UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly periodperiod ended SeptemberJune 30, 20192021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from / to
Commission file number 001-39096
AKERNA CORP.
(Exact name of registrant as specified in its charter)
Delaware | 83-2242651 | |
(State or other jurisdiction of
| (I.R.S. Employer
| |
#246 Denver, Colorado | 80202 | |
(Address of principal executive offices) | (Zip Code) |
(888) 932-6537
Registrant’s telephone number, including area codecode: (888)932-6537
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which | ||
Common Stock, $0.0001 par value per share | KERN | Nasdaq Stock Market LLC | ||
Warrants to purchase one share of common stock | KERNW | Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes ☒ No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).Yes x☒No¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes☐ No ☒
As of November 13, 2019,August 10, 2021, there were 10,958,65625,929,693 shares of the registrant’s common stock, par valuevalue $0.0001 per share, issued and outstanding.
INDEX
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June 30, December 31, 2021 2020 Assets Current assets: Cash $ 11,778,601 $ 17,840,640 Restricted cash 508,261 500,000 Accounts receivable, net 1,797,708 1,753,547 Prepaid expenses and other current assets 2,395,346 2,458,727 Total current assets 16,479,916 22,552,914 Fixed assets, net 53,354 1,193,433 Investment, net 226,101 233,664 Capitalized software, net 5,213,267 3,925,739 Liabilities and Equity Current liabilities Accounts payable, accrued expenses and other accrued liabilities $ 4,681,554 $ 3,188,576 Deferred revenue 1,180,181 843,900 Total current liabilities 13,371,935 16,051,215 Commitments and contingencies (Note 7) 0— 0— Equity: Preferred stock, par value $0.0001; 5,000,000 shares authorized, 1 share special voting preferred stock issued and outstanding at June 30, 2021 and December 31, 2020 0— 0— Common stock, par value $0.0001; 75,000,000 shares authorized, 25,332,439 and 19,901,248 issued and outstanding at June 30, 2021 and December 31, 2020, respectively 2,533 1,990 Additional paid-in capital 123,856,649 94,086,433 Accumulated deficit (69,742,478 (57,179,525 ) Total equity $ 61,962,363 $ 57,222,620 Total liabilities and equity $ 76,534,945 $ 77,169,072 statements (unaudited) For the Six Months Ended June 30, 2021 2020 Revenues Software $ 8,251,881 $ 5,196,043 Consulting 583,631 823,584 Other 85,399 54,557 Total revenues 8,920,911 6,074,184 Cost of revenues 3,214,784 Gross profit 5,552,364 2,859,400 Operating expenses Product development 2,951,358 1,963,725 General and administrative 6,228,943 6,583,289 Total operating expenses 15,109,374 13,921,490 Loss from operations (9,557,010 (11,062,090 Other (expense) income: Interest (expense) income, net (937,505 31,438 Other (expense) income, net 243 (124 Total other (expense) income (2,987,810 427,273 Net loss before income taxes and equity in losses of investee Net loss attributable to Akerna shareholders $ (12,562,954 $ (9,819,735 Basic and diluted weighted average common stock outstanding 23,375,981 12,871,648 Basic and diluted net loss per common share $ (0.54 $ (0.83 2021 2020 Foreign currency translation The accompanying notes are an integral part of these condensed consolidated financial statements AKERNA CORP. For the Six Months Ended June 30, 2021 (unaudited) Common Additional Accumulated Other Comprehensive Accumulated Total Shares Amount Capital Deficit Equity Balance – March 31, 2021 23,067,517 $ 2,306 $ 110,903,949 $ (63,637,227 $ 59,766,045 Conversion of Exchangeable Shares to common stock Net loss — 0— 0— (6,105,251 (6,105,251 Balance – June 30, 2021 25,332,439 $ 2,533 $ 123,856,649 $ (69,742,478 $ 61,962,363 The accompanying notes are an integral part of these condensed consolidated financial statements AKERNA CORP. Condensed Consolidated Statements of Changes in For the (unaudited) Additional Accumulated Other Comprehensive Accumulated Total Non controlling Interests in Consolidated Capital Deficit Equity Balance – March 31, 2020 $ 68,912,407 $ (35,847,722 $ 33,065,971 Net loss 0— (5,312,523 (5,312,523 Balance – June 30, 2020 $ 71,902,474 $ (41,160,245 $ 30,806,550 AKERNA CORP. Condensed Consolidated Statements of Cash Flows (unaudited) For the Six Months Ended June 30, 2021 2020 Cash flows from operating activities Net loss $ (12,562,954 $ (10,669,494 Adjustment to reconcile net loss to net cash used in operating activities: Equity in losses of investment 7,564 3,692 Bad debt 150,294 370,154 Stock-based compensation expense 1,074,621 760,584 Changes in operating assets and liabilities: Accounts receivable 286,118 (400,251 Prepaid expenses and other current assets (115,934 (120,489 Deferred revenue (633,052 (507,089 Net cash used in operating activities (3,715,198 (8,587,734 Cash flows from investing activities Developed software additions (2,004,609 (1,990,584 Cash paid for business combination, net of cash acquired 0— 122,675 Net cash used in investing activities (2,004,609 (2,024,545 Cash flows from financing activities Value of shares withheld for related to tax withholdings Net cash (used in) provided by financing activities (333,847 15,987,210 Effect of exchange rate changes on cash and restricted cash (124 0— Net change in cash and restricted cash (6,053,778 5,374,931 Cash and restricted cash - beginning of period 18,340,640 19,280,897 Cash and restricted cash - end of period $ 12,286,862 $ 24,655,828 (Unaudited) Note 1 - Description of Business Description of Business Akerna Corp. Liquidity and Capital Resources Since In the event the Company On July 23, 2021, we entered into an Equity Distribution Agreement with Oppenheimer & Co. Inc. and A.G.P./Alliance Global Partners. Pursuant to the Note 2 - Summary of Significant Accounting Policies Basis of Presentation The condensed consolidated balance sheet as of and for the Principles of Consolidation 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 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 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 Concentrations of Credit Risk During the Foreign Currency Translation The functional currency of the 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 exchange prevailing during the Reclassifications and Certain prior year financial statement amounts have been reclassified for consistency with the current year presentation. Segment Reporting In the following table, we disclose our long-lived assets by geographical location (in thousands): Warrant Liabilities We classify private placement warrants as liabilities. At the end of each reporting period, Recent Accounting Pronouncements ASU 2016-02 The Financial Accounting Standards Board, or the FASB, has issued new guidance related to the accounting for leases. The new standard ASU 2016-13 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 The FASB has issued guidance to help entities evaluate the The FASB has issued guidance clarifying the Note 3 – Revenue Financial Statement Impact of Adopting ASC 606, "Revenue from Contracts with Customers" 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 June 30, 2021 and December 31, 2020, and three and six months ended June 30, 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 and six months ended June 30, 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. 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 and six months ended June 30, 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 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 Six Months Ended June 30, Government $ 1,638 $ 2,472 Non-government 7,283 3,602 $ 8,921 $ 6,074 For the Six Months Ended June 30, United States $ 6,267 $ 6,020 Canada 2,654 54 $ 8,921 $ 6,074 (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. 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 June 30, 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 $5.7 million as of June 30, 2020, of which $2.9 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 The following table summarizes deferred revenue activity for the six months ended June 30, 2020 (in thousands): As of Net additions Revenue recognized As of June 30, 2021 Deferred revenue $ 844 3,362 (3,026 $ 1,180 Of the $8.9 million of revenue recognized in the six months ended June 30, 2021, $0.4 million was included in deferred revenue at December 31, 2020. Costs to Obtain Contracts In The following table summarizes deferred contract cost activity for the six months ended June 30, 2021 (in thousand): As of Additions Amortized costs (1) As of June 30, 2021 Deferred contract costs $ 228 $ (1) Includes contract costs amortized to sales and marketing expense during the period. Note 4 – Significant Transactions Viridian Sciences On April 1, 2021, we completed the acquisition of Viridian Sciences Inc. (“Viridian”), a cannabis business management software provider that is built on SAP Business One. We acquired Viridian in exchange for $6.0 million of our common stock. In addition to the stock consideration, the agreement provides for contingent consideration of up to $1.0 million, payable in additional common stock, if Viridian meets certain revenue criteria. 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 Shares issued $ 6,000 The following table summarizes the fair values of assets acquired and liabilities assumed as of the Preliminary Accounts receivable 556 Prepaid expenses and other current assets 71 Acquired technology 470 Accounts payable and accrued expenses (350 Deferred revenue (1,000 Net assets acquired $ 6,002 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. Pro Forma Financial Information The following unaudited pro forma financial information for the six months ended June 30, 2021 and the The pro forma financial information for all periods presented above has been calculated after adjusting the results of Trellis, Ample and Viridian to reflect the business combination accounting effects resulting from these acquisitions, 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 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 The During the six months ended June 30, 2021, several Ample shareholders exchanged a total of 607,914 exchangeable shares with a value of $4,650,542 for the Note Prepaid expenses Accounts payable and accrued liabilities consisted of the following: Note 6 - Fair Value Fair Value Option Election – Convertible Notes We issued Convertible Notes with a principal amount of $17.0million at a purchase price of $15.0million 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 Three Months Ended June 30, Fair value balance at beginning of period or issue date (June 9, 2020) $ 7,705,000 Change in fair value reported in other comprehensive loss 3,000 Fair value balance at end of period $ 6,152,000 Six Months Ended June 30, Fair value balance at beginning of period or issue date (June 9, 2020) $ 13,398,000 Change in fair value reported in other comprehensive loss 16,000 Fair value balance at end of period $ 6,152,000 The We estimated the fair value by using the Fair Value Assumptions - Convertible Notes Face value principal payable (in thousands) $ 5,903,000 $ 15,172,272 Original conversion price $ 11.50 $ 11.50 Value of Common Stock $ 4.03 $ 3.24 Expected term (years) 1.93 2.3 Volatility 89 % 77 % Market yield to 26.3 to 27.2 % Risk free rate 0.2 % 0.1 % Fair Value Measurement – Warrants For the Private Warrants classified as derivative liabilities, which are measured at Fair value balance at beginning of period $ 487,372 Change in fair value reported in the statements of operations (133,125 Fair value balance at end of period $ 354,247 Fair value balance at beginning of period $ 311,376 Change in fair value reported in the statements of operations 42,871 Fair value balance at end of period $ 354,247 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 We estimated the fair value by using the following key inputs: Fair Value Assumptions - Private Warrants June 30, 2021 December 31, 2020 Number of Private Warrants 225,635 225,635 Original conversion price $ 11.50 $ 11.50 Value of Common Stock $ 4.03 $ 3.24 Expected term (years) 2.96 3.46 Volatility 98.2 % 102.3 % Risk free rate 0.5 % 0.2 % Note 7 - Commitments and Contingencies Litigation 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 unpaid invoices pursuant to a Master Services Agreement dated February 5, 2018 by and between TechMagic and Solo. The invoices set forth services that TechMagic USA LLC purports to have provided to Solo regarding development of mobile software applications for MJF and Solo between March and November 2020 totaling approximately $787,000. 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 June 30, approximately $2 million for services allegedly provided pursuant to a Subcontractor Agreement between MJ Freeway and TreCom. MJ Freeway provided a notice of termination of the operative Subcontractor Agreement on August 4, 2020. MJ Freeway disputes the validity of TreCom’s invoices and the enforceability of the alleged agreement that TreCom submitted to the court. Akerna filed counterclaims against TreCom for breach of contract, a declaratory judgment, commercial disparagement, and defamation.TreCom failed to return Akerna’s intellectual property and issued numerous disparaging statements to one of Akerna’s clients. Akerna intends to vigorously defend against TreCom’s claims, and pursue its own claims. As of On May 21, 2021, our wholly-owned subsidiary, Solo, filed suit against two of Solo’s former directors, Ashesh Shah and Palle Pedersen.Solo seeks recovery for Mr. Shah’s intentional interference with contractual relations, and the From time to time, Operating Leases During the three months ended June 30, 2021, we began negotiations to terminate our office lease in Toronto, Canada. We booked a liability and lease termination expense of $1.3 million which is management’s best estimate of the costs to exit our existing lease. The lease termination expense is included within the General and Administrative expense line item on the condensed consolidated statement of operations. In connection with the lease termination, we also wrote off certain assets, primarily leasehold improvements, the resulting loss of which was also recorded in the General and Administrative expense line item on the condensed consolidated statement of operations. Note 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 June 30, 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. Based on management’s evaluation and in consultation with the 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. The tables below disclose the effects on the financial statements included in this Quarterly Report on Form 10-Q Year Ended June 30, 2020 As reported Adjustment As revised Consolidated Statements of Operations Change in fair value of derivative liability $ 0 — $ 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 0 — (1.14 Six Months Ended December 31, 2020 As reported Adjustment As revised Consolidated Statements of Operations Change in fair value of derivative liability $ 0 — $ 746,852 $ 746,852 Net loss attributable to Akerna shareholders (16,957,334 746,852 (16,210,482 Net loss per share (1.06 0 — (1.01 As of December 31, 2020 As reported Adjustment As revised Consolidated Balance Sheet Derivative liability $ 0— $ 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 Note 9 - Loss Per Share During the Diluted net loss per common share is calculated 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 The weighted-average number of shares outstanding used in the The table below details potentially outstanding shares on a fully diluted basis that were not included in the calculation of 2021 Warrants 5,813,804 Unvested restricted stock units 998,104 Unvested restricted stock awards 32,394 Total 9,645,604 Note On Forward-Looking This Quarterly Report on Form 10-Q ● 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; ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● 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.” Should one or more of these Business Overview Executing upon our expansion strategy, we On the commercial side, our products help state-licensed businesses operate in compliance with We drive revenue growth through the development of our product line, our acquisitions and from continued expansion of the cannabis, hemp, and CBD industry. Businesses across the regulated cannabis industry use our solutions. The brand recognition of our existing products, our ability to provide services in all areas of the seed-to-sale life cycle, and our wealth of relevant experience attracts cultivation, manufacturing, and dispensary clients who are seeking comprehensive business optimization solutions. Our software solutions are designed to be scalable, and while mid-market and smaller customers have historically been our primary target segment, we are focused on extending our customer reach to address the needs of the emerging enterprise level operator. We believe these larger multi-state/multi-vertical operations represent significant long-term future growth opportunities as Our platforms provide licensed businesses with a true enterprise solution for managing their inventory and compliance and allow government regulators to engage in accurate and real-time compliance monitoring. Key capabilities of our technology infrastructure include: Seed-to-Sale Tracking allows the tracking of products from cultivation, through harvest and processing and manufacturing, to the monitoring of the final sale to the patient or consumer. Our traceability technology captures every step in an individual plant’s life, providing visibility into the supply chain from any measurement of finished product dispensed to a patient or customer, back to the plant it came from, and all activity, transportation, and transactions that happen in between. While we do not provide a point-of-sale processing, and never take, own, or handle any product or cash transaction, our platform does record all sales as part of state and jurisdictional compliance Track-and-Trace processes. The data gathered throughout all of these processes is captured, and provides the insights and information needed to run an efficient and streamlined cannabis business. Seed-to-Sale software operates in a complementary relationship with state-mandated Track-and-Trace systems, replicating the reporting functionality and eliminating the need for operators to duplicate their compliance data into two disparate systems. Track-and-Trace systems are Track-and-Trace is the compliance reporting system used by Anti-Counterfeiting Technology. Solo sciences provides next-generation anti-counterfeiting technology fused with a direct communication system between brands and consumers. The solo sciences mission is to build confidence and establish trust among consumers, while enabling retailers and distributors to close the loop with creators and producers. Cannabis Market Insights are Using our years of experience, proprietary databases, and resources to identify trends and predict changes in the cannabis industry we evolve our products and better assist our clients in operating in compliance with Financial Results of Operations Revenue We generate revenue Software. Our software revenue is Consulting Services. Consulting services revenue Other Revenue. Our other revenue is derived primarily from point-of-sale hardware and Cost of Revenue and Operating Expenses Cost of Revenue Our cost of revenue is derived from direct costs Product Our product Sales and Marketing Expenses Sales and marketing expense is primarily salaries and related expenses, including commissions,for our sales, marketing, and 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. 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 Results of Operations for the The following table highlights the various sources of revenues and expenses for the Six Months Ended June 30, Change 2021 2020 Period over Period Revenues: Software $ 8,251,881 $ 5,196,043 $ 3,055,838 59 % Consulting 583,631 823,584 (239,953 29 Other 85,399 54,557 30,842 57 % Total revenue 8,920,911 6,074,184 2,846,728 47 % Cost of revenues 3,368,547 3,214,784 153,763 5 % Gross profit 5,552,364 2,859,400 2,692,964 94 % Gross profit margin 62 % 47 % Operating expenses: 2,951,358 General and administrative 6,228,943 6,583,289 (354,346 5 % Total operating expenses 15,109,374 13,921,490 1,187,884 9 % Loss from operations $ (9,557,010 $ (11,062,090 $ 1,505,080 (14 )% Software Revenue Our total software revenueincreasedto Consulting Revenue Consulting revenue was Other Revenue Cost of Revenue and Gross Our cost of revenue was $3.4million, or 38% of total revenue, for the The decrease in cost of revenue Operating Expenses Product development expense was $3.0million for thesix months ended June 30, 2021, compared to $2.0million for thesix months ended June 30, 2020, an increase of $1.0 million, or 50%. Product development expense increased primarily as a result of the acquisitions of Ample and Viridian in the amount of $0.3 million and $0.1 million, respectively, as well as an increase in stock-based compensation expense of $0.3 million. Sales and marketing expense was $3.6 million for the six months ended June 30, 2021, compared to $4.2 million for the six months ended June 30, 2020, a decrease of $0.6 million, or 14%. Sales and marketing decreased primarily due to a reduction in customer event spend due primarily to cancelling all in-person customer activities and events as a result of the COVID-19 pandemic. General and administrative expense was $6.2 million for the six months ended June 30, 2021, compared to $6.6million for the six months ended June 30, 2020, a decrease of $0.4million, or 5%. This decrease was primarily due to $1.0 million in transactional costs and $2.2 million in acquisition related expenses that we incurred during the six months ended June 30, 2020 in connection with our acquisition of Ample and Trellis that were not recurring in 2021. During the six months ended June 30, 2021, we also had a slight decrease of $0.1 million in salaries and overhead as a direct result of cost-saving measures placed into service during 2020. Bad debt expense also decreased by $0.2 million during the six months ended June 30, 2021, as compared to 2020, due to our improvement in the overall quality of our revenue and client portfolio as well as enhancement of our sales and marketing team. Offsetting these decreases is a $2.4 million restructuring charge incurred during the six months ended June 30, 2021 related to a lease settlement agreement for relinquishing office space in Toronto and the related write off of leasehold improvements associated with the lease termination. . Results of Operations for the Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 The following table highlights the various sources of revenues and expenses for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020: Three Months Ended June 30, Change 2021 2020 Period over Period Revenues: Software $ 4,456,728 $ 2,849,734 $ 1,606,995 56 % Consulting 410,884 131,000 279,884 214 Other 39,275 22,904 16,372 71 % Total revenue 4,906,887 3,003,638 1,903,249 63 % Cost of revenues 1,914,380 1,818,565 95,815 5 % Gross profit 2,992,507 1,185,073 1,807,434 153 % Gross profit margin 61 % 39 % Operating expenses: Product development: 1,527,258 1,088,938 438,320 40 % General and administrative 4,375,981 3,126,027 1,249,954 40 % Total operating expenses 9,043,514 7,368,461 1,675,053 23 % Loss from operations $ (6,051,007 $ (6,183,388 $ 132,381 (2 Software Revenue Our total software revenueincreasedto $4.5million for the three months ended June 30, 2021from $2.8million for the three months ended June 30, 2020, for an increaseof $1.6million, or 56%. Software revenue accounted for 91% and 95% of total revenue for the three months ended June 30, 2021and2020, respectively. The increase in software revenue during the three months ended June 30, 2021 was primarily attributable to revenue generated from our acquisition of Ample and Viridian in the amounts of $1.0 million and $1.0 million, respectively. These increases were partially offset by a decrease in software revenues generated from government clients which totaled $ 0.9 million and $1.4 million duringthe three months ended June 30, 2021 and 2020, respectively. Consulting Revenue Our consulting revenue was $0.4million for the three months ended June 30, 2021compared to $0.1million for the three months ended June 30, 2020, an increase of $0.3million, or 214%. This increase is primarily due to increased demand as the restrictions from COVID-19 are being lifted in various states we serve.While the pandemic overall has caused delays in providing consulting services to our customers, the impact was greater during the three months ended June 30, 2020 at the early stages of the pandemic. Despite the overall slowing of our consulting activity experienced during the pandemic, we expect increased demand for our services in the second half of calendar 2021, which we began to see in the three months ended June 30, 2021. Consulting revenue was 8% and 3% of total revenue for the three months ended June 30, 2021and2020, respectively. Due to the nature of consulting revenue, our dependence on emerging market activity as well as the ongoing pandemic as a driver of demand, the percentage of consulting revenue as a percentage of total revenue has varied from period to period depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations. Other Revenue Other revenue includes retail/resale revenue, which was generated from point-of-sale hardware. Other revenue was less than $0.1 million for the three months ended June 30, 2021 and 2020 and comprised less than 1% of total revenue for the three months ended June 30, 2021 and 2020. Cost of Revenue and Gross Profit Our cost of revenue was $1.9million, or 39% of total revenue, for the three months ended June 30, 2021 compared to $1.8million, or 61% of total revenue, for the three months ended June 30, 2020. The decrease in cost of revenue as a percentage of total revenue was primarily due acquiring additional B2B customers, of which have a higher gross margin. Because the applications and services available through the Leaf Data Systems are provided through relationships with third-party service providers at higher costs than those from our 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, were $0.5 million and $0.9 million during the three months ended Operating Expenses Sales and General and administrative Non-GAAP Financial Measures In addition to our Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Other companies, including Investors are encouraged to review the related GAAP financial measures and EBITDA and Adjusted EBITDA We believe that EBITDA and Adjusted EBITDA, when considered with the financial statements determined in 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 The reconciliation of net loss to EBITDA and Adjusted EBITDA is as follows: 2021 Net loss $ (12,562,954 Adjustments: Depreciation and amortization 2,367,015 EBITDA $ (7,197,317 Stock-based compensation expense 1,024,715 Business combination and merger related costs 107,726 Non-recurring financing fees 129,594 Adjusted EBITDA $ 2021 Net loss $ (6,105,251 Adjustments: Depreciation and amortization 1,314,132 EBITDA $ (4,740,415 Stock-based compensation expense 521,335 Business combination and merger related costs 63,735 Non-recurring financing fees 111,761 Adjusted EBITDA $ Liquidity and Capital Resources In the event the Company requires additional liquidity, the Company believes it 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 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 continue to evaluate our liquidity and capital Cash Flows Our cash and restricted cash Six Months Ended 2021 2020 Cash (used in) provided by: $ (3,715,198) $ (8,587,734 (2,004,609) (2,024,545 (333,847) 15,987,210 Net decrease in cash and restricted cash $ (6,053,778) $ 5,374,931 Sources and Uses of Cash for the Six months ended June 30, 2021 and 2020 Net cash used in operating activities Net cash used in investing activities totaled $2.0million during the Net cash used in financing activities totaled $0.3 million during the six months ended June 30, Warrant Liability and Financial Statement Revisions As discussed in Note 8 to the accompanying financial statements, 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. As a result of 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 Not applicable. 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 We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule15d-15(e) under the Exchange Act) as of 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 We have hired additional experienced resources to fill accounting functions and expects to add further We contracted an outside consultant to assist in determining the appropriate accounting for complex instruments. 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, Notwithstanding the material weakness, management has concluded that the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with GAAP. Changes in Internal Control over Financial Reporting During the most recently completed fiscal quarter, 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. 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 7 to our 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 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. 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. From March 11, 2021 through to the date of this report, we issued 836,235 shares of our common stock to the holders of Akerna’s convertible notes upon conversion of installment amounts due under the terms of the notes. The shares were issued upon conversion of the installment amounts under the notes to the holders of the notes pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) provided by Section 3(a)(9) thereof. During the quarter ended June 30, 2021, the Company did not repurchase any of its Common Shares. None. Not applicable. None. 31.1 31.2 32.1 32.2 101 XBRL (Extensible Business Reporting Language). The following materials from Akerna Corp’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 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. By: /s/ Jessica Billingsley Jessica Billingsley, Chief Executive Officer and Director (Principal Executive Officer) By: /s/ John Fowle, Chief Financial Officer (Principal Financial and Accounting Officer)Intangible assets, net 7,772,289 7,388,795 Goodwill 46,790,018 41,874,527 Total Assets $ 76,534,945 $ 77,169,072 Current portion of long-term debt 7,155,953 11,707,363 Derivative liability 354,247 311,376 Long-term debt, less current portion 1,200,647 3,895,237 Total liabilities 14,572,582 19,946,452 Special voting preferred stock, par value $0.0001; 1 share authorized, issued and outstanding as of June 30, 2021 and December 31, 2020, with $1 preference in liquidation; exchangeable shares, no par value, 1,039,373 and 2,667,349 shares issued and outstanding as of June 30, 2021 and December 31, 2020 respectively (See Note 4) 7,951,203 20,405,219 Accumulated other comprehensive loss (105,544 ) (91,497 ) ) 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 SeeThe accompanying notes toare an integral part of these condensed consolidated financial statements.1 (unaudited)For the Three Months Ended June 30, 2021 2020 $ 4,456,728 $ 2,849,734 410,884 131,000 39,275 22,904 4,906,887 3,003,638 1,914,380 1,818,565 3,368,547 2,992,507 1,185,073 1,527,258 1,088,938 Sales and marketing 1,826,143 2,117,118 3,562,058 4,157,869 4,375,981 3,126,027 Depreciation and amortization 1,314,132 1,036,378 2,367,015 1,216,607 9,043,514 7,368,461 (6,051,007 ) (6,183,388 ) ) ) (163,125 ) (2,084 ) ) Change in fair value of convertible notes (16,405 ) 766,000 (2,007,677 ) 766,000 Change in fair value of derivative liability 133,125 (606,958 ) (42,871 ) (370,041 ) 243 0— ) (46,162 ) 156,958 ) (6,097,169 ) (6,026,430 ) (12,544,820 ) (10,634,817 ) Income tax expense (4,300 ) (30,985 ) (10,570 ) (30,985 ) Equity in losses of investee (3,782 ) (3,692 ) (7,564 ) (3,692 ) Net loss (6,105,251 ) (6,061,107 ) (12,562,954 ) (10,669,494 ) Net loss attributable to noncontrolling interest in consolidated subsidiary 0— 748,584 0— 849,759 $ (6,105,251 ) $ (5,312,523 ) ) ) 24,530,169 13,166,444 $ (0.25 ) $ (0.46 ) ) ) 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 ) SeeThe accompanying notes toare an integral part of these condensed consolidated financial statements.statements2 For the Three months ended For the Six months ended June 30, 2021 June 30, 2021 2021 2020 Net loss $ (6,105,251 ) $ (6,061,107 ) $ (12,562,954 ) $ (10,669,494 ) Other comprehensive (loss) income: 2,183 0— 1,953 0— Unrealized (loss) gain on convertible notes (3,000 ) 63,000 (16,000 ) 63,000 Comprehensive loss $ (6,106,068 ) $ (5,998,107 ) $ (12,577,001 ) $ (10,606,494 ) 3 Special Voting Preferred Stock
Paid-InShare Amount Income 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 0— 0— 0— Settlement of convertible debt 0— 0— 2,080,140 208 8,467,292 0— 0— 8,467,500 Shares withheld for withholding taxes 0— 0— (48,948 ) (5 ) (333,842 ) 0— 0— (333,847 ) Stock-based compensation — 0— 0— 0— 503,379 0— 0— 503,379 Settlement of liabilities with shares 0— 0— 101,705 10 377,315 0— 0— 377,325 Restricted stock vesting 0— 0— 13,978 1 (1 ) 0— 0— 0— Forfeitures of restricted shares 0— 0— (668 ) 0— 0— 0— 0— 0— Foreign currency translation adjustments — 0— — 0— 0— (230 ) 0— (230 ) Unrealized loss (gains) on convertible notes — 0— — 0— 0— (13,000 ) 0— (13,000 ) Net loss — 0— — 0— 0— 0— (6,457,702 ) (6,457,702 ) 1,647,287 $ 12,601,744 $ (104,727 ) ) (607,914 ) (4,650,541 ) 607,914 62 4,650,479 0— 0— 0— Settlement of convertible debt 0— 0— 543,355 54 1,729,090 0— 0— 1,729,144 Shares issued in connection with Viridian Acquisition 1,000,000 100 6,001,900 6,002,000 Shares withheld for withholding taxes 0— 0— 0— 0— 0— 0— 0— 0— Stock-based compensation — 0— — 0— 571,242 0— 0— 571,242 Settlement of liabilities with shares 0— 0— 0— 0— 0— 0— 0— 0— Restricted stock vesting 0— 0— 114,321 11 (11) 0— 0— 0— Forfeitures of restricted shares 0— 0— (668 ) 0— 0— 0— 0— 0— Foreign currency translation adjustments — 0— — 0— 0— 2,183 0— 2,183 Unrealized loss (gains) on convertible notes — 0— 0— 0— 0— (3,000 ) 0— (3,000 ) — 0— 0— ) ) 1,039,373 $ 7,951,203 $ (105,544 ) ) 4 Stockholders’ Equitythree months ended SeptemberSix Months Ended June 30, 20192020Common
Paid-In
Shareholders'Total Share Amount Income Subsidiary Equity Balance – January 1, 2020 10,921,485 1,093 51,060,652 0— (31,340,510 ) 19,721,235 0— 19,721,235 Common stock issued in business combination 1,950,000 195 17,549,805 0— 0— 17,550,000 0— 17,550,000 Noncontrolling interests in acquired subsidiary — 0— 0— 0— 0— 0— 4,863,433 4,863,433 Stock-based compensation — 0— 301,948 0— 0— 301,948 0— 301,948 Forfeitures of restricted shares (15,813 ) (2 ) 2 0— 0— 0— 0— 0— Net loss — 0— 0— 0— (4,507,212 ) (4,507,212 ) (101,175 ) (4,608,387 ) 12,855,672 $ 1,286 $ 0— ) 4,762,258 37,828,229 Common stock issued in business combination 349,650 035 2,531,431 0— 0— 2,531,466 0— 2,531,466 Noncontrolling interests in acquired subsidiary — 0— 0— 0— 0— 0— 690,578 690,578 Stock-based compensation — 0— 458,636 0— 0— 458,636 0— 458,636 Forfeitures of restricted shares (2,416 ) 0— 0— 0— 0— 0— 0— 0— Unrealized loss on convertible Notes — 0— 0— 63,000 0— 63,000 0— 63,000 — 0— 0— ) ) (748,584 ) (6,061,107 ) 13,202,906 $ 1,321 $ 63,000 ) 4,704,252 35,510,802 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 SeeThe accompanying notes toare an integral part of these condensed consolidated financial statements.statements 5 Condensed Consolidated Statements of Changes in Stockholders’ EquityFor 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.(unaudited)) ) Loss on write off of fixed assets 1,045,180 0— Amortization of deferred contract cost 242,110 0— Non-cash interest expense 926,968 0— Depreciation and amortization 2,367,014 1,216,607 Debt issuance costs 0— 1,177,390 Foreign currency loss (17,344 ) 0— Change in fair value of convertible notes 2,007,677 (766,000 ) Change in fair value of derivative liability 42,871 370,041 Change in fair value of contingent consideration 0— (998,000 ) ) ) ) Accounts payable and accrued liabilities 1,463,669 975,121 ) ) ) ) ) ) Furniture, fixtures, and equipment additions 0— (156,636 ) ) ) (333,847 ) 0— Proceeds from issuance of long term debt 0— 17,164,600 Cash paid for debt issuance costs 0— (1,177,390 ) ) ) ) Cash paid for interest 50,854 0— Cash paid for taxes 64,963 51,472 Supplemental Disclosure of non-cash investing and financing activity: Settlement of convertible notes in common stock 10,196,382 0— Conversion of exchangeable shares to common stock 12,453,853 0— Settlement of other liabilities in common stock 377,325 0— For the three months ended September 30, 2019 2018 Cash flows from operating activities Net loss $ (2,846,071 ) $ (1,695,683 ) Adjustment to reconcile net loss to net cash used in operating activities Bad debt expense 252,809 47,873 Stock-based compensation expense 161,165 - Changes in operating assets and liabilities Accounts receivable (1,508,217 ) 151,462 Prepaid expenses and other current assets (292,272 ) (167,200 ) Accounts payable 281,598 293,515 Accrued liabilities (7,032 ) 40,553 Deferred revenue 278,208 362,193 Net cash used in operating activities (3,679,812 ) (967,287 ) 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 Cash and restricted cash - beginning of period 22,367,289 2,572,401 Cash and restricted cash - end of period $ 22,929,931 $ 11,605,114 Cash paid for taxes $ - $ - Cash paid for interest $ 1,974 $ 416 SeeThe accompanying notes toare an integral part of these condensed consolidated financial statements.statements6 (Unaudited) Liquidity and Capital Resources (the “Company”, herein referred to as we, us our or “Akerna”),Akerna, through its wholly-owned subsidiaryour wholly owned subsidiaries MJ Freeway, LLC, (“MJF”) is aor MJF, Trellis Solutions, Inc., or Trellis, Ample Organics, Inc, or Ample, Viridian Sciences, Inc, or Viridian, and solo sciences, inc, or Solo, provides enterprise software solutions that enable regulatory compliance and inventory management technology company. The Company’smanagement. Our proprietary, software platform isbroad 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 developedWe 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 itsWe provide our commercial software platform, MJ Platform®, Trellis® and Viridian Sciences® 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 statementsWe 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 priorregulations. 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 completedlegal 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 resultsregulatory compliant build-out of MTech prior to the completion of the Mergers.operations. itsour inception, the Company haswe have incurred recurring operating losses, used cash from operations, and relied on capital raising transactions to continue ongoing operations. AlthoughDuring the three and six months ended June 30, 2021, we incurred a loss from operations of $6.1 million and $9.6 million, respectively, and for the six months ended June 30, 2021, we used cash in operations of $3.7 million. As of June 30, 2021, we had cash of $11.8 million, excluding restricted cash, and working capital of $3.1 million. During the six months ended June 30, 2021, the Company incurred a number of one-time, non-recurring expenses of approximately $2.7 million. These expenses include business combination and merger related costs, restructuring charges, and other non-recurring charges. 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 flowsufficient working capital to sustain operations for a period of at least twelve months from operations,the date that our June 30, 2021 financial statements were issued.anticipates thatrequires additional liquidity, the Company believes it 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 cashoutstanding 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 sufficientcontinue to meetevaluate our liquidity and capital resources.working capital requirements forterms of the next twelve months. FromAgreement, we may offer and sell from time to time, we may pursue various strategic business opportunities. These opportunities may include investment in or ownershipup to $25 million 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 lettersshares 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 may raise additional equity or debt capital or enter into arrangements to secure necessary financing to fund the completion of such strategic business opportunities, althoughour common stock. While no assurance can be provided that we will be successful in completing a futureable to raise capital raise. Theunder such program, we intend to use the net proceeds from the sale of additional equity could result in additional dilution to the Company’s existing stockholders,our shares of common stock, if any, for general corporate purposes, including working capital, marketing, product development, capital expenditures 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 conditionsmerger 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.acquisition activities.7 6AKERNA CORP.Notes to Condensed Consolidated Financial Statements(Unaudited)TheseThe accompanying unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission (“SEC”), for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required byin accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) can beand with the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain footnotes and other financial information normally required by 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 and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. yearperiod ended June 30, 2019 wasDecember 31, 2020, has been derived from the Company’sour 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 theour consolidated financial statements and notes thereto of the Company for the yearperiod ended June 30, 2019December 31, 2020, which were included in the annualour report on Form 10-K10-KT filed by the Company on September 23, 2019.March 31, 2021. In the opinion of management, thesepreparedeliminated in consolidation.same basis asprimary beneficiary of the annualVIE, 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.theretothereto. 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 Companycarrying 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 operatingreadily available from other sources. Actual results for the year ending June 30, 2020, or any other interim or future periods.Accounts Receivable, NetThe 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. The Company grantsWe grant credit in the normal course of business to its customers. The Companycustomers in the United States. We periodically performsperform credit analysis and monitorsmonitor the financial condition of itsour customers to reduce credit risk.threesix months ended SeptemberJune 30, 2019, one customer2021 and 2020, 1 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%11% and 10%26% of total revenues, respectively. There were no accounts receivable outstanding as of SeptemberDuring the three months ended June 30, 2018.Revenue RecognitionThe Company recognizes revenue only when all of the following criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred or services have been performed, the fee2021 and 2020, one government client accounted for the arrangement is fixed or determinable,10% 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 $1,020,39228% of total revenues, respectively. As of June 30, 2021 and December 31, 2020, 2 government clients accounted for a total of 37% and 36% of net accounts receivable, respectively. 8 three months ended September 30, 2019 and 2018, respectively. Total costs of government revenues incurred by the Company, whichperiod. Translation gains or losses are included as a component of accumulated other comprehensive loss in cost of revenues on the statements of operations, were $665,303stockholders' equity. Gains and $528,270 during the three months ended September 30, 2019losses resulting from foreign currency transactions are recognized as other income (expense).2018, respectively.RevisionsThe Company also offers various software consulting services to its customers, including implementation services, business planning, support, and 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 areperformed or products are delivered, or in the case of up-front implementation fees, over the longer of the contract term or estimated customer life. AKERNA CORP.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.ReclassificationsRecently Issued Accounting PronouncementsASU 2014-09,Revenue from Contracts with Customers (Topic 606), supersedesThe Company operates its business as one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the revenue recognition requirements and industry-specific guidance underRevenue 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 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 forchief operating decision maker, the Company’s fiscal 2020 annualChief Executive Officer, in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.As of June 30, 2021 As of December 31, 2020 Long-lived assets: United States $ 13,845 $ 9,994 Canada 4,633 5,074 Total $ 18,478 $ 15,068 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.In January 2016, the FASB issued ASU No. 2016-01,Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires certain equity investments to be measured at fair value with 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 recordadjust 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. 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. TheFollowing our change in fiscal year effective on December 31, 2020, the new standard is effective for us beginning on January 1, 2022 and interim periods thereafter. We have limited assets subject to operating lease and therefore expect the Companyadoption 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. Julyon January 1, 2020 with early adoption permitted. The Company is2023. We are evaluating the impact of adoption of the new standard on itsour consolidated financial statements.9 In June 2016,ASU 2018-15FASB issuedaccounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. ASU No. 2016-13,Financial Instruments - Credit Losses: Measurement2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance (i) provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense, (ii) requires an entity (customer) to expense the capitalized implementation costs of Credit Losses on Financial Instruments. Among other things, these amendments requirea hosting arrangement that is a service contract over the measurementterm of all expected credit lossesthe hosting arrangement and (iii) clarifies the presentation requirements for reporting such costs in the entity’s 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.statements. The new standardguidance is effectiveapplicable for us for the Company beginning July 1, 2021 with early adoption permitted. The Company isyear ending December 31, 2021. We are evaluating the impact of adoption of the new standard on its consolidatedour financial statements.statements, however, do not anticipate a significant impact to our financials as a result of this guidance.In June 2018,ASU 2020-01FASB 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 nonemployeesinteractions between various standards governing investments in the same way as share-based payment transactions with employees. Under theequity securities. The new guidance nonemployee share-based payment transactions are measured ataddresses accounting for the grant-date fair valuetransition into and are no longer remeasured atout of the then-current fair values at each reporting date until the shareequity method and measurement of certain purchased options have vested.and forward contracts to acquire investments. The amended guidancestandard is effective for the Company’s fiscal 2020us for annual reporting period and for interim periods thereafter,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. 10 is evaluatingderives the impactmajority 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. 11 2021 2020 (1) 2021 2020 (1) standardemerging 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.12 financial statements.balance sheets under Total current liabilities, net of any long-term portion that is included in Other long-term liabilities.
December 31,
2020) August 2018,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 FASB issued ASU No. 2018-15, Intangibles—Goodwillcontract had not been obtained. These costs are included in the accompanying consolidated balance sheets and Other—Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,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 broadens the scope of existing guidance applicable to internal-use software development costs. The update requires costswe have determined to be capitalized or expensedone year based on the natureestimated customer relationship period.
December 31,
2020217 (242 ) 203 13
Fair ValueContingent consideration 2 Total preliminary fair value of consideration transferred $ 6,002 costsdate of acquisition (in thousands):
Fair ValueCapitalized software 500 Customer relationships 820 Acquired trade name 20 Goodwill 4,915 ) ) 14 project stagethree and six months ended June 30, 2020 summarizes the combined results of operations for Akerna, Trellis, Solo, Ample and Viridian as though the companies were combined as of January 1, 2019 (in thousands): Six Months Ended
June 30,2021 Revenue $ 9,929 Net loss $ (12,561 ) Three Months Ended
June 30,2020 Revenue $ 5,506 Net loss $ (7,072 ) Six Months Ended
June 30,2020 Revenue $ 11,362 Net loss $ (13,431 ) which theythe pro forma combined financial statements to give effect to pro forma events that are incurreddirectly attributable to the business combination and factually supportable. The pro forma financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what the results of operations would have been had the Ample acquisition taken place at the beginning of the Company’s fiscal year 2019.amortizationcertain limitations. As a result of these agreements and impairment guidance consistentthe issuance of the special voting preferred stock, each holder of Exchangeable Shares effectively has the ability to cast votes along with existing internal-use software development cost guidance. 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.guidance is applicablespecial 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 no votes attached to it, the share shall be automatically cancelled. The exchangeable shares do not have a par value.Company beginning July 1,same number of shares ofAkerna 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 June 30, 2021, with early adoption permitted, including adoption in an interim period. The Company is evaluating the impactthere were a total of adoption of the new standard on its financial statements.1,039,373 exchangeable shares issued and outstanding.15 AKERNA CORP.Notes to Condensed Consolidated Financial Statements(Unaudited)35 - Balance Sheet Disclosuresconsistand other current assets consisted of the following:As of As of September 30, June 30, June 30, December 31, 2019 2019 2021 2020 Software and technology $ 321,432 $ 237,930 $ 570,777 $ 480,651 Professional services 428,348 169,804 Professional services, dues and subscriptions 741,581 826,195 Insurance 68,241 159,940 548,023 243,222 Deposit 51,925 10,000 $ 869,946 $ 577,674 Deferred contract costs 202,556 227,718 Unbilled receivables 231,095 612,446 Other 101,313 68,495 Total prepaid expenses and other current assets $ 2,395,345 $ 2,458,727 As of As of June 30, December 31, 2021 2020 Accounts payable $ 1,126,483 $ 513,610 Professional fees 461,594 333,709 Sales taxes 245,759 216,367 Compensation 216,301 311,379 Contractors 596,921 1,281,857 Other 2,034,496 531,654 Total accounts payable and accrued liabilities $ 4,681,554 $ 3,188,576 16 Company deferred approximately $164,000change in professional services costs related to the contract with the Stateestimated fair value resulting from changes in instrument-specific credit risk is recorded in other comprehensive income as a component of Utah. These costs will be recognized at the same timeequity. The remaining estimated fair value adjustment is presented as the related revenue is recognized,a single line item within other income (expense) in our condensed consolidated statement of operations under the matching principle.caption, change in fair value of convertible notes. Accrued liabilities consist For the Convertible Notes, which are measured at fair value categorized within Level3of the following:fair value hierarchy, the following is a reconciliation of the fair values for the three and six months endedJune 30, 2021 and June 30, 2020: 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 2021 2020 $ 14,960,000 Payments on Convertible Notes (1,572,405 ) 0— Change in fair value reported in the statements of operations 16,405 (766,000 ) (63,000 ) $ 14,131,000 2021 2020 $ 14,960,000 Payments on Convertible Notes (9,269,677 ) 0— Change in fair value reported in the statements of operations 2,007,677 (766,000 ) (63,000 ) $ 14,131,000 accrued compensationestimated fair value of the Convertible Notes as of June 30, 2019,2021 and September 30, 2019, includes approximately $215,000December 31, 2020, was computed using a Monte Carlo simulation, which incorporates significant inputs that are not observable in the market, and thus represents a Level3measurement as defined by GAAP. The unobservable inputs utilized for measuring the fair value of accrued bonus earnedthe 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. Company’s Chief Executive Officer with respectfollowing key inputs to fiscal year 2019. The balance was paid in October, 2019.the Monte Carlo Simulation Model:June 30, 2021 December 31, 2020 26.1% % 27.1% 17 Note 4 - Loss Per ShareBasic net lossIn 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 1 share is calculated based on the weighted-average number of shares of common stock outstanding in accordance with ASC Topic 260, Earnings per Share. Diluted net loss per common share is calculated based on the weighted-average number of shares of common stock outstanding plus the effect of potentially dilutive issuances of common stock. When the Company reports a net loss, the calculation of diluted net loss 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 purchaseMTech’s common stock and 215,063 were related1 warrant of MTech (“MTech Public Warrant”). Each MTech Public Warrant entitled the holder to the unvested sharespurchase 1 share of restricted common stock. For the three months ended September 30, 2018, 5,993,750 potentially dilutive issuances of shares ofMTech’s common stock all related to warrantsat 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 1 share of MTech’s common stock and 1 warrant of MTech (“MTech Private Warrant”). Each MTech Private Warrant entitled the holder to purchase shares1 share of MTech’s common stock have been excluded from the computationat an exercise price of diluted weighted average shares of common stock outstanding because the effect would be anti-dilutive.$11.50.9AKERNA CORP.Notes to Condensed Consolidated Financial Statements(Unaudited)Note 5 - Stockholders’ EquityIssuances for CashIn 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 SharesPrior 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 inmergers between MTech and MJF on June 17, 2019, as contemplated by the non-vested PIUsMerger Agreement dated October 10, 2018, as amended ("Mergers"), the MTech Public Warrants and the MTech Private Warrants were exchanged for restricted sharesconverted, respectively, at an exchange ratio of 1-for-one to a warrant to purchase one share of Akerna’s common stock with identical terms and conditions as the MTech Public Warrants (“Restricted Shares”Public Warrant”) subject to restricted stock agreementsand the MTech Private Warrants (“Private Warrant”, collectively with varying vesting terms that reflect the vesting conditions applicable to PIUsPublic Warrants, “Warrants”)In connection with the completion of the applicable MJF equity holdersMergers, we also issued 189,365 common stock purchase warrants upon the cashless exercise of a unit purchase option, which warrants have identical terms to the Public Warrants and are included in references to Public Warrants and Warrants herein.the timefair value categorized within Level 3 of the Mergers.Duringfair value hierarchy, 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 amortizationfollowing is a reconciliation 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.WarrantsA 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 - Commitments and ContingenciesOperating LeasesThe Company leases facilities, equipment, and vehicles under non-cancelable operating leases. Rent expensefair values for the three months ended September 30, 2019 and 2018 was $35,247 and $43,475, respectively.On September 30, 2019, the 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 equal to a one-month payment and initial set-up fees 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 and the current leases are approximately $276,000 for the remainder of the year ended June 30, 2020, approximately $530,000 for the yearsix months ended June 30, 2021 and approximately $316,000June 30, 2020:Three Months Ended June 30, 2021 2020 $ 451,270 ) 606,958 $ 1,058,228 Six Months Ended June 30, 2021 2020 $ 688,187 370,041 $ 1,058,228 year endedfair value hierarchy. 18 2022.2021 and December 31, 2020, we recognized a loss contingency of $0.6 million.AKERNA CORP.NotesOn 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 Condensed Consolidated Financial Statements(Unaudited)Letter-of-CreditSeptemberJune 30, 2019,2021, we recognized a loss contingency of $0.1 million. Companydefendants’ breaches of various fiduciary duties owed to Solo.Defendant Shah engaged in improper communications with Solo’s customers with the intent that those customers cease their contractual relations with Solo.The defendants also entered into an improper contract with a contractual counter party that the defendants had a standby letter-of-credit withconflict of interest with.The defendants have not asserted any counterclaims, and we therefore have not recognized a bank in the amount 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.loss contingency.Litigationthe Companywe may be involved in litigation relating to claims arising out of itsour operations in the normal course of business. The CompanyWe 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 SeptemberJune 30, 2019,2021, and through the date these financial statements were issued, there were no other legal proceedings requiring recognition or disclosure in the financial statements.78 – Revisions of Previously Issued Financial StatementsDuring19 courseAudit 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 preparingthese 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. 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 forfinancial statements yet to be reissued: ) ) ) ) ) ) ) ) Accumulated deficit (57,872,599) 693,074 (57,179,525) periods outlined below. Additionally, during the course of preparing its Annual Report on Form 10-K for the fiscal yearthree and six months ended June 30, 2019,2021 and 2020, we used the Company identified certain coststwo-class method to compute net loss per share because we issued securities other than common stock that is economically equivalent to a common share in that the class of revenue relatedstock has the right to consulting services previously being recordedparticipate in operating expenses,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 two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current period earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the period's earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the Exchangeable Shares have no obligation to fund losses.20 resultedit 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.overstatementcomputation of diluted earnings per share does not include the gross profit for eacheffect 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 operationspotential outstanding common shares that would have been anti-dilutive for the three months ended September 30, 2018, December 31, 2018, and March 31, 2019, and consolidated statementsperiod.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 to the above mentioned financial statements.diluted earnings per share:As of June 30, 2020 Shares issuable upon exchange of Exchangeable Shares 1,039,373 0— Shares of common stock issuable in upon conversion of Convertible Notes 1,761,929 1,936,845 5,813,804 325,121 75,654 8,151,424 810 - Subsequent EventsAppointment of Chief Revenue OfficerOctober 1, 2019, the CompanyJuly 23, 2021, we entered into a letter agreementan Equity Distribution Agreement with Nina Simosko pursuantOppenheimer & Co. Inc. and A.G.P./Alliance Global Partners. Pursuant to which Ms. Simosko will serve as the Company’s Chief Revenue Officer effective as of September 23, 2019. The letter agreement provides for an at-will employment relationship. Ms. Simosko will receive an annual base salary of $200,000 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 changeAgreement, we may offer and sell from time to time, up to $25 million of control transaction, Ms. Simosko’s unvested restricted stock units or any other equity interestsshares of our common stock. While no assurance can be provided that she maywe will be granted, will immediately vest. If Ms. Simosko’s employment is terminated byable to raise capital under such program, we intend to use 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.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 generatednet proceeds from the Company’s customers. The sharesale 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 203,000our shares of preferredcommon stock, if any, 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 issuedgeneral corporate purposes, including working capital, marketing, product development, capital expenditures 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 withmerger and advise ZolTrain’s management on significant business issues. acquisition activities.Compensation Agreement with Jessica BillingsleyOn 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.21 The Management’s DiscussionThe following discussion and Analysis of the Financial Condition and Results of Operationsanalysis should be read togetherin conjunction with our unaudited condensed consolidated financial statements for the Management’s Discussionthree and Analysis of Financial Condition and Results of Operationssix months ended June 30, 2021, and the Audited Consolidated Financial Statements and 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 foraccordance with generally accepted accounting principles in the fiscal year ended June 30, 2019.United States.StatementsStatementscontains statements which constitute forward-looking statementsincluding 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 forof 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 operationsevents and are based upon management’s current planssubject 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 containedexpressed in anyor suggested by the forward-looking statement. Manystatements, 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 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 accounting treatment of certain of our private warrants; ● our ability to effectively manage any disruptions to our business and/or any negative impact to our financial performance caused by the economic and social effects of the COVID-19 pandemic and measures taken in response; and 22 factors are beyond our abilityrisks 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 thesemade. We disclaim any obligation to revise subsequently any forward-looking statements even if our situation changesto 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.We areAkerna is a leading provider of enterprise software solutions within the cannabis industry. Cannabis businesses face significant complexity due to the stringent regulations and restrictions that shift based on regional, state, and national governing bodies. As the first to market more than ten years ago, Akerna’s family of software platforms enable regulatory compliance and inventory management across the entire supply chain. When the legal cannabis market started to grow, we identified a need for organic material tracking and regulatory compliance software as a service (SaaS) solution customized specifically for the unique needs of the industry. By providing an integrated ecosystem of applications and services that enables compliance, regulation, consumer safety and taxation, Akerna is building the technology company. Our proprietary software platform isbackbone of the cannabis industry. While designed specifically for the unique needs of the cannabis market, our solutions are adaptable for other industries in which interfacing withrequiring government regulatory agencies for compliance purposes is required,oversight, or where the tracking of organic materials from seed or plant to end products is desired. Ten years ago,identified a need for organic material trackingacquire complementary cannabis brands to grow the scope of Akerna’s cannabis ecosystem. Throughout 2019, 2020, and regulatory compliance software a2021, we integrated five new brands into the Akerna product and service (“SaaS”) solutionsoffering. Our first acquisition, solo sciences, was initiated in the fall of 2019, with the full acquisition completed in July 2020. We added Trellis Solutions to our portfolio on April 10, 2020 and finalized the acquisition of Ample Organics and Last Call Analytics on July 7, 2020. Most recently, in April 2021, we completed our acquisition of Viridian Sciences Inc., a cannabis business management software system built on SAP Business One. Through our growing cannabisfamily of companies, Akerna provides highly versatile platforms that equip our clients with a central data management system for tracking regulated products. Our solutions also provide clients with integrated security, transparency, and hemp industry. We developed products intended to assist states in monitoring licensed businesses’scalability capabilities, all while maintaining compliance with state regulations, and totheir governing regulations.such law. Weapplicable regional laws. Our integrated ecosystem provides integrations with third-party vendors and add-ons that enhance the capabilities of our commercial software platforms. On the regulatory side, we provide track and trace solutions that allow state governments to monitor compliance of licensed cannabis businesses.To date, our 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 havehas helped monitor legalthe compliance forof more than $16$20 billion in legal cannabis. While our software facilitates the success of legal cannabis sales to date,businesses, we do not handle any cannabis relatedcannabis-related material, do not process cannabis sales transactions within the United States, and our revenue generationis generated from a fixed-fee based subscription model and is not related to the type or amount of sales made by our clients.revenuesthe cannabis industry continues to consolidate at a rapid rate. The sophistication of our platform accommodates the complexities of both multi-vertical and multi-state business needs, making us critical partners and allowing us to cultivate long-term, successful relationships with our clients.23 generateddesigned solely for government regulators to maintain compliance and do not have the sophistication or functionality to provide cannabis business owners with the insights and tools for effective business management. Our seed-to-sale platforms integrate with the state Track-and-Trace compliance system, reporting in the mandated data along the supply chain while also providing business owners with the capabilities to make informed business decisions based on the fully overview of their operations.us on a fixed-fee based subscription model.regulatory bodies in most states. In order to adhere to their state-specific compliance regulations, cannabis operators are required to enter specific data points along the supply chain into the state-mandated track-and-trace system. By doing so, regulators can track the movement of cannabis inventory through the full supply chain, even when it moves between facilities or operators. The aggregated view that Track-and-Trace software ensures that the end product being sold has been grown, harvested, processed, transferred and sold compliantly, and provides assurance of safety to consumers.Our core products,Single System Integration allows state-licensed clients to manage inventory, customer records, and staff in one tracking system. MJ Platform and Leaf Data Systems platforms can be fully integrated with one another to create a streamlined Seed-to-Sale/Track-and-Trace solution. Additionally, our platforms can also be integrated with systems of numerous third-party suppliers. We have certified integrations with world class accounting solutions, including Sage, SAP and MJ Platform,Netsuite.highly-versatile platforms thatcurated using the anonymized data aggregated through our Seed-to-Sale platform for key industry intelligence. With over $20 billion in cannabis sales tracked over the past 11 years, we have cultivated a substantial legal cannabis dataset across 30+ states and multiple countries. This data provides a detailed overview of key industry trends, giving us the ability to provide banks, investors, researchers, cannabis businesses, and non-cannabis businesses with cannabis market intelligence and comparison data. a central data management system for tracking regulated products – from seedthe applicable laws of their jurisdictions and capitalizing on commercial opportunities within the applicable regulatory framework, with accuracy, efficiency, and geographic specificity. We have worked with clients and governments across the globe to initial plant growthcreate customized solutions that fit their specific regulatory and commercially compliant needs. While the majority of our clients are in the United States and Canada, our solutions allow cannabis businesses to product – throughout the complete supply chain, using a global unique identifier method. Our platforms also provide clients with integrated security, transparency and scalability capabilities. These capabilities allow our state-licensed clients to control inventory, operate efficiently in athis fast-changing industry and comply with state, local, and federal (in countries such as Canada, Italy, Macedonia, and Colombia) regulation at all times,. Akerna and allows our government regulatory clientsfamily of companies is well-positioned to effectivelyprovide compliance solutions for the expanding national and cost-efficiently monitor licensees and ensure that commercial businesses are complying with their states’ regulations.international legal cannabis market.in three principal areas:●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 statesWe also resell a limited number of printers for printing compliance product labelsfrom two primary sources: (1) software and scales that are National Type Evaluation Program (“NTEP”) certified legal for trade.(2) consulting services. Revenue from these resale activities wassoftware comprised approximately 2%93% and 86% of totalour revenue in each offor the threesix months ended SeptemberJune 30, 2019,2021 and September 30, 2018,2020, respectively. Revenue from consulting services comprised approximately 7% and is not expected to become a significant generator of revenue.Our commercial software revenue growth is driven by leveraging our reputation and continued cannabis, hemp and Cannabidiol (CBD) industry growth. We believe we are well known in these industries and can leverage our reputation, brand recognition, and wealth of relevant experience to attract existing cultivation, manufacturing and dispensary customers, and attract new market entrants. We believe that the reputation14% of our existing productsrevenue for six months ended June 30, 2021 and our ability to provide services in all areas of the seed to sale life cycle will attract customers from competitors that are seeking more comprehensive services and will attract 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.2020, respectively.Through 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 verification 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.Financial Results of OperationsRevenuederivedgenerated from subscriptions and services related to the use of our commercial software platforms, MJ Platform, Ample, Trellis and Viridian, our SaaS enterprise resource planning tool offering for state-licensed businesses, andgovernment regulatory platform, Leaf Data Systems, our track-and-trace product for government agencies. MJ Platformand the sale of business intelligence, data analytics and other software related services. Software contracts are generally quarterly or annual contracts paid monthly, quarterly, or annually in advance of service and cancellable upon 30 or 90 days’ notice, although we do have some multi-year MJ Platformcommercial 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 Platformquarterly 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 consultingAmounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is derived throughoutrecognized on a straight-line basis over the life cycleservice term of a customer. Our other revenuethe arrangement beginning on the date that our solution is derived primarily from pointmade available to the customer and ending at the expiration of sale hardware and labels.the subscription term.24 growth is drivengenerated by numerous factors. In new emerging states, we provideproviding 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.15We 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 andprojects completed during the pre-application phase generally solidify us as the contractorsoftware 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 over time as more states emerge with legalization reforms, such as Missouri, New Jersey, Illinoisreforms.Utah.other non-recurring revenue.derivedassociated 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 associatedand subcontractor expenses incurred in connection with operating MJ Platform and Leaf Data Systems. We recordcertain government contracts. Consulting cost of revenue based onrelates 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. and Development Expenses and development expenses include salaries and benefits, nearshore contractor expenses, technology expenses, and other overhead. Theseoverhead 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 ExpensesOur 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 expensesqualifying for capitalization, are our largest cost andexpensed 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.marketing staff, including commissions, as well asclient 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.The Company’s significantOur critical accounting policies are disclosed in Note 2- Summary of Significant Accounting Policies in the Company’s Annualour Transition Report on Form 10-K for the yearssix-month period ended June 30, 2019 and 2018.December 31, 2020. Since the date of the AnnualTransition Report, there have been no material changes to the Company’s significantour critical accounting policies except for our accounting policies for warrants as disclosedabove.disclosed in Note 8 to the condensed consolidated financial statements.25 Three months ended SeptemberSix Months Ended June 30, 2019 compared2021 Compared to three months ended SeptemberSix Months Ended June 30, 2018 2020threesix months ended SeptemberJune 30, 20192021, as compared to the threesix months ended SeptemberJune 30, 2018:2020: 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 Revenue 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 Other income 73,095 17,017 Net loss $ (2,846,071 ) $ (1,695,683 ) ) % Product development: 1,963,725 987,633 50 % Sales and marketing 3,562,058 4,157,869 (595,811 ) (14) % ) Depreciation and amortization 2,367,015 1,216,607 1,150,408 95 % ) ) Total RevenueTotal revenue increased to approximately $3.2 million for the three months ended September 30, 2019 from approximately $2.3 for the three months ended September 30, 2018, an increase of approximately $0.9 million, or 39%. 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.approximately $2.3 $8.3million for the threesix months ended SeptemberJune 30, 2019 2021from $1.9 $5.2million for the threesix months ended SeptemberJune 30, 2018,2020, for anincreaseof approximately $0.4 $3.1million, or 23%59%. Total softwareSoftware revenue accounted for 72%93% and 82%86% of total revenue for the threesix months ended SeptemberJune 30, 2019 2021and 2018,2020, respectively. The increase in software revenue during the six months ended June 30, 2021 was primarily drivenattributable to revenue generated from our acquisitions of Ample, Trellis and Viridian in the amounts of $2.2 million, $0.1 million, and $0.9 million, respectively. These increases were partially offset by total revenue growtha decrease of MJ Platform of approximately $0.3$0.9 million or 39%. Softwarein software revenues generated from government customers under Leaf Data Systems increased to approximately $1.1clients which totaled $1.6 million forand $2.5 million during the threesix months ended SeptemberJune 30, 2019 from approximately $1.0 million for the three months ended September 30, 2018, for an increase of approximately $0.1 million, or 7%.While our revenues from Leaf Data Systems from our contracts with the State of Washington2021 and the State of Pennsylvania declined for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 by approximately $0.2 million as a result 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 2019.2020, respectively.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 $0.6million for the threesix months ended SeptemberJune 30, 2019 2021compared to approximately $0.4 $0.8million for the threesix months ended SeptemberJune 30, 2018, for an2020, adecreaseof $0.2million, or29%. "This increase of approximately $0.4 million, or 125%. The result was driven by a higher volume of consulting activities and engagements duringis primarily due to increased demand as the quarter. We delivered approximately 30 operational license applications on behalf of Missouri-based clients during the month of August alone, andrestrictions from COVID-19 are being lifted in various states 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.serve." Consulting services are correlated to state legalizations and other regulatory expansion activity. As a result, individual period-over-periodyear-over-year comparisons may experienceexperienced 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 providing consulting services. However, many state ballot initiatives were passed for new medical or adult-use marijuana laws in the November 2020 elections. 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. 26%7% and 16%14% of total revenue for the threesix months ended SeptemberJune 30, 2019 2021and 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 in which we recognizepercentage of consulting revenue over total revenue has varied from period to period depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations.OurOther revenue includes retail/resale revenue, represents revenuewhich was generated from point of sale hardware and labels. Retail/resalepoint-of-sale hardware. Other revenue increased to approximately $57,000totaled less than $0.1 million for the threesix months ended SeptemberJune 30, 2019 from approximately $50,000 for the three months ended September 30, 2018, an increase of approximately $7,000, or 14%. Retail/resale revenue2021 and 2020 and was 2%less than 1% of total revenue for the threesix months ended SeptemberJune 30, 20192021 and September 30, 2018.2020.26 MarginProfitthreesix months ended SeptemberJune 30, 2019 was approximately $1.4 million, an increase of approximately $0.3 2021 compared to $3.2million, or 31%, as compared to53% of total revenue, for the six months ended June 30, 2020.for the three months ended September 30, 2018as a percentage of approximately $1.1 million. The increase compared to the prior three-month periodtotal revenue was primarily due to acquiring additional B2B customers, of which have 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 SystemSystems are provided through relationships with third-party service providers theat 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 $0.7were $0.9 million and $1.6 million during the six months ended June 30, 2021and2020, respectively. The decrease in the cost of government revenues incurred by us was due to a decrease in customer change order requests of our contracts with the state of Utah and Pennsylvania.% Sales and marketing 1,826,143 2,117,118 (290,975 ) (14) % Depreciation and amortization 1,314,132 1,036,378 277,754 27 % ) ) )% 27 28 SeptemberJune 30, 20192021and2020, respectively. The decrease in the cost of government revenues incurred by us was due to a decrease in customer change order requests of our contracts with the state of Utah and 2018, respectively.PennsylvaniaThe following table presents operatingProduct development expense line itemswas $1.5million for thethree months ended SeptemberJune 30, 20192021, compared to $1.1million for the three months ended June 30, 2020, anincreaseof $0.4 million, or40%. Product development expense increased slightly as a result of the acquisitions of Ample and 2018Viridian for a total of $0.2 million and the period-over-period dollar$0.1 million, respectively, as well as a slight increase in stock-based compensation expense of $0.1 million, partially offset by reduced usage of third-party contractors associated with software development.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 $4.7marketing expense was $1.8 million for the three months ended SeptemberJune 30, 2019 from approximately $2.92021, compared to $2.0 million for the three months ended SeptemberJune 30, 2018, an increase2020, a decrease of approximately $1.8$0.2 million, or 60%14%. The increaseSales and marketing decreased primarily due to a reduction in operating expenses was driven by higher product development expenses, an increasecustomer event spend and third-party consultants 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, generalthe COVID-19 pandemic.expenses, an increase of approximately $1.4expense was $4.4 million or 67%. The overall increase in operating expenses for the three months ended SeptemberJune 30, 20192021, compared to $3.1million for the three months ended June 30, 2020, an increase of $1.2million, or40%. This increase was primarily driven by increasesdue to $2.4 million in salary expenses across Engineering, Sales and Marketing and Administrative functions aslease termination costs we continued to add headcount in order to support our growth.Salary expenses for Product Development functions increased by approximately $0.4 million, or 55%. Salary expenses for Sales and Marketing and Administrative functions increased by approximately $0.9 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 incurred during the three months ended SeptemberJune 30, 2018.Non-payroll2021 in connection with terminating our office space in Toronto, partially offset by $1.0 million in transaction related expenses within Selling, General and Administrative functions also increased forcosts we incurred during the three months ended SeptemberJune 30, 2019 by approximately $0.5 million. These are primarily comprised2020 in connection with our acquisition of SalesAmple and Marketing expenses relatedTrellis. marketing initiativesresults 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.paymentscompanies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to partnersevaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. We attempt to compensate for these limitations by providing specific information regarding the GAAP items excluded from these non-GAAP financial measures.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 timingthe reconciliation of these marketing events will affectnon-GAAP financial measures to their most directly comparable GAAP financial measures and not rely on any single financial measure to evaluate our marketing costsbusiness. 29 a quarter. Non-payroll related expenses within Product development functions decreased by approximately $50,000accordance 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.three months ended September 30, 2019, primarily driven by fewer professional fee expenses incurred.reasons set forth below: 18● stock-based compensation expense, because this represents a non-cash charge and our mix of cash and share-based compensation may differ from other companies, which effects the comparability of results of operations and liquidity; ● cost incurred in connection with business combinations and mergers that are required to be expensed as incurred in accordance with GAAP, because business combination and merger related costs are specific to the complexity and size of the underlying transactions as well as the frequency of our acquisition activity these costs are not reflective of our ongoing operations; ● costs incurred in connection with non-recurring financing fees when we elect the fair value option to account for our debt instruments 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; ● restructuring charges, which includes costs to terminate a lease and the related writeoff of leasehold improvements and furniture, as 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 ● changes in the fair value of contingent consideration because these adjustments are not recurring across all periods and we believe these costs are not representative of operating performance. Six Months Ended June 30, 2020 ) $ (10,669,494 ) Interest expense (income) 937,504 (31,438 ) Change in fair value of convertible notes 2,007,677 (766,000 ) Change in fair value of derivative liability 42,871 370,041 Income tax expense 10,570 30,985 1,216,607 ) $ (9,849,299 ) 673,480 2,245,361 1,177,390 Restructuring charges 2,453,776 — Changes in fair value of contingent consideration — (998,000 ) Equity in losses of investee 7,564 3,692 (3,473,942 ) $ (6,747,376 ) 30 Three Months Ended June 30, 2020 ) $ (6,061,107 ) Interest expense (income) 163,124 2,084 Change in fair value of convertible notes 16,405 (766,000 ) Change in fair value of derivative liability (133,125) 606,958 Income tax expense 4,300 30,985 1,036,378 ) $ (5,150,702 ) 371,532 1,026,929 1,177,390 Restructuring charges 2,406,589 — Changes in fair value of contingent consideration — (998,000 ) Equity in losses of investee 3,782 3,692 (1,633,213 ) $ (3,569,159 ) 31 Liquidity and Capital ResourcesAs 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 hashave incurred recurring operating losses, used cash from operations, and relied on capital raising transactions to continue ongoing operations. Although we have continuing negative cash flow from operations,During the Company anticipates that its current cash will be sufficient 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 yearthree and six months ended June 30, 20192021, we incurred a loss from operations of $6.1 million and $9.6 million, respectively, and for the six months ended June 30, 2021, we used cash in operations of $3.7 million. As of June 30, 2021, we had cash of $11.8 million, excluding restricted cash, and working capital of $3.1 million. During the six months ended June 30, 2021, the Company incurred a number of one-time, non-recurring expenses of approximately $2.7 million. These expenses include business combination and merger related costs, restructuring charges, and other non-recurring charges. 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 sufficient working capital to sustain operations for a discussionperiod of at least twelve months from the risks relateddate that our June 30, 2021 financial statements were issued.structure.resources.The industry in whichOn July 23, 2021, we participate is highly fragmented,entered into an Equity Distribution Agreement with many smallOppenheimer & Co. Inc. and thinly-capitalized competitors. As partA.G.P./Alliance Global Partners. Pursuant to the terms of the Agreement, we may offer and sell from time to time, up to $25 million of shares of our growth strategy,common stock. While no assurance can be provided that we may seekwill be able to acquire assets or companies that are synergistic withraise capital under such program, we intend to use the net proceeds from the sale of our business.shares of common stock, if any, for general corporate purposes, including working capital, marketing, product development, capital expenditures and merger and acquisition activities.32 balancebalances were approximately $22.9$12.3 million and $22.4$24.7 million as of September 30, 2019 and June 30, 2019,2021 and 2020, respectively. Cash flow information for the threesix months ended SeptemberJune 30, 20192021 and 20182020 is as follows: Three months ended
September 30,
June 30, 2019 2018 Cash provided by (used in): Operating activities $ (3,679,812 ) $ (967,287 ) ) Investing activities - - ) Financing activities 4,242,454, 10,000,000 Net increase in cash $ 562,642 $ 9,032,713 Effect of change in exchange rates on cash and restricted cash (124) — increased decreasedto approximately $3.7million during the threesix months ended SeptemberJune 30, 2019,2021, from approximately $1.0 $8.6million during the threesix months ended SeptemberJune 30, 2018, an increase 2020, adecreaseof approximately $2.7 $4.9million. CashThe decrease in cash used in operating activities was primarily driven bydue to improvements in cash flows from working capital changes.net losssix months ended June 30, 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 providedused by investing activities during the threesix months ended SeptemberJune 30, 20192020,was $2.0million as a result of acquisitions and Septemberinvestment in software products.2018.Net2021 and represents cash paid for the value of shares withheld for tax withholdings on restricted stock units that vested. Our net cash provided by financing activities totaled approximately $4.2was $16.0 million duringfor the threesix months ended SeptemberJune 30, 2019 as a result of warrants that were exercised. Net cash provided by financing activities totaled approximately $10 million during the three months ended September 30, 20182020 as a result of proceeds raisedfrom debt issuance.Series C financing in August 2018. Uponpreviously filed Form 10-KT for the consummationsix-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.33 properlyprocessed, 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.SeptemberJune 30, 20192021 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 SeptemberJune 30, 2019,2021, 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.Remediation:Material WeaknessesThe Company has contracted an outside consultantassistSPAC 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 remediating pastsubsequent changes in fair value reported disclosurein earnings each reporting period. As a result of this reevaluation, management identified a new material weakness in our internal control weaknesses andover financial reporting during Q2 2021, prior to assist in the overallfiling of the Q1 2021 Form 10-Q, related to our improper evaluation of design and operating effectiveness of its internal controls over financial reporting. accounting for complex instruments.34 The Company hasRemediation:resources.resources, including those to assist in evaluating the appropriate accounting for complex financial instruments. In addition, the Company haswe have identified upgraded IT, accounting and finance systems, which the Company expectswe expect will automate critical control functions and improve operational effectiveness and efficiencies.The Company believes thatWe 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. the Company intendswe intend to continue periodic testing and reporting of the internal controls to ensure continuity of compliance.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.2035 To the knowledge ofmanagement, therecondensed financial statements included elsewhere in this Form 10-Q and 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.incorporated by reference into this Item 1.Not applicableExcept as set forth below, there have been no material changes to our Risk Factors as disclosed in our Transition Report on Form 10-KT for the year ended December 31, 2020, as filed with the SEC on March 31, 2021.36 None.None.Compensation Agreement with Jessica BillingsleyOn 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 OfficerOn 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.37 10.13.1Office Service Agreement, dated September 30, 2019, effective February 1, 2020Amended 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)31.13.2Amended and Restated Bylaws of Akerna Corp. (incorporated by reference to Exhibit 3.2 to Akerna Corp.’s Form 10-KT as filed with the Commission on March 31, 2021) Interactive Data File (XBRL)2138 AKERNA CORP.By:Name:Date:November 14, 2019August 12, 2021Ruth Ann KraemerJohn FowleName:Ruth Ann KraemerDate:November 14, 2019August 12, 20212239