:

The annual bonus was determined based upon the following four (4) budget components, each of which scales linearly between achieving 75% to 100%, and greater than 100% with respect to platform recurring revenue and government recurring revenue budget components respectively, of the applicable fiscal year’s budget for each such component (with 50% of the target bonus payable upon achievement of 75% of budget, 100% of the target bonus payable upon achievement of budget (and, with respect to the platform recurring revenue and government recurring revenue budget components, with 200% of each weighted portion of the target bonus payable upon achievement of 125% of the corresponding component of budget (the “Accelerator”), with linear interpolation between points)).

~~However, during fiscal year 2020 the Accelerator may be paid at the sole discretion of the Compensation Committee in cash, stock, or a combination thereof.~~

In addition, the Compensation Committee determined that, during fiscal year 2020, Ms. Billingsley is eligible to earn a performance based incentive of $250,000, payable in stock, whereby (a) 50% of the bonus is automatically granted if the Company’s stock price/shareholder return increases by 15% (measuring point starts at $10 per share) with respect to the consecutive 20-day volume weighted average price prior to and including June 30, 2020, and (b) the remaining 50% of the bonus may be paid at the sole discretion of the Compensation Committee.

~~Except as set forth herein, the terms of Ms. Billingsley’s employment agreement, dated June 17, 2019, remain unchanged and in full force and effect.~~

~~Appointment of Chief Operating Officer~~

~~On November 11, 2019, the Company’s Board of Directors appointed Ray Thompson as the Company’s Chief Operating Officer.~~

Prior to the Mergers and since November 2018, Mr. Thompson has served in the capacity of chief operating officer of MJF. From November 2016 to January 2018, Mr. Thompson worked as the Head of Customer and Sales Operations for Gloo, a people development SaaS company. During that time, he reported to the executive team to develop and execute on market strategies, product offerings, financial projections, and talent management. From October 2008 to October 2016, Mr. Thompson served as Corporate Senior Vice President, managing across all aspects of the business providing enterprise SaaS solutions to federal and state governments and international humanitarian organizations. From 1996 to 2008, Mr. Thompson has served in various executive sales and marketing roles across multiple technologies companies.

There is no arrangement or understanding between Mr. Thompson and any other person pursuant to which he was selected as an officer of the Company. Additionally, there are no family relationships between any director or executive officer of the Company and Mr. Thompson.

Item 6.Exhibits

3.1		Amended and Restated Certificate of Incorporation of Akerna Corp. (incorporated by reference to Exhibit 3.1 to Akerna Corp.’s Form 8-K as filed with the Commission on June 21, 2019)
3.2		Amended and Restated Bylaws of Akerna Corp. (incorporated by reference to Exhibit 3.1 to Akerna Corp.’s Form 8-K as filed with the Commission on June 21, 2019)
10.1		~~Office Service~~ Agreement and Plan of Reorganization with Navigator Acquisition Corp. dated ~~September 30, 2019, effective February 1, 2020~~March 10, 2021
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		~~Interactive Data File (XBRL)~~ XBRL (Extensible Business Reporting Language). The following materials from Akerna Corp’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, 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.

21

35

SIGNATURES

~~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.

	~~AKERNA CORP.~~
By:
	~~By:~~	/s/ Jessica Billingsley
		~~Name:~~	Jessica Billingsley,
			Chief Executive Officer and Director (Principal Executive Officer)

		~~Date:~~	~~November 14, 2019~~May 21, 2021

	By:	/s/ ~~Ruth Ann Kraemer~~John Fowle
		~~Name:~~	~~Ruth Ann Kraemer~~
			John Fowle, Chief Financial Officer (Principal Financial and Accounting Officer)

		~~Date:~~	~~November 14, 2019~~May 21, 2021

22

36

Delaware		83-2242651
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
��
~~1601 Arapahoe St.,~~1550 Larimer Street, #246 Denver, Colorado		80202
(Address of principal executive offices)		(Zip Code)

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~~ (Nasdaq Capital Market)
Warrants to purchase one share of common stock	KERNW	Nasdaq Stock Market LLC ~~(Nasdaq~~ (Nasdaq Capital Market)

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

	INDEX	Page Number

PART I	FINANCIAL INFORMATION

~~ITEM 1.~~	~~FINANCIAL STATEMENTS (Unaudited)~~	1
	Condensed Consolidated Balance Sheets ~~as of September 30, 2019~~ (unaudited) ~~and June 30, 2019~~	1
	~~Unaudited~~ Condensed Consolidated Statements of Operations ~~for the Three Months Ended September 30, 2019 and 2018~~(unaudited)	2
	~~Unaudited~~ Condensed Consolidated Statements of ~~Stockholders’ Equity for the Three Months Ended September 30, 2019 and 2018~~Comprehensive Loss (unaudited)	3
	~~Unaudited~~ Condensed Consolidated Statements of Changes in Equity (unaudited)	4
	Condensed Consolidated Statements of Cash Flows ~~for the Three Months Ended September 30, 2019 and 2018~~(unaudited)	56
	Notes to Condensed Consolidated Financial Statements (unaudited)	67
~~ITEM~~Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.	1422
~~ITEM~~Item 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	1931
~~ITEM~~Item 4.	Controls and ~~Procedures~~Procedures.	2032

PART II	OTHER INFORMATION

~~ITEM~~Item 1.	Legal ~~Proceedings~~Proceedings.	2134
~~ITEM~~Item 1A.	Risk Factors	2134
~~ITEM~~Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2134
~~ITEM~~Item 3.	Defaults Upon Senior ~~Securities~~Securities.	2134
~~ITEM~~Item 4.	Mine Safety ~~Disclosures~~Disclosures.	2134
~~ITEM~~Item 5.	Other ~~Information~~Information.	2134
~~ITEM~~Item 6.	Exhibits	2135
	~~Signatures~~SIGNATURES	2236

	For the three months ended						For the Three Months Ended
	September 30,						March 31,
	2019			2018			2021			2020
Cash flows from operating activities
Net loss	$	(2,846,071	)	$	(1,695,683	)	$	(6,457,702	)	$	(4,608,387	)
Adjustment to reconcile net loss to net cash used in operating activities
Bad debt expense		252,809			47,873
Adjustment to reconcile net loss to net cash used in operating activities:
Equity in losses of investment								3,782			—
Bad debt								(10,516	)		208,729
Stock-based compensation expense		161,165			-			503,379			301,948
Changes in operating assets and liabilities
Amortization of deferred contract cost								118,519			—
Non-cash interest expense								769,773			—
Depreciation and amortization								1,052,882			2,824
Foreign currency loss								(18,801)			—
Change in fair value of convertible notes								1,991,272			—
Change in fair value of derivative liability								175,995			(236,917	)
Changes in operating assets and liabilities:
Accounts receivable		(1,508,217	)		151,462			(177,832	)		234,203
Prepaid expenses and other current assets		(292,272	)		(167,200	)		236,339			(631,319	)
Accounts payable		281,598			293,515
Accrued liabilities		(7,032	)		40,553
Other assets								—			(58,925	)
Accounts payable and accrued liabilities								152,455			975,312
Deferred revenue		278,208			362,193			286,637			(101,237	)
Net cash used in operating activities		(3,679,812	)		(967,287	)		(1,373,818	)		(3,913,769	)

Cash flows from investing activities
Developed software additions								(704,637	)		(604,851	)
Furniture, fixtures, and equipment additions								—			(53,621	)
Cash paid for business combination, net of cash acquired								—			101,340
Net cash used in investing activities								(704,637	)		(557,132)

Cash flows from financing activities
Cash received in connection with exercise of warrants		4,242,454			-
Cash received in connection with issuance of shares		-			10,000,000
Net cash provided by financing activities		4,242,454			10,000,000

Net increase in cash and restricted cash		562,642			9,032,713

Value of shares withheld for related to tax withholdings								(333,847	)		—
Net cash (used in) provided by financing activities								(333,847	)		—
Effect of exchange rate changes on cash and restricted cash								(1,579	)		—
Net change in cash and restricted cash								(2,413,881	)		(4,470,901	)
Cash and restricted cash - beginning of period		22,367,289			2,572,401			18,340,640			19,280,897

Cash and restricted cash - end of period	$	22,929,931		$	11,605,114		$	15,926,759		$	14,809,996

Cash paid for interest								—			—
Cash paid for taxes	$	-		$	-			—			—

Cash paid for interest	$	1,974		$	416
Supplemental Disclosure of non-cash investing and financing activity:
Settlement of convertible notes in common stock								8,467,292			—
Conversion of exchangeable shares to common stock								7,803,475			—
Settlement of other liabilities in common stock								377,325			—

Fair Value Assumptions - Private Warrants	March 31, 2021			December 31, 2020
Number of Private Warrants		225,635		$	225,635
Original conversion price	$	11.50		$	11.50
Value of Common Stock	$	4.94		$	3.24
Expected term (years)		3.21			3.46
Volatility		95.4	%		102.3	%
Risk free rate		0.4	%		0.2	%

	Shares issuable upon exercise of warrants			Weighted average exercise price		Weighted average remaining life
Outstanding at July 1, 2019		6,183,115		$	11.50		3.72
Issued		-			-		-
Exercised		(368,910	)		11.50		-
Expired/cancelled		-			-		-
Outstanding at September 30, 2019		5,814,205		$	11.50		3.40

	June 30, 2018
	As reported			Adjustment			As revised
Consolidated Balance Sheet
Total assets	$	3,017,731		$	(223,766	)	$	2,793,965
Total liabilities		1,393,902			-			1,393,902
Total stockholders’ equity		1,623,829			(223,766	)		1,400,063

	September 30, 2018
	As reported			Adjustment			As revised
Condensed Consolidated Balance Sheet
Total assets		12,090,810			(296,267	)		11,794,543
Total liabilities		2,090,163			-			2,090,163
Total stockholders’ equity		10,000,647			(296,267	)		9,704,380

Condensed Consolidated Statements of Operations
Total revenue		2,371,900			(72,501	)		2,299,399
Cost of revenue		956,123			107,012			1,063,135
Gross profit		1,415,777			(179,513	)		1,236,264
Operating expenses		3,055,976			(107,012	)		2,948,964
Net loss		(1,623,182	)		(72,501	)		(1,695,683	)
Net loss per share		(0.30	)					(0.31	)

	December 31, 2018
	As reported			Adjustment			As revised
Condensed Consolidated Balance Sheet
Total assets		9,836,178			(320,434	)		9,515,744
Total liabilities		2,205,735			-			2,205,735
Total stockholders’ equity		7,630,443			(320,434	)		7,310,009

Condensed Consolidated Statements of Operations
Total revenue		2,598,079			(24,167	)		2,573,912
Cost of revenue		1,198,911			122,084			1,320,995
Gross profit		1,399,168			(146,251	)		1,252,917
Operating expenses		3,826,539			(122,084	)		3,704,455
Net loss		(2,370,204	)		(24,167	)		(2,394,371	)
Net loss per share		(0.39	)					(0.40	)

	March 31, 2019
	As reported			Adjustment			As revised
Condensed Consolidated Balance Sheet
Total assets		8,199,718			(320,434	)		7,879,284
Total liabilities		3,059,378			-			3,059,378
Total stockholders’ equity		5,140,340			(320,434	)		4,819,906

Condensed Consolidated Statements of Operations
Total revenue		2,327,880			-			2,327,880
Cost of revenue		1,042,403			124,079			1,166,482
Gross profit		1,285,477			(124,079	)		1,161,398
Operating expenses		3,788,644			(124,079	)		3,664,565
Net loss		(2,490,103	)		-			(2,490,103	)
Net loss per share		(0.41	)					(0.41	)

	June 30, 2019
	As reported			Adjustment			As revised
Consolidated Balance Sheet
Total assets		24,522,671			(320,434	)		24,202,237
Total liabilities		2,442,503			-			2,442,503
Total stockholders’ equity		22,080,168			(320,434	)		21,759,734

Consolidated Statements of Operations
Total revenue		10,919,785			(96,668	)		10,823,117
Cost of revenue		4,633,844			-			4,633,844
Gross profit		6,285,941			(96,668	)		6,189,273
Operating expenses		18,701,619			-			18,701,619
Net loss		(12,306,547	)		(96,668	)		(12,403,215	)
Net loss per share		(2.04	)					(2.05	)

	Three months ended September 30,
	2019		% of revenue			2018		% of revenue			Change Period over Period
Operating expenses:
Product development	$	1,130,880		35	%	$	801,472		35	%	$	329,408	41	%
Selling, general and administrative		3,583,815		112	%		2,147,492		93	%		1,436,323	67	%

Total operating expenses	$	4,714,695		148	%	$	2,948,964		128	%	$	1,765,731	60	%

INDEX

Page Number