UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, ~~2020~~2021

☐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~~001-39096

AKERNA CORP.

(Exact name of registrant as specified in its charter)

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

~~1630~~ ~~Welton~~1550 Larimer Street ~~Floor 4~~ , #246 Denver, Colorado		80202
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

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

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

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

As of November ~~12, 2020,~~9, 2021, there were ~~19,685,932~~30,735,549 shares of the registrant’s common stock, par value $~~0.0001~~$0.0001 per share, outstanding.

	INDEX	Page Number

PART I	FINANCIAL INFORMATION
	Condensed Consolidated Balance Sheets (unaudited)	1
	Condensed Consolidated Statements of Operations (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Loss (unaudited)	3
	Condensed Consolidated Statements of Changes in Equity (unaudited)	4
	Condensed Consolidated Statements of Cash Flows (unaudited)	68
	Notes to Condensed Consolidated Financial Statements (unaudited)	79
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	1925
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2935
Item 4.	Controls and Procedures.	3036

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings.	3238
Item 1A.	Risk Factors	3238
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3240
Item 3.	Defaults Upon Senior Securities.	3240
Item 4.	Mine Safety Disclosures.	3240
Item 5.	Other Information.	3240
Item 6.	Exhibits	3341
	SIGNATURES	3442

AKERNA CORP.

Condensed Consolidated Balance Sheets

(unaudited)

~~(unaudited)~~

	September 30,			June 30,			September 30,			December 31,
	2020			2020			2021			2020
Assets
Current assets:
Cash	$	14,257,858		$	24,155,828		$	9,608,788		$	17,840,640
Restricted cash		500,000			500,000			508,261			500,000
Accounts receivable, net		2,799,225			1,861,534			1,647,619			1,753,547
Prepaid expenses and other current assets		1,475,613			1,215,341			2,194,221			2,458,727
Total current assets		19,032,696			27,732,703			13,958,889			22,552,914

Non-current assets:
Fixed assets, net		1,395,690			131,095			52,322			1,193,433
Investment, net		244,774			246,308			226,101			233,664
Capitalized software, net		3,389,646			2,629,304			6,167,413			3,925,739
Intangible assets, net		10,730,021			7,493,975			7,311,541			7,388,795
Goodwill		46,500,030			20,254,309			46,790,018			41,874,527
Other non-current assets		41,925			41,925

Total Assets	$	81,334,782		$	58,529,619		$	74,506,284		$	77,169,072

Liabilities and Equity

Current liabilities
Accounts payable and accrued liabilities	$	5,998,001		$	4,861,928
Contingent consideration payable		817,000			389,000
Accounts payable, accrued expenses and other accrued liabilities							$	5,185,519		$	3,188,576
Deferred revenue		1,170,625			368,685			908,256			843,900
Current portion of long-term debt		10,146,001			6,135,364			0—			11,707,363
Derivative liability								160,201			311,376
Total current liabilities		18,131,627			11,754,977			6,253,976			16,051,215

Long-term debt, less current portion		5,481,599			10,200,236			3,834,001			3,895,237

Total liabilities		23,613,226			21,955,213			10,087,977			19,946,452

Commitments and contingencies (Note 6)
Commitments and contingencies (Note 7)								0—			0—

Equity:
Preferred stock, par value $0.0001; 4,999,999 shares authorized, none are issued and outstanding at September 30, 2020 and 5,000,000 shares authorized and none are issued and outstanding at June 30, 2020		—			—
Special voting preferred stock, par value $0.0001; 1 share authorized, issued and outstanding as of September 30, 2020, with $1.00 preference in liquidation and none authorized, issued and outstanding as of June 30, 2020; exchangeable shares, no par value, 2,667,349 shares issued and outstanding as of September 30, 2020, and none as of June 30, 2020 (See Note 3)		20,405,219			—
Common stock, par value $0.0001; 75,000,000 shares authorized, 14,685,932 issued and outstanding at September 30, 2020, and 13,258,707 shares issued and outstanding at June 30, 2020		1,464			1,321
Preferred stock, par value $0.0001; 5,000,000 shares authorized, 1 share special voting preferred stock issued and outstanding at September 30, 2021 and December 31, 2020								0—			0—
Special voting preferred stock, par value $0.0001; 1 share authorized, issued and outstanding as of September 30, 2021 and December 31, 2020, with $1 preference in liquidation; exchangeable shares, no par value, 385,947 and 2,667,349 shares issued and outstanding as of September 30, 2021 and December 31, 2020 respectively (See Note 4)								2,952,495			20,405,219
Common stock, par value $0.0001; 75,000,000 shares authorized, 27,167,917 and 19,901,248 issued and outstanding at September 30, 2021 and December 31, 2020, respectively								2,717			1,990
Additional paid-in capital		83,164,840			72,906,924			132,803,659			94,086,433
Accumulated other comprehensive (loss) income		(7,000	)		63,000
Accumulated other comprehensive loss								(44,639	)		(91,497	)
Accumulated deficit		(45,842,967	)		(41,101,091	)		(71,295,925	)		(57,179,525	)
Total stockholders’ equity	$	57,721,556		$	31,870,154
Noncontrolling interests in consolidated subsidiary		—			4,704,252
Total equity		57,721,556			36,574,406		$	64,418,307		$	57,222,620
Total liabilities and equity	$	81,334,782		$	58,529,619		$	74,506,284		$	77,169,072

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

AKERNA CORP.

Condensed Consolidated Statements of Changes in Equity ~~(unaudited)~~

For the Three Months Ended September 30, ~~2020~~2021

(unaudited)

Special Voting Preferred
Common

Additional
Paid-In

Accumulated Other Comprehensive

Accumulated

Akerna
Shareholders'

Noncontrolling Interests in Consolidated

Total

Stock

Shares

Amount

Capital

Income

Deficit

Equity

Subsidiary

Equity

Balance – July 1, 2020
$ —

13,203,806

$
1,321

$
72,906,924

$ 63,000

$
(41,101,091
)
$
31,870,154

$
4,704,252

$
36,574,406

Special voting preferred stock issued in business combination
25,203,490

—

—

—

—

—

25,203,490

—

25,203,490
Conversion of Exchangeable Shares to common stock
(4,798,271 )
627,225

63

4,798,208

—

—

—

—

—
Acquisition of noncontrolling interest
—

800,000

80

4,695,357

—

—

4,695,437

(4,695,437 )
—
Amortization of stock-based compensation
—

—

—

764,351

—

—

764,351

—

764,351
Restricted stock unit vesting
—

3,025

—

—

—

—

—

—

—
Change in fair value of convertible notes

—

—

—

—

(70,000 )

—

(70,000
)

—

(70,000
)
Net loss

—

—

—

—

—

(4,741,876
)

(4,741,876
)

(8,815
)

(4,750,691
)
Balance – September 30, 2020
$ 20,405,219

14,634,056

$
1,464

$
83,164,840

$ (7,000 )
$
(45,842,967
)
$
57,721,556

$
—

$
57,721,556

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

Balance – July 1, 2021	1,039,373		$	7,951,203			25,332,439		$	2,533		$	123,856,649		$	(105,544	)	$	(69,742,478	)	$	61,962,363
Conversion of Exchangeable Shares to common stock	(653,426	)		(4,998,708	)		653,426			66			4,998,642			0—			0—			0—
Settlement of convertible debt	0—			0—			470,634			47			1,413,895			0—			0—			1,413,942
Shares withheld for withholding taxes	0—			0—			(31,422	)		(3	)		(103,704	)		0—			0—			(103,707	)
Shares issued in connection with Asset Purchase	0—			0—			83,333			8			299,992			0—			0—			300,000
Stock-based compensation	—			0—			—			0—			510,132			0—			0—			510,132
Shares issued in connection with the ATM program	0—			0—			556,388			56			1,828,063			0—			0—			1,828,119
Restricted stock vesting	0—			0—			103,119			10			(10	)		0—			0—			0—
Forfeitures of restricted shares	0—			0—			0—			0—			0—			0—			0—			0—
Foreign currency translation adjustments	—			0—			—			0—			0—			63,905			0—			63,905
Unrealized loss (gains) on convertible notes	—			0—			—			0—			0—			(3,000	)		0—			(3,000	)
Net loss	—			0—			—			0—			0—			0—			(1,553,447	)		(1,553,447	)
Balance – September 30, 2021	385,947		$	2,952,495			27,167,917		$	2,717		$	132,803,659		$	(44,639	)	$	(71,295,925	)	$	64,418,307

AKERNA CORP.

Condensed Consolidated Statements of Changes in Equity

For the Nine Months Ended September 30, 2021

(unaudited)

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

Balance – January 1, 2021	2,667,349		$	20,405,219			19,901,248		$	1,990		$	94,086,433		$	(91,497	)	$	(57,179,524	)	$	57,222,621
Conversion of Exchangeable Shares to common stock	(2,281,402	)		(17,452,724	)		2,281,402			228			17,452,496			0—			0—			0—
Settlement of convertible debt	0—			0—			3,094,129			309			11,610,278			0—			0—			11,610,587
Shares withheld for withholding taxes	0—			0—			(80,370	)		(8	)		(437,546	)		0—			0—			(437,554	)
Shares issued in connection with Viridian Acquisition	0—			0—			1,000,000			100			6,001,900			0—			0—			6,002,000
Shares issued in connection with Asset Purchase	0—			0—			83,333			8			299,992			0—			0—			300,000
Stock-based compensation	—			0—			—			0—			1,584,755			0—			0—			1,584,755
Shares issued in connection with the ATM program	0—			0—			556,388			56			1,828,060			0—			0—			1,828,116
Settlement of liabilities with shares	0—			0—			101,705			10			377,315			0—			0—			377,325
Restricted stock vesting	0—			0—			231,418			24			(24	)		0—			0—			0—
Forfeitures of restricted shares	0—			0—			(1,336	)		0—			0—			0—			0—			0—
Foreign currency translation adjustments	—			0—			—			0—			0—			65,858			0—			65,858
Unrealized loss (gains) on convertible notes	—			0—			—			0—			0—			(19,000	)		0—			(19,000	)
Net loss	—			0—			—			0—			0—			0—			(14,116,401	)		(14,116,401	)
Balance – September 30, 2021	385,947		$	2,952,495			27,167,917		$	2,717		$	132,803,659		$	(44,639	)	$	(71,295,925	)	$	64,418,307

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

AKERNA CORP.

Condensed Consolidated Statements of Changes in Equity ~~(unaudited)~~

For the Three Months Ended September 30, ~~2019~~2020

(unaudited)

		Special Preferred Voting Stock		Common			Additional Paid-In		Accumulated Other Comprehensive			Accumulated			Total Shareholders'			Non controlling Interests in Consolidated			Total
		Amount		Share	Amount		Capital		Income			Deficit			Equity			Subsidiary			Equity

Balance – June 30, 2020	$	0—		13,203,806	$	1,321	$	71,902,474	$	63,000		$	(41,160,245	)	$	30,806,550		$	4,704,252		$	35,510,802
Adoption of ASC 606 Adjustment		0—		—		0—		0—		0—			185,826			185,826			0—			185,826
Balance, July 1. 2020		0—		13,203,806		1,321		71,902,474		63,000			(40,974,419	)		30,992,376			4,704,252			35,696,628
Special voting preferred stock issued in business combination		25,203,490		—		0—		0—		0—			0—			25,203,490			0—			25,203,490
Conversion of exchangeable shares to common stock		(4,798,271	)	627,225		63		4,798,208		0—			0—			0—			0—			0—
Acquisition of noncontrolling interest		0—		800,000		80		4,695,357		0—			0—			4,695,437			(4,695,437	)		0—
Stock-based compensation		0—		—		0—		764,351		0—			0—			764,351			0—			764,351
Restricted stock vesting		0—		3,025		0—		0—		0—			0—			0—			0—			0—
Unrealized loss (gain) on convertible notes		0—		—		0—		0—		(70,000	)		0—			(70,000	)		0—			(70,000	)
Net loss		0—		—		0—		0—		0—			(3,979,230	)		(3,979,230	)		(8,815	)		(3,988,045	)
Balance – September 30, 2020	$	20,405,219		14,634,056	$	1,464	$	82,160,390	$	(7,000	)	$	(44,953,649	)	$	57,606,424			0—			57,606,424

AKERNA CORP.

For the Nine Months Ended September 30, 2020

(unaudited)

		Special Preferred Voting Stock		Common					Additional Paid-In		Accumulated Other Comprehensive			Accumulated			Total Shareholders'			Non controlling Interests in Consolidated			Total
		Amount		Share		Amount			Capital		Income			Deficit			Equity			Subsidiary			Equity

Balance – January 1, 2020	$	0—		10,921,485		$	1,093		$	51,060,652	$	0—		$	(31,340,510	)	$	19,721,235			0—			19,721,235
Special voting preferred stock issued in business combination		25,203,490		—			0—			0—		0—			0—			25,203,490			0—			25,203,490
Conversion of exchangeable shares to common		(4,798,271	)	627,225			63			4,798,208		0—			0—			0—			0—			0—
Common stock issued in business combination		0—		2,299,650			230			20,081,236		0—			0—			20,081,466			0—			20,081,466
Noncontrolling interests in acquired subsidiary		0—		—			0—			0—		0—			0—			0—			5,554,011			5,554,011
Adoption of ASC 606 Adjustment		0—		—			0—			0—		0—			185,826			185,826			0—			185,826
Acquisition of noncontrolling interest		0—		800,000			80			4,695,357		0—			0—			4,695,437			(4,695,437	)		0—
Stock-based compensation		0—		—			0—			1,524,935		0—			0—			1,524,935			0—			1,524,935
Restricted stock vesting		0—		3,025			0—			0—		0—			0—			0—			0—			0—
Forfeitures of restricted shares		—		(17,329	)		(2	)		2		0—			0—			0—			0—			0—
Unrealized loss (gain) on convertible notes		0—		—			0—			0—		(7,000	)		0—			(7,000	)		0—			(7,000	)
Net loss		0—		—			0—			0—		0—			(13,798,965	)		(13,798,965	)		(858,574	)		(14,657,539	)
Balance – September 30, 2020	$	20,405,219		14,634,056		$	1,464		$	82,160,390	$	(7,000	)	$	(44,953,649	)	$	57,606,424			0—			57,606,424

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

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain footnotes and other financial information normally required by ~~accounting principles generally accepted in the United States of America, or~~ GAAP, have been condensed or 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 nine months ended September 30, ~~2020~~ 2021 are not necessarily indicative of the results that may be expected for the fiscal year ~~transition period comprised of six months~~ ending December ~~31,2020.~~ 31, 2021.

The condensed consolidated balance sheet as of and for the ~~year~~period ended ~~June 30,~~December 31, 2020, has been derived from our audited financial statements at that date but does not include all disclosures and financial information required by GAAP for complete financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with our consolidated financial statements and notes thereto for the ~~year~~period ended ~~June 30,~~December 31, 2020, which were included in our ~~annual~~ report on Form ~~10-K~~10-KT filed on ~~September 29, 2020.~~March 31, 2021.

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 eliminated in consolidation.

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

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

~~Segment Reporting~~

Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance and information for different revenue streams is not evaluated separately. As such, t~~he Company has~~ ~~one~~ ~~operating segment, and the decision-making group is the senior executive management team. In the following table, revenue is disaggregated by primary geographical markets and revenue source.~~

For the Three Months Ended

2020
2019
Primary geographical markets:

United States $ 2,285,211
$ 3,054,670
Canada
1,270,109

28,385
Other
158,684

109,835
Total $ 3,714,004
$ 3,192,890

As of September 30, 2020

As of June 30, 2020

Long-lived assets:

United States $ 10,170,265
$ 10,254,374
Canada
5,345,092

-
Total $ 15,515,357
$ 10,254,374

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes thereto. 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 carrying value of assets and liabilities that are not readily available from other sources.Actual results could differ materially from those ~~estimates.~~

~~Accounts Receivable, Net~~estimates under different assumptions or conditions; however, we believe that our estimates are reasonable.

We maintain an allowance for doubtful accounts equal to the estimated uncollectible amounts based on our historical collection experience and review of the current status of trade accounts receivable. The allowance for doubtful accounts was $~~0.2~~ ~~million~~ ~~as September 30, 2020 and $0.2 million as of June 30, 2020.~~

Concentrations of Credit Risk

We grant credit in the normal course of business to customers in the United States. We periodically perform credit analysis and monitor the financial condition of our customers to reduce credit risk.

During the ~~three~~nine months ended September 30, 2021 and 2020, ~~and~~ ~~2019~~, ~~one~~1 government client accounted for 1711% and 23% of total revenues, respectively. During the three months ended September 30, 2021 and 2020, 1 government client accounted for 10% and 24%17% of total revenues, respectively. As of September 30, 2021 and December 31, 2020, ~~two~~2 government clients accounted forfor a total of ~~38%~~14% and 20%36% of net accounts receivable, ~~and one government client had outstanding receivables as of September 30, 2019, which accounted for 63% of net accounts receivable.~~ respectively.

910

~~Goodwill Impairment Assessment~~

We evaluate and test the recoverability of our goodwill for impairment at least annually during October of each year or more often if circumstances indicate that goodwill may not be recoverable. To date, we have not recorded any impairment of our goodwill.

Foreign Currency Translation

~~We have Canadian~~The functional currency of the Company's non-U.S. operations ~~with Canadian Dollar~~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 period. Translation gains or losses are included as ~~the functional currency.~~ ~~Foreign exchange gains~~a component of accumulated other comprehensive loss in shareholders' equity. Gains and losses ~~and translation adjustments, which result~~resulting from ~~the process of remeasuring~~ foreign currency transactions ~~into the appropriate functional currency, were immaterial during the quarter ended September 30, 2020.~~

~~Supplemental Information Regarding Noncash Investing and Financing Activities~~are recognized as other income (expense).

~~During the three months ended September 30, 2020, we~~ ~~acquired~~ ~~100% of the outstanding equity interest in Ample Organics, Inc., or Ample, in exchange for Akerna common stock valued at $25.2 million, please refer to Note 3 for additional information about the transaction and a schedule of the assets acquired and liabilities assumed in conjunction with this transaction~~

~~Stock-Based Compensation~~Reclassifications

We measured stock-based compensation based on the fair value of the share-based awards on the date of grant and recognize the related costs on a straight-line basis over the requisite service period, which is generally the vesting period. During the three months ended September 30, 2020, we granted 451,925 shares of Restricted Stock Units at an aggregate grant date fair value of approximately $2.2 million, vesting equally over four years.

~~Reclassifications and Revisions~~

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

Segment Reporting

The Company operates its business as one operating segment. Operating segments are defined as components of an enterprise about which separate financial ~~statement amounts have been revised~~information is evaluated regularly by the chief operating decision maker, the Company’s Chief Executive Officer, in deciding how to ~~correct misstatements~~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.

In the following table, we disclose the combined gross balance of our fixed assets, capitalized software, and intangible assets by geographical location (in thousands):

	As of September 30, 2021		As of December 31, 2020
Long-lived assets:
United States	$	15,285	$	9,994
Canada		4,923		5,074
Total	$	20,208	$	15,068

Warrant Liabilities

We classify private placement warrants as liabilities. At the end of each reporting period, changes in fair value during the period are recognized within the condensed consolidated statements of operations and comprehensive loss. We will continue to adjust the warrant liability for changes in the ~~prior year, please refer~~fair value 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 ~~Note 9~~additional paid-in capital.

Investment

We hold an equity security in Zoltrain, Inc. (Zoltrain) for ~~additional information regarding~~which the ~~corrections.~~fair value is not readily determinable. Accordingly, we measure this investment at cost minus impairment, plus or minus changes resulting from observable price changes. When indicators of impairment exist, we estimate the fair value and record an impairment charge if the carrying value of the investment exceeds its estimated fair value. Any impairment charges are recorded in other (expense) income, net, in our consolidated statements of operations. Prior to the quarter ended September 30, 2021, we determined we could exert significant influence over Zoltrain's operations through voting rights and representation on the board of directors and we accounted for our investment in Zoltrain using the equity method of accounting, recording our share in the investee’s earnings and losses in the consolidated statement of operations.

Recent Accounting Pronouncements

ASU 2016-02

The Financial Accounting Standards Board, or the FASB, has issued guidance to simplify the remeasurement of goodwill when impairment is identified. Under existing guidance we would have to perform procedures to determine the fair value of our assets and liabilities as of the testing date in a manner similar to the procedures necessary to allocate purchase price to acquired assets and liabilities in a business combination. Under the new guidance, the goodwill impairment charge is equal to the excess of the carrying value of the reporting unit to which goodwill is assigned and the fair value of that reporting unit. We have elected to adopt the guidance early effective July 1, 2020 and will utilize this approach if necessary when we perform our annual goodwill impairment test.

The FASB has issued guidance related to the accounting for share-based compensation to nonemployees, which eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees. Under the new guidance, nonemployee share-based payment transactions are measured at the grant-date fair value and are no longer remeasured at the then-current fair values at each reporting date until the share options have vested. The amended guidance is effective for our fiscal year end transition financial statements for the six months ending December 31, 2020 and for interim periods beginning on January 1, 2021. We have completed our implementation procedures and concluded that there will be no material impact to our results of operations or financial condition as a result of this new standard.

The FASB has issued guidance to revise accounting for revenue from contracts with customers, which supersedes the revenue recognition requirements and industry-specific guidance currently in effect for us. The new revenue standard 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. The new revenue standard is effective for our fiscal 2021 annual reporting period and for interim periods thereafter. The new revenue standard allows for either full retrospective or modified retrospective adoption. We will adopt the new standard using the modified retrospective approach and anticipate that the timing of recognition of incremental costs of obtaining contracts will be the most significant change to our results of operations upon adoption. As a result of our announced change in fiscal year end to December 31, 2020, as further discussed in Note 1, we will adopt the new standard in our transition period financial statements for the six months ending December 31, 2020. We are in the process of finalizing our implementation of this standard and expect to record a cumulative catch up adjustment to defer certain direct contract costs that have previously been recognized as expense as incurred, Additionally, we expect to adjust the recognition pattern for certain implementation fees earned in connection with government contracts.

~~The~~ FASB, has issued new guidance related to the accounting for leases. The new standard 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. Following our change in fiscal year effective on December 31, 2020, the new standard is effective for us beginning ~~with our fiscal year ending December 31,~~ on January 1, 2022 and in interim periods thereafter. We have limited assets subject to operating lease and therefore expect the adoption of the new standard to result in the recognition of right of use assets and lease liabilities for any office or vehicle leases in effect at that date, we do not expect a significant impact to our results of operations.

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 on January 1, 2023. We are evaluating the impact of adoption of the new standard on our consolidated financial statements.

ASU 2018-15

The FASB has issued guidance ~~regarding whether~~to help entities evaluate the accounting 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 2018-15 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 ~~development~~(and hosting arrangements that include an internal-use software license). The guidance (i) provides criteria for determining which implementation costs ~~should be~~to capitalize as an asset related to the service contract and which costs to expense, (ii) requires an entity (customer) to expense the capitalized ~~or charged to expense. Depending upon on~~implementation costs of a hosting arrangement that is a service contract over the ~~nature~~term of the hosting arrangement and (iii) clarifies the presentation requirements for reporting such costs ~~and~~in the project stage in which they are incurred. Capitalized development costs are subject to amortization and impairment guidance consistent with existing internal-use software development cost guidance. Following our change in fiscal year end effective December 31, 2020, theentity’s financial statements. The guidance is applicable for us for the year ending December 31, ~~2021 and in interim periods thereafter, with early adoption permitted, including adoption in an interim period.~~2021. We are evaluating the impact of adoption of the ~~new~~ standard on our financial ~~statements.~~statements, however, do not anticipate a significant impact to our financials as a result of this guidance.

ASU 2020-01

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

ASU 2021-04

On May 3, 2021, FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company is evaluating this new standard.

ASU 2021-08

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends the accounting related to contract assets and liabilities acquired in business combinations. Under current GAAP, an entity generally recognizes assets and liabilities acquired in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU 2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to businesses combinations occurring on or after the effective date of the amendment. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this new guidance on the consolidated financial statements.

Note 3 – ~~Significant Transactions~~ Revenue

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

On July 7,1, 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 September 30, 2021 and December 31, 2020, and three months ended September 30, 2021 in the accompanying consolidated financial statements are presented under ASC 606.

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 nine months ended September 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 consists of subscription revenue, the sale of business intelligence, data analytics and other software related services, as well as sales of solo*TAGs 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 activate a solo*TAGor solo*CODE, we receive an activation fee, which is recognized upon activation by the customer. Subscription revenue 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

Other revenue is derived primarily from point-of-sale hardware and other non-recurring revenue. From time to time we purchase equipment for resale to customers. Such equipment is generally drop-shipped to our customers and 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, implementation and consulting services. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, contract duration, and invoice frequency. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as deferred revenue, which is a current liability on the accompanying consolidated balance sheets.

Revenue Recognition Policies for the three months ended September 30, 2020 and the three and nine months ended September 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 derives the majority of its revenue from subscription fees paid for access to and usage of its SaaS solutions for a specified period of time, typically one year. In addition to subscription fees, contracts with customers may include implementation fees for launch assistance and training. Fixed subscription and implementation fees are billed in advance of the subscription term and are due in accordance with contract terms, which generally provide for payment within 30 days. The Company's contracts typically have a one-year term. The Company's contractual arrangements include performance, termination and cancellation provisions, but do not provide for refunds. Customers do not have the contractual right to take possession of the Company's software at any time.

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

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

	For the Nine Months Ended September 30,
	2021		2020 ⁽¹⁾
Government	$	2,366	$	3,333
Non-government	11,690		6,455
	$	14,056	$	9,788

	For the Nine Months Ended September 30,
	2021		2020 ⁽¹⁾
United States	$	10,272	$	8,642
Canada	3,784		1,146
	$	14,056	$	9,788

(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.

Software. Our software revenue is generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform, Ample, Viridian, and Trellis, our government regulatory platform, Leaf Data Systems, and the sale of business intelligence, data analytics and other software related services. Software contracts are generally 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 commercial software contracts. Leaf Data Systems contracts are generally multi-year contracts payable annually or quarterly in advance of service. Commercial software and Leaf Data Systems contracts generally may only be terminated early for breach of contract as defined in the respective agreements. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term.

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

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

Contracts with Multiple Performance Obligations

Customers may elect to purchase a subscription to multiple modules, multiple modules with multiple service levels, or, for certain of the Company's solutions. We evaluate such contracts to determine whether the services to be provided are distinct and accordingly should be accounted for as separate performance obligations. If we determine that a contract has multiple performance obligations, the transaction price, which is the total price of the contract, is allocated to each performance obligation based on a relative standalone selling price method. We estimate standalone selling price based on observable prices in past transactions for which the product offering subject to the performance obligation has been sold separately, or by using a residual approach for consulting revenue, whereby we estimate the standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract. 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 September 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 $4.2 million as of September 30, 2020, of which $2.0 million is expected to be recognized as revenue over the next twelve months.

Deferred Revenue

Deferred revenue represents the unearned portion of subscription, implementation, and consulting fees. Deferred revenue is recorded when cash payments are received in advance of performance. Deferred amounts are generally recognized within one year. Deferred revenue is included in the accompanying consolidated balance sheets under total current liabilities.

The following table summarizes deferred revenue activity for the nine months ended September 30, 2021 (in thousands):

	As of December 31, 2020			Net additions		Revenue recognized		As of September 30, 2021
Deferred revenue	$	844		5,970		(5,906	)	$	908

Of the $14.1million of revenue recognized in the nine months ended September 30, 2021, $0.9 million was included in deferred revenue at December 31, 2020.

Costs to Obtain Contracts

In accordance with ASC 606, we now capitalize sales commissions that are directly related to obtaining customer contracts and that would not have been incurred if the contract had not been obtained. These costs are included in the accompanying consolidated balance sheets and are classified as Prepaid expenses and other current assets. Deferred contract costs are amortized to sales and marketing expense over the expected period of benefit, which we have determined to be one year based on the estimated customer relationship period.

The following table summarizes deferred contract cost activity for the nine months ended September 30, 2021 (in thousand):

	As of December 31, 2020			Additions		Amortized costs (1)		As of September 30, 2021
Deferred contract costs	$	228		309		(357	)	$	180

(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 ~~Ample Organics~~Viridian Sciences Inc. (“~~Ample”~~Viridian”), ~~Ample provides~~ a ~~seed-~~t~~o-sale platform to clients in Canada,~~ ~~which offers tracking, reporting, and compliance tools to~~ cannabis ~~cultivators, processors, sellers, and clinics.~~ business management software provider that is built on SAP Business One. We acquired ~~100% of the stock of Ample Organics by issuing~~ ~~3.3~~Viridian in exchange for 1.0 million ~~exchangeable~~ shares of ~~one~~ of our ~~wholly-owned subsidiaries. The exchangeable shares may be exchanged, at the option of the holder, for shares of Akerna~~ common stock ~~on a~~ ~~one-for-one~~ ~~basis, therefore the exchangeable shares issued were~~ valued at $~~7.65~~ ~~per share, the closing price of an equivalent share of Akerna common stock, for an aggregate value of $25.2~~$6.0 million. ~~The exchangeable shares are economically equivalent to shares of Akerna common stock.~~ In addition to the stock consideration, ~~we paid~~ $~~5.7~~ ~~million in cash, which was used to settle all of Ample's then outstanding debt and transaction costs.The~~the agreement provides for contingent consideration of up to ~~CAD$10,000,000~~,$1.0 million, payable in ~~exchangeable shares, payable~~additional common stock, if ~~Ample's~~ ~~Recurring Revenue recognized during the~~12~~months after the acquisition date is CAD$9,000,000or more.~~Viridian meets certain revenue criteria. The contingent consideration ~~amount is reduced by an amount equal to the product of CAD$6.67multiplied by the difference between CAD$9,000,000and the amount of Recurring Revenue realized during the~~12~~months following the acquisition. The contingent consideration was~~will be recorded as the estimated fair value ~~of $0.8~~ ~~million as of~~on the acquisition date and ~~will be~~ adjusted to ~~the~~ estimated fair value in each subsequent reporting period until settlement.~~The preliminary fair value of consideration transferred consisted of the following (in thousands):~~

	Preliminary Fair Value		Preliminary Fair Value
Common shares issued	$	25,203
Cash		5,724
Shares issued			$	6,000
Contingent consideration		817		2
Total preliminary fair value of consideration transferred	$	31,744	$	6,002

~~We incurred $1.0~~ m~~illion of transaction costs directly related to the acquisition that is reflected in selling, general and administrative expenses in our condensed consolidated statements of operations.~~

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

Preliminary
Fair Value

Cash

$
445

Accounts receivable

917

Prepaid expenses

149

Intangible assets and goodwill

30,433

Furniture, fixtures and equipment

1,327

Accounts payable and accrued expenses

(978
)
Deferred revenue

(549
)
Net assets acquired

$
31,744

	Preliminary Fair Value
Accounts receivable		556
Prepaid expenses and other current assets		148
Capitalized software		423
Acquired technology		470
Customer relationships		820
Acquired trade name		20
Goodwill		4,915
Accounts payable and accrued expenses		(350	)
Deferred revenue		(1,000	)
Net assets acquired	$	6,002

The excess of purchase consideration over the ~~preliminary~~ 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 ~~preliminary~~ based on management’s estimates and ~~assumptions and will change as additional information is received.~~assumptions. We expect to finalize the valuation as soon as practicable, but no later than one year from the acquisition date.

The amounts of ~~Ample’s~~Viridian's revenue and net ~~loss~~income included in our ~~condensed~~ consolidated statement of operations from the acquisition date of ~~July 7, 2020,~~April 1, 2021, to September 30, ~~2020~~2021 were $~~1.2~~$1.9 million a~~nd $0.4~~ ~~million,~~and $0.6 million, respectively.

Pro Forma Financial Information

The following unaudited pro forma financial information for the nine months ended September 30, 2021 and the three and nine months ended September 30, 2020 summarizes the combined results of operations for Akerna, Trellis, Solo, Ample and ~~Ample~~Viridian as though the companies were combined as of ~~the beginning of our fiscal~~ ~~2019~~ ~~(in thousands):~~ January 1, 2019:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019				2021
Revenues	$	3,790		$	4,130
Revenue							$	15,064,163
Net loss	$	(4,686	)	$	(4,185	)	$	(14,114,608	)

	Three Months Ended September 30,
		2020
Revenue	$	4,986,671
Net loss	$	(3,365,226	)

	Nine Months Ended September 30,
		2020
Revenue	$	16,348,997
Net loss	$	(18,014,765	)

The pro forma financial information for all periods presented above has been calculated after adjusting the results of ~~Solo,~~ Trellis, Ample and ~~Ample~~Viridian to reflect the business combination accounting effects resulting from ~~this acquisition,~~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. As noted above, the allocation is preliminary and changes to the value of the contingent consideration and finalization of our valuation could result in changes to the amount of amortization expense from acquired intangible assets included in the pro forma financial information presented above. The Akerna historical condensed consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination and factually supportable. The pro forma financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what the results of operations ~~that~~ would have been ~~achieved if~~had the Ample acquisition ~~had~~ taken place at the beginning of the Company’s fiscal year 2019.

Special Voting Preferred Stock and Exchangeable Shares

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

The special voting preferred stock has a par value of ~~$0.0001~~$0.0001 per share and a preference in liquidation of $1.00. The special voting preferred stock entitles the holder to an aggregate number of votes equal to the number of the exchangeable shares issued and outstanding from time to time and which we do not own. The holder of the special voting preferred stock and the holders of shares of Akerna common stock will both together as a single class on all matters submitted to a vote of our shareholders. At such time as the special voting preferred stock has ~~not~~no votes attached to it, the share shall be automatically cancelled. The exchangeable shares do not have a par value.

OnDuring the nine months ended September ~~1, 2020,~~30, 2021, several Ample shareholders exchanged a total of ~~627,225~~2,281,402 exchangeable shares with a value of $~~4,798,271~~$17,452,726 for the 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 September 30, ~~2020,~~2021, there were a total of ~~2,667,349 Exchangeable Shares~~385,947 exchangeable shares issued and outstanding.

1317

Note 5 - Balance Sheet Disclosures

Prepaid expenses and other current assets consisted of the following:

	As of		As of
	September 30,		December 31,
	2021		2020
Software and technology	$	461,555	$	480,651
Professional services, dues and subscriptions		803,861		826,195
Insurance		415,630		243,222
Deferred contract costs		179,928		227,718
Unbilled receivables		265,155		612,446
Other		68,092		68,495
Total prepaid expenses and other current assets	$	2,194,221	$	2,458,727

Accounts payable and accrued liabilities consisted of the following:

	As of		As of
	September 30,		December 31,
	2021		2020
Accounts payable	$	1,808,867	$	513,610
Professional fees		441,211		333,709
Sales taxes		253,326		216,367
Compensation		404,906		311,379
Contractors		616,502		1,281,857
Other		1,660,707		531,654
Total accounts payable and accrued liabilities	$	5,185,519	$	3,188,576

Note4 6 - Fair Value

~~Contingent Consideration~~

~~Solo~~

I~~n connection with our acquisition of Solo, the Solo selling shareholders received the potential to earn the contingent consideration, which was to be calculated as~~ ~~the lesser of~~ ~~(i) $0.01~~ ~~per solo*TAG~~^TM~~and solo*CODE~~^TM~~sold or (ii)~~ 7~~% of net revenue. The fees were to be paid annually until the earlier of (~~1~~) our shares trading above $~~12 ~~per share for any consecutive~~ 20 ~~trading days in a~~ 30~~-day period; (b) upon our no longer owning a majority stake in Solo; or (c) upon expiration of the patents related to solo*TAG~~^TM~~and solo*CODE~~^TM~~, which is December 1, 2029.~~

We recorded the fair value of the liability in the condensed consolidated balance sheets under the caption “current contingent consideration” and recognized changes to the fair value of the liability against earnings or loss each reporting period until settlement. The fair value of the contingent consideration on the date of the acquisition of Solo ~~was $389,000~~. In connection with our exercise of the option to acquire the remaining interest in Solo, the selling shareholders agreed to retrospectively and prospectively relieve the contingent consideration obligation. ~~Therefore the settled value of the contingent consideration~~ ~~was~~ $0. We ~~have recorded a gain on settlement of the contingent consideration liability during the three months ended~~ ~~September 30, 2020~~ ~~in general and administrative expenses in our condensed consolidated statement of operations.~~

~~Ample~~

~~In addition to the stock and cash consideration,~~ ~~the agreement provides for contingent consideration of up to CAD$10,000,000, payable in exchangeable shares, payable if Ample's Recurring Revenue recognized during the~~ 12~~months after the acquisition date is CAD$9,000,000or more. The contingent consideration amount is reduced by an amount equal to the product of CAD$6.67multiplied by the difference between CAD$9,000,000and the amount of Recurring Revenue realized during the~~ ~~twelve~~ ~~months~~ ~~following the acquisition.~~

We record the fair value of the liability in the condensed consolidated balance sheets as contingent consideration payable and recognize changes to the liability against earnings or loss in general and administrative expenses in the condensed consolidated statements of operations. The fair value of the contingent consideration on the date of the acquisition of Ample~~was $817,000. The carrying amount at fair value of the aggregate liability for the contingent consideration recorded on the condensed consolidated balance sheet as of~~ ~~September 30,~~ ~~2020~~,~~is $817,000~~.

Fair Value Option Election – Convertible Notes

We issued Convertible Notes with a principal amount of $~~17.0~~$17.0million at a purchase price of $~~15.0~~$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 change in estimated fair value resulting from changes in instrument-specific credit risk is recorded in other comprehensive income as a component of equity. The remaining estimated fair value adjustment is presented as a single line item within other (expense) income ~~(expense)~~ in our condensed consolidated statement of operations under the caption, change in fair value of convertible notes.

For the Convertible Notes, which are measured at fair value categorized within Level3of the fair value hierarchy, the following is a reconciliation of the fair values ~~from June 30, 2020, to~~ for the three and nine months endedSeptember 30, ~~2020~~:2021 and September 30, 2020:

Fair value balance as of June 30, 2020
$
14,131,000

Change in fair value reported in the statements of operations
(778,000 )
Change in fair value reported in other comprehensive income

70,000

Fair value balance as of September 30, 2020
$
13,423,000

	Three Months Ended September 30,
	2021			2020
Fair value balance at beginning of period	$	6,152,000		$	14,131,000
Payments on Convertible Notes		(2,344,226	)		0—
Change in fair value reported in the statements of operations		23,227			(778,000	)
Change in fair value reported in other comprehensive loss		3,000			70,000
Fair value balance at end of period	$	3,834,001		$	13,423,000

	Nine Months Ended September 30,
	2021			2020
Fair value balance at beginning of period or issue date (June 9, 2020)	$	13,398,000		$	14,960,000
Payments on Convertible Notes		(11,613,903	)		0—
Change in fair value reported in the statements of operations		2,030,904			(1,544,000	)
Change in fair value reported in other comprehensive loss		19,000			7,000
Fair value balance at end of period	$	3,834,001		$	13,423,000

The estimated fair value of the Convertible Notes as of ~~June~~September 30, ~~2020,~~2021 and ~~September 30,~~December 31, 2020, was computed using a Monte Carlo simulation, which incorporates significant inputs that are not observable in the market, and thus represents a Level3measurement as defined by GAAP. The unobservable inputs utilized for measuring the fair value of the Convertible Notes reflect our assumptions about the assumptions that market participants would use in valuing the Convertible Notes as of the issuance date and subsequent reporting period.

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

Fair Value Assumptions - Convertible Notes	September 30, 2021				December 31, 2020
Face value principal payable (in thousands)	$	3,558,824			$	15,172,272
Original conversion price	$	11.50			$	11.50
Value of Common Stock	$	2.82			$	3.24
Expected term (years)		0.1				2.3
Volatility		99		%		77		%
Market yield			25.1	%		27.1%	to 27.2	%
Risk free rate		0.1		%		0.1		%

Fair Value Assumptions - Convertible Notes

September 30, 2020

June 30, 2020

Face value principal payable

$
17,000,000


$
17,000,000

Original conversion price

$
11.50

$
11.50

Value of Common Stock

$
3.64

$
8.80

Expected term (years)

2.67

2.90

Volatility

68
%

45
%
Market yield

28.0
%

23.9
%
Risk free rate

0.1% to 0.2
%

0.2
%

Fair Value Measurement – Warrants

In connection with MTech Acquisition Corp.'s ("MTech") initial public offering, MTech sold 5,750,000 units at a purchase price of $10.00 per unit, inclusive of 750,000 units sold to the underwriters on February 8, 2018, upon the underwriters’ election to fully exercise their over-allotment option. Each unit consisted of 1 share of MTech’s common stock and 1 warrant of MTech (“MTech Public Warrant”). Each MTech Public Warrant entitled the holder to purchase 1 share of MTech’s common stock at an exercise price of $11.50. Concurrently with MTech’s initial public offering, MTech sold 243,750 units at a purchase price of $10.00 per unit on a private offering basis.Each unit consisted of 1 share of MTech’s common stock and 1 warrant of MTech (“MTech Private Warrant”). Each MTech Private Warrant entitled the holder to purchase 1 share of MTech’s common stock at an exercise price of $11.50.

Upon completion of the mergers between MTech and MJF on June 17, 2019, as contemplated by the Merger Agreement dated October 10, 2018, as amended ("Mergers"), the MTech Public Warrants and the MTech Private Warrants were converted, respectively, at an exchange ratio of one-for-one to a warrant to purchase one share of Akerna’s common stock with identical terms and conditions as the MTech Public Warrants (“Public Warrant”) and the MTech Private Warrants (“Private Warrant”, collectively with the Public Warrants, “Warrants”)In connection with the completion of the Mergers, we also issued 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.

For the Private Warrants classified as derivative liabilities, which are measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values for the three and nine months ended September 30, 2021 and September 30, 2020:

	Three Months Ended September 30,
	2021			2020
Fair value balance at beginning of period	$	354,247		$	1,058,228
Change in fair value reported in the statements of operations		(194,046	)		(762,646	)
Fair value balance at end of period	$	160,201		$	295,582

	Nine Months Ended September 30,
	2021			2020
Fair value balance at beginning of period	$	311,376		$	688,187
Change in fair value reported in the statements of operations		(151,175	)		(392,605	)
Fair value balance at end of period	$	160,201		$	295,582

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 liability” and recognize changes to the liability against earnings or loss each reporting period. Upon exercise of the Private Warrants, holders will receive a delivery of Akerna shares on a net or gross share basis per the terms of the Private Warrants and any exercise will reclassify the Private Warrants, at the time of exercise, to shareholder’s equity to reflect the equity transaction.There are no periodic settlements prior to the holder exercising the Private Warrants. There were no transfers in or out of Level 3 from other levels for the fair value hierarchy.

We estimated the fair value by using the following key inputs:

Fair Value Assumptions - Private Warrants	September 30, 2021			December 31, 2020
Number of Private Warrants		225,635			225,635
Original conversion price	$	11.50		$	11.50
Value of Common Stock	$	2.82		$	3.24
Expected term (years)		2.71			3.46
Volatility		92.9	%		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 less than 5% of our issued and outstanding shares of common stock is, to our knowledge, the founder and one of the principal managers of TechMagic USA LLC. As of September 30, 2021 and December 31, 2020, we recognized a loss contingency of $0.6 million.

On April 2, 2021, TreCom Systems Group, Inc. (“TreCom”) filed suit against Akerna and our wholly-owned subsidiary, MJ Freeway, LLC, in federal District Court for the Eastern District of Pennsylvania, seeking recovery of up to approximately $2 million for services allegedly provided pursuant to a Subcontractor Agreement between MJ Freeway and TreCom. MJ Freeway provided a notice of termination of the operative Subcontractor Agreement on August 4, 2020. MJ Freeway disputes the validity of TreCom’s invoices and the enforceability of the alleged agreement that TreCom submitted to the court. Akerna filed counterclaims against TreCom for breach of contract, a declaratory judgment, commercial disparagement, and defamation. TreCom failed to return Akerna’s intellectual property and issued numerous disparaging statements to one of Akerna’s clients. TreCom subsequently filed a motion to dismiss these counterclaims, which was denied by the court.Akerna intends to vigorously defend against TreCom’s claims, and pursue its own claims. As of September 30, 2021, we recognized a loss contingency of $0.1 million.

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 defendants’ 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 conflict of interest with.The defendants have not asserted any counterclaims, and we therefore have not recognized a loss contingency.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. As of September 30, 2021, and through the date these financial statements were issued, there were no other legal proceedings requiring recognition or disclosure in the financial statements.

Note 8 – Long Term Debt

On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlined the provisions of the Paycheck Protection Program (the “PPP”). On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act, was signed into law increasing funding provided by the CARES Act and on June 5, 2020, the Paycheck Protection Program Flexibility Act extended the program until December 31, 2020. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all, or a portion of loan granted under the program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities.

On April 21, 2020, the Company issued a promissory note to KeyBank National Association (“KeyBank”) in the principal aggregate amount of $2,204,600 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The PPP Loan had a two-year term bearing interest at a rate of 1% per annum with principal and interest payments of $92,818 to be paid monthly on the 12th of the month beginning 7 months from the date of the PPP Loan. The PPP Loan provides for prepayment of 20% or less of the unpaid principal balance at any time. If more than 20% is prepaid, then all accrued interest must also be paid.

In August 2021, the Company submitted its application for 100% loan forgiveness and on September 3, 2021, the loan was 100% forgiven by the Small Business Administration. As a result, the Company recorded a gain on the forgiveness of the loan in the amount of $2,234,730.

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

The ~~followin~~gfollowing discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements for the three and nine months ended September 30, ~~2020,~~2021, and the related notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States.

Forward-Looking ~~Statements~~Statements

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

	●	our ability to sustain our revenue growth rate, to achieve or maintain profitability, and to effectively manage our anticipated growth;
	●	our short operating history makes it difficult to evaluate our business and future prospects;
	●	our dependence on the commercial success of our clients, the continued growth of the cannabis industry and the regulatory environment in which the cannabis industry operates
	●	our ability to attract new clients on a cost-effective basis and the extent to which existing clients renew and upgrade their subscriptions;
	●	the timing of our introduction of new solutions or updates to existing solutions;
	●	our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content;
	●	our ability to respond to changes within the cannabis industry;
	●	the effects of adverse changes in, or the enforcement of, federal laws regarding our clients’ cannabis operations or our receipt of proceeds from such operations;
	●	our ability to manage unique risks and uncertainties related to government contracts;
	●	our ability to manage and protect our information technology systems;
	●	our ability to maintain and expand our strategic relationships with third parties;
	●	our ability to deliver our solutions to clients without disruption or delay;
	●	our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance;
	●	our ability to expand our international reach;
	●	our ability to retain or recruit officers, key employees, and directors;
	●	our ability to raise additional capital or obtain financing in the future;
	●	our ability to successfully integrate acquired businesses with Akerna’s business within anticipated timelines and at their expected costs;
	●	our ability to complete planned acquisitions on time or at all due to failure to obtain stockholder approval or governmental or regulatory clearances, or the failure to satisfy other conditions to completion, or the failure of completion for any other reason;
	●	our response to adverse developments in the general market, business, economic, labor, regulatory, and political conditions, including worldwide demand for cannabis and the spot price and long-term contract price of cannabis;
	●	our response to competitive risks;
	●	our ability to protect our intellectual property;
	●	the market reaction to negative publicity regarding cannabis;
	●	our ability to manage the requirements of being a public company;
	●	our ability to service our convertible debt;
	●	our accounting treatment of certain of our private warrants;
	●	our ability to effectively manage any disruptions to our business and/or any negative impact to our financial performance caused by the economic and social effects of the COVID-19 pandemic and measures taken in response; and
	●	other factors discussed in other sections of this Quarterly Report on Form 10-Q, including the sections of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Part II, Item 1A. “Risk Factors” and in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission, or the SEC, on ~~September 29, 2020,~~March 31, 2021, under Part I, Item 1A, “Risk Factors.”

1925

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

Business Overview

~~We are~~Akerna is a ~~leading~~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. Our proprietary~~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 ~~platforms~~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 backbone 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 with~~requiring 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. ~~Over~~ ~~ten~~ ~~years ago,~~

Executing upon our expansion strategy, we ~~identified a need for organic material tracking~~acquire complementary cannabis brands to grow the scope of Akerna’s cannabis ecosystem. Throughout 2019, 2020, and ~~regulatory compliance software as a~~2021, we integrated five new brands into the Akerna product and service ~~or SaaS, solutions~~offering. 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 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 ~~cannabis~~family of companies, Akerna provides highly versatile platforms that equip our clients with a central data management system for tracking regulated products. Our solutions also provide clients with integrated security, transparency, and ~~cannabidiol, or CBD, industry. We now seek to create~~scalability capabilities, all while maintaining compliance with their governing regulations.

On the ~~backbone on which the cannabis industry is built by providing an integrated ecosystem of applications and services that enables compliance, regulation and taxation. We develop~~commercial side, our products ~~intended to~~ help state-licensed businesses operate in compliance with applicable laws and to assist states in monitoring licensed businesses’ compliance with state regulations. We provide commercial software platforms to state and federally licensed businesses and our regulatory software platform ~~to government regulatory agencies~~.regional laws. Our integrated ecosystem ~~provided additional~~provides integrations with third-party vendors and add-ons that enhance the capabilities of our commercial software platforms. ~~Although~~On the regulatory side, we ~~have~~provide track and trace solutions that allow state governments to monitor compliance of licensed cannabis businesses.To date, our software has helped monitor ~~legal~~the compliance ~~for~~of more than $20$20 billion in legal cannabis. While our software facilitates the success of legal cannabis ~~sales to date,~~businesses, we do not handle any cannabis-related material, do not process cannabis sales transactions within the United States, and our revenue ~~generation~~is generated from a fixed-fee based subscription model and is not related to the type or amount of sales made by our ~~clients, as revenues are generated by us on a fixed-fee based subscription model.~~clients.

~~Executing upon the expansion strategy detailed by CEO Jessica Billingsley in~~ ~~2019, we have~~ ~~acquired competitive brands Ample Organics, or Ample, on July 7, 2020 and Trellis Solutions, or Trellis, on April 10, 2020. These additions to the~~ ~~Akerna~~ ~~family of brands add~~ ~~two~~ ~~well-known seed-to-sale software options with reputable experience and significant market share. Ample Organics, the leading Health Canada approved software for Canadian Licensed Producers, or~~ ~~LPs, has majority market share in Canada, the only G~~7 ~~country with federally legal cannabis. Trellis also brings a streamlined solution for Cultivators, Manufacturers, and Distributors, trusted by some of California’s largest brands.~~

Through the Akerna family companies, MJ Freeway, or MJF, Ample, and Trellis, we provide highly-versatile platforms that provide our clients with a central data management system for tracking regulated products – from seed to initial plant growth to the product to the final sale of the product to a patient or consumer – 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 a fast-changing industry and comply with state, local, and federal (in countries such as Canada, Italy, Macedonia, and Colombia) regulation at all times, and allows our government regulatory clients to effectively and cost-efficiently monitor licensees and ensure commercial businesses are complying with their states’ regulations.

~~We generate revenue from software sales and by providing consulting services as follows:~~

●

~~Commercial Software Products – MJ Platform~~^®~~is ourSaaS~~offering for state and legally-licensed businesses. MJ Platform is an Enterprise Resource Planning, or ERP, compliance system specific to the cannabis industry, including state-legal marijuana, hemp, and 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.

~~The Ample suite of products includes AmpleOrganics, a seed-to-sale SaaS cannabis compliance offering for Canadian Licensed Producers;~~ ~~AmplePayments, a payment processing offering;~~ ~~AmpleCare, an API-first~~ ~~middleware~~ solution that allows for the submission of both patient registration documents and medical documents in a secure electronic format to licensed producers using the AmpleOrganics seed-to-sale platform; and ~~AmpleLearn, an education and training platform designed to educate and onboard personnel working within a licensed cannabis company.~~

Trellis’ seed-to-sale SaaS offering features inventory tracking to manage a licensee’s cannabis inventory from cultivation to extraction and sale. The Trellis product is designed to meet the needs of smaller licensees.

	●	Government Regulatory Software Products – 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 are serving ~~three~~ clients for Leaf Data Systems, the Commonwealth of Pennsylvania, the State of Washington and the State of Utah. The Commonwealth of Pennsylvania and the State of Utah both require licensed cannabis operators to also use MJ Platform to report their compliance information. The State of Utah mandates the use of solo*TAG^TM ~~to provenance plants and products throughout the compliance supply chain.~~

	●	Consulting Services Contracts – 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 maintain 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 from working with numerous cannabis operations. Our consulting team has experience in most aspects of cannabis operations in most verticals (~~e.g.~~, cultivation, processing, distribution, manufacturing, and retail). Our service providers understand the intricacies of the varying regulations governing cannabis in each jurisdiction and, to the extent necessary, modify the professional services based on the jurisdiction. We provide project-focused consulting services to clients that are initiating or expanding their cannabis businesses or are interested in data consulting engagements with respect to the legal cannabis industry. Our advisory engagements include service offerings focused on compliance requirement assessments, readiness and best practices, compliance monitoring systems, application processes, inspection readiness, and business plan and compliance reviews. We typically provide our consulting services to clients in emerging markets that are seeking consultation on newly introduced licensing regimes and assistance with the regulatory compliant build-out of operations in newly legal states.

	●	Business Intelligence and Data Analytics Products—Akerna Business Intelligence is an Infrastructure as a Service (IaS) tool which delivers supply chain analytics for the cannabis, hemp, and CBD industry.~~Last Call Analytics provides a subscription analytics tool for alcohol brands to analyze their retail sales analytics.~~

We also resell a limited number of printers for printing compliance product labels and scales that are National Type Evaluation Program certified legal for trade. Revenue from these resale activities was 2% of total revenue in each of the three months ended September 30, 2020, and September 30, 2019~~. Beginning late in our fiscal year ended June 30,~~ ~~2020~~, we entered into a revenue-sharing arrangement with a printer supplier, as a result, we expect our revenue and cost of sales related to this activity to decrease in the future. Following our acquisition of solo sciences, inc., or Solo, in January 2020, ~~we sell a cannabis tracking technology that provides our clients with seed-to-sale-to-self data throughout a product’s life cycle.~~

We drive ~~commercial software~~ revenue growth ~~by leveraging~~through the development of our ~~reputation~~product line, our acquisitions and ~~we benefit~~ from continued ~~growth in~~expansion of the cannabis, hemp, and CBD ~~industry. We believe we are well known in these industries and~~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 ~~operating~~ cultivation, manufacturing, and dispensary clients who are seeking comprehensive ~~services as well as attracting newly formed clients as they enter into existing markets or newly legalized markets. We also experience revenue growth in states~~business optimization solutions. Our software solutions are designed to be scalable, and ~~countries with an established market by providing a solution to operators seeking to vertically integrate~~while mid-market and improve their business processes. We provide not only a vertically integrated solution across the cannabis, hemp, and CBD supply chain, but also provide a business intelligence capture, MJ Analytics, which provides operators with timely information about their business to allow them to run their businesses efficiently. This business intelligence capture is derived from the suite of services we provide and ~~sets us apart from competitors~~.

~~Through~~smaller customers have historically been our ~~ecosystem strategy including acquisition, investment, and partnership strategies,~~primary target segment, we are ~~creating~~focused on extending our customer reach to address the ~~backbone on which~~needs of the emerging enterprise level operator. We believe these larger multi-state/multi-vertical operations represent significant long-term future growth opportunities as the cannabis industry ~~is built, enabling~~continues to consolidate at a rapid rate. The sophistication of our platform accommodates the complexities of both multi-vertical and multi-state business needs, making us critical partners and allowing us to cultivate long-term, successful relationships with our clients.

Our platforms provide licensed businesses with a true enterprise solution for managing their inventory and compliance ~~regulation,~~ and ~~taxation. With the Akerna family~~allow government regulators to engage in accurate and real-time compliance monitoring. Key capabilities of ~~companies, we are able to provide~~ our ~~new and existing clients with full transparency through~~technology infrastructure include:

Seed-to-Sale Tracking allows the tracking of ~~organic matter~~products from ~~seed-to-sale. We believe~~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 ~~integrated ecosystem creates further value by~~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 designed solely for government regulators to maintain compliance and do not have the sophistication or functionality to provide cannabis business owners with the insights and tools for effective business management. Our seed-to-sale platforms integrate with the state Track-and-Trace compliance system, reporting in the mandated data along the supply chain while also providing ~~additional integrations and add-ons that enhance~~business owners with the capabilities to make informed business decisions based on the fully overview of their operations.

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

Single System Integration allows state-licensed clients to manage inventory, customer records, and staff in one tracking system. MJ Platform and Leaf Data Systems platforms can be fully integrated with one another to create a streamlined Seed-to-Sale/Track-and-Trace solution. Additionally, our ~~full client base. For example:~~

	●	~~our integration with tier~~ ~~one~~ ~~ERP software providers supplying sophisticated accounting solutions that collect and store business transactions to satisfy external reporting requirements;~~

	●	~~our integration with~~ ~~ove~~r 85 ~~par~~tners to provide full-service solutions at all points in the cannabis business life cycle, including compliance, hardware, banking, accounting, online ordering, payment solutions, CRM and loyalty, delivery, and business analytics;

	●	our license with ZolTrain provides our MJ Platform clients with training modules to educate their staff and improve the patient /consumer experience by pairing education with product information both in person and through digital channels;

	●	~~our Leaf Data Systems track-and-trace solution specifically customized for the State of Utah to include an electronic verification system and inventory control system, implements solo* TAG~~^TM~~, the world’s first cryptographically-secure, cannabis product authentication system, exclusively for governments as an alternative to radio-frequency identification, or RFID, tracking; and~~

	●	~~MJ Analytics, a next-generation analytics platform that offers Enterprise-level data tools and provides users with unparalleled access and insight into the cannabis supply chain, from seed to sale.~~

platforms can also be integrated with systems of numerous third-party suppliers. We ~~use~~have certified integrations with world class accounting solutions, including Sage, SAP and Netsuite.

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

Cannabis Market Insights are curated using the anonymized data aggregated through our Seed-to-Sale platform for key industry intelligence. With over $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.

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

Using our years of experience, proprietary databases, and resources to identify trends and predict changes in the cannabis industry ~~in order to~~we evolve our products and better assist our clients in operating in compliance with the applicable laws of their jurisdictions and capitalizing on commercial opportunities within the applicable regulatory framework, with accuracy, efficiency, and geographic specificity. ~~Following~~We have worked with clients and governments across the globe to create customized solutions that fit their specific regulatory and commercially compliant needs. While the majority of our ~~July 2020 acquisition~~clients are in the United States and Canada, our solutions allow cannabis businesses to operate efficiently in this fast-changing industry and comply with state, local, and federal (in countries such as Canada, Italy, Macedonia, and Colombia). Akerna and our family of ~~Ample Organics, we have~~ ~~four~~ ~~data products: The MJ Analytics, or MJA;~~companies is well-positioned to provide compliance solutions for the expanding national and~~Akerna~~Acumen Business Insights, which both leverage the extensive data captured in each of MJ Platform’s cultivation, E&I, distribution, and retail modules; AmpleData, which leverages data obtained through Canadian regulated retail channels; and Last Call Analytics, which provides retail sales analytics for alcohol brands. MJA gives MJ Platform clients access to aggregated data across their organization to keep track of emerging international legal and commercial trends, allowing for informed actionable insights at various levels within the organization, including room, location, state, brand, and administration. MJ Platform allows users to align their operational data from ~~three~~ vantage points: in real-time, past trends, and predictive future. These proprietary databases assist users in making important decisions in real-time with respect to product monitoring, tracking, planning, and pricing.
cannabis market.

Financial Results of Operations

Revenue

We generate revenue from two primary sources: (1) software and (2) consulting services. Revenue from software comprised approximately 91% and 87%of our revenue for the nine months ended September 30, 2021 and 2020, respectively. Revenue from consulting services comprised approximately 7% and 12% of our revenue for nine months ended September 30, 2021 and 2020, respectively.

Software. Our software revenue is ~~derived~~generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform^®, Ample, Trellisand ~~Trellis, our data analytics offerings, our SaaS ERP offerings for state-licensed businesses, and~~Viridian, our government regulatory platform, Leaf Data Systems, ~~our track-and-trace product for government agencies. Commercial~~and 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, ~~after the first year,~~ although we do have some multi-year commercial software contracts. Leaf Data Systems contracts are generally multi-year contracts payable annually or quarterly in advance of service. Commercial software and Leaf Data Systems contracts generally may only be terminated early for breach of contract as defined in the respective agreements. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term.

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

Other Revenue.Our other revenue is derived primarily from ~~the sale of business intelligence and data analytics products, point of sale~~point-of-sale hardware and ~~labels, including solo*TAG™ and solo*CODE™~~.other non-recurring revenue.

Cost of Revenue and Operating Expenses

Cost of Revenue

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

Product ~~and~~ Development Expenses

Our product development expenses include salaries and benefits, nearshore contractor expenses, technology expenses, and other overhead related to the ongoing maintenance of our commercial and government regulatory software platforms and planning for new software development. Product development ~~that does not qualify~~costs, other than software development expenses qualifying for ~~capitalization.~~ capitalization, are expensed as incurred. Capitalized software development costs consist primarily of employee-related costs. We devote substantial resources to enhancing and maintaining our technology infrastructure, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology.

~~Selling, General~~Sales and ~~Administrative~~Marketing Expenses

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

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

General and Administrative Expenses

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

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

Our critical accounting policies are disclosed in our ~~Annual~~Transition Report on Form 10-K for the ~~year~~six-month period ended ~~June 30,~~December 31, 2020. Since the date of the ~~Annual~~Transition Report, there have been no material changes to our critical accounting ~~policies.~~policies except for our accounting policies for warrants as disclosed in Note 9 to the condensed consolidated financial statements.

Results of Operations for the ~~Three~~Nine Months Ended September 30, ~~2020~~2021 Compared to ~~Three~~Nine Months Ended September 30, ~~2019~~ 2020

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

	Nine Months Ended September 30,						Change
	2021			2020			Period over Period
Revenues:
Software	$	12,809,841		$	8,519,635		$	4,290,206		50	%
Consulting		1,135,033			1,156,171			(21,138	)	(2	)%
Other		111,540			112,381			(841	)	(1	)%
Total revenue		14,056,414			9,788,187			4,268,227		44	%

Cost of revenues		5,339,929			4,954,721			385,208		8	%
Gross profit		8,716,485			4,833,466			3,883,019		80	%
Gross profit margin		62	%		49	%

Operating expenses:
Product development:		4,517,836			3,722,551			795,285		21	%
Sales and marketing		5,564,519			6,255,371			(690,852	)	(11	)%
General and administrative		8,306,417			9,053,476			(747,059	)	(8	)%
Depreciation and amortization		3,605,435			2,387,629			1,217,806		51	%
Total operating expenses		21,994,207			21,419,027			575,180		3	%

Loss from operations	$	(13,277,722	)	$	(16,585,561	)	$	3,307,839		(20	)%

Software Revenue

Our total software revenueincreasedto $12.8million for the nine months ended September 30, 2021from $8.5million for the nine months ended September 30, 2020, ~~as compared to the three months ended September 30, 2019:~~

Three Months Ended
September 30,

Change

2020

2019

Period over Period

Revenues:

Software
$
3,154,442

$
2,254,480

$
899,962

40
%
Consulting

331,080

831,363

(500,283
)

(60
%)
Other

228,482

107,047

121,435

113
%
Total revenue

3,714,004

3,192,890

521,114

16
%

Cost of revenues

1,739,937

1,379,701

360,236

26
%
Gross profit

1,974,067

1,813,189

160,878

9
%
Gross profit margin

53%

57%

Operating expenses:

Product development:

1,758,826

610,902

1,147,924

188
%
Sales and marketing
2,097,502

1,841,514

255,988

14 %
General and administrative

2,470,187

1,742,301

727,886

42
%
Depreciation and amortization
1,171,022

17,899

1,153,123

nm
Total operating expenses

7,497,537

4,212,616

3,284,921

78
%

Loss from operations
$
(5,523,470
)

$
(2,399,427
)
$
(3,124,043
)

130
%

~~nm – percentage change not meaningful~~

~~Total Revenue~~

~~Total revenue increased to $3.7 million~~ for ~~the three months ended September 30, 2020 from $3.2 million for the three months ended September 30, 2019,~~ anincreaseof ~~$0.5~~ $4.3million, or ~~16%.~~ ~~The increase in total revenue compared to the fiscal~~ ~~three months ended September 30, 2019~~ ~~was driven primarily by our growth achieved following our acquisition of Ample, partially offset by a decrease in consulting revenue, discussed below.~~

~~Software Revenue~~

~~Our total software revenue~~ ~~increased~~ ~~to $3.2 million for the fiscal three months ended September 30, 2020 from $2.3~~ ~~million for the three months ended September 30, 2019, for an~~ ~~increase~~ ~~of $0.9~~ ~~million, or~~ 40 50%. Software revenue accounted for85 91% and71 87% of total revenue for the ~~three~~nine months ended September 30, 2021and2020, ~~and~~ ~~2019~~, respectively. The increase in software revenue during the ~~three~~ nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was ~~primarily driven~~attributable to revenue generated from our acquisitions of Ample and Viridian in the amounts of $2.1 million and $1.9 million, respectively, as well as an increase of $0.9 million in data revenue. These increases were partially offset by ~~our acquisition~~a decrease of ~~Ample.~~

~~Software~~$0.5 million in software revenues generated from government clients which totaled ~~$0.9~~$3.0 million and $~~1.1~~$3.5 million during the ~~three~~nine months ended September 30, 2021 and 2020, ~~and2019~~, respectively. ~~Leaf Data Systems~~

Consulting Revenue

Our consulting revenue ~~decreased~~was $1.1million for the ~~three~~nine months ended September 30, ~~2020~~2021compared to ~~2019~~ primarily as a result of a decrease in the volume of change orders. Change orders represent out-of-scope functionality modifications requested by the client. Revenues earned from these change orders are recognized upon acceptance and delivery of the requested modifications. As a result, revenues from change orders vary and may be impacted by the timing of entering into agreements and the number of requested change orders in any given period.

~~Consulting Revenue~~

~~Our consulting revenue includes revenue generated from consulting services delivered to prospective and current cannabis, hemp and CBD businesses and business operators. Our consulting revenue was $0.3~~$1.2million for the ~~three~~nine months ended September 30, 2020 ~~compared to $0.8~~ ~~million for the three months ended September 30, 2019, a~~ ~~decrease~~ ~~of $0.5~~ ~~million, or~~ 60%. This decrease is mainly due to the impact of COVID-19. Consulting services are correlated to state legalizations and other regulatory expansion activity. As a result, individual year-over-year comparisons experienced variability depending on the timing of recent legislative changes. During the COVID-19 pandemic and resulting shut-down, state legislatures have turned their focus to the pandemic and tabled work on cannabis legislation, which resulted in delays in our providing consulting services during the first quarter of fiscal ~~2020~~. However, many state ballot initiatives were passed for new medical or adult-use marijuana laws in the November 2020 elections. We expect, despite the slowing of our consulting activity experienced during the pandemic, we will see increased demand for our services following the November 2020 elections.

Consulting revenue was9 8% and 2612% of total revenue for the ~~three~~nine months ended September 30, 2021and2020, ~~and~~ ~~2019~~, 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 ~~quarters in which we recognize~~percentage of consulting revenue over total revenue has varied from ~~year~~period to ~~year~~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 ~~our business intelligence and data analytics revenue,~~ retail/resale revenue, which was generated from ~~point of sale hardware, and revenue generated by the sale of solo*TAGs~~^TM~~, solo*CODEs~~^TM ~~and the related activation fees~~.point-of-sale hardware. Other revenue ~~increased~~ ~~to $0.2~~totaled $0.1 million for the ~~three~~nine months ended September 30, 2021 and2020 ~~from $0.1~~ ~~million for the three months ended September 30, 2019~~ ~~due to the acquisition of Ample. Other revenue~~ and was 6~~% and 3%~~ approximately 1% of total revenue for the ~~three~~nine months ended September 30, 2021 and 2020.

Cost of Revenue and Gross Profit

Our cost of revenue was $5.3million, or 38% of total revenue, for the nine months ended September 30, 2021 compared to $5.0million, or 51% of total revenue, for the nine months ended September 30, 2020. Our gross profit margin improved to 62% for the nine months ended September 30, 2021 from 49% for the nine months ended September 30, 2020. This improvement in gross margin was primarily due operating synergies realized from our acquired assets, our ongoing initiatives to drive operating effectiveness and acquiring additional B2B customers, of which have a higher gross margin.

Operating Expenses

Product development expense was $4.5million for thenine months ended September 30, 2021, compared to $3.7million for thenine months ended September 30, 2020, an increase of $0.8 million, or 21%. Product development expense increased primarily due the acquisitions of Ample and Viridian which resulted in a $0.5 million increase in salary-related expenses and a $0.3 million increase in stock compensation expense for the nine months ended September 30, 2021 compared to the same period in the prior year.

Sales and marketing expense was $5.6 million for the nine months ended September 30, 2021, compared to $6.3 million for the nine months ended September 30, 2020, a decrease of $0.7 million, or 11%. Sales and ~~2019. We have entered into~~marketing decreased primarily due to a ~~revenue-sharing agreement with a printer supplier, whereby our clients will acquire hardware from the supplier~~reduction in customer event spend due primarily to cancelling all in-person customer activities and the supplier will share a percentage of revenue generated by our clients with us. In accordance with GAAP, we may only recognize the portion of the revenue that the supplier shares with us pursuant to the new arrangement,events as a result ~~we expect both revenue~~of the COVID-19 pandemic.

General and ~~cost of sales to decrease in the future, with minimal effect on gross margin.~~

~~Cost of Revenue and Gross Profit~~

~~Our cost of revenue~~ ~~increased~~ ~~to $1.7~~administrative expense was $8.3 million for the ~~three~~nine months ended September 30, 2021, compared to $9.1million for the nine months ended September 30, 2020, ~~from $1.4~~a decrease of $0.7million, ~~for~~or 8%. This decrease was primarily related to a reduction in acquisition related expenses of $2.9 million and transactional costs of $0.8 million, as we completed one acquisition, Viridian, during the ~~three~~nine months ended September 30, ~~2019, an~~ ~~increase~~2021 compared to acquisitions of 26~~%. This increase was primarily due to~~Solo, Trellis, and Ample during 2020. During the addition of a subcontractor supporting our Leaf Data Systems contract with Utah, an increase in subcontractor costs to support our contract with Pennsylvania, and an increase in the cost of hosting, software and applications as a result of our increased usage fees for cloud service providers to support the growth in commercial software platform subscriptions and government regulatory platform contracts. ~~We also incurred higher direct labor costs associated with providing our consulting services of $0.2~~ ~~million.~~

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 $~~0.8~~ ~~million and $0.7~~ ~~million during the three~~nine months ended September 30, 2021, there was also a decrease of $0.4 million in rental expenses which is related to the termination of our office spaces in Denver in December 2020 and ~~2019, respectively. The increase~~Toronto in ~~the cost~~June 2021, a slight decrease of ~~government revenues incurred by us was due to the additional customer requests~~$0.2 million in salaries and overhead as a direct result of our contracts with the state of Utah and Pennsylvania, and a higher volume of ongoing support and maintenance services provided by subcontractors in connection with the contracts with Pennsylvania and Washington.

~~Operating Expenses~~

~~The following table presents operating expense line items for the three months ended September 30,~~cost-saving measures placed into service during 2020, and ~~2019 and the period-over-period dollar and percentage changes for those line~~ ~~items:~~

Three Months Ended September 30,

Change

2020

2019

Period over Period

Operating expenses:

Salary expenses, excluding Solo, Trellis, and Ample
$
884,016

$
317,377

$
566,639

179
%
Product development of Solo, Trellis, and Ample
592,740

—

253,292

nm
Other product development

282,070

—

592,740

nm
Product development

1,758,826

610,902

1,147,924

188
%
Percentage of revenue

47%

19%

Sales and marketing, excluding Solo, Trellis, and Ample

1,700,930

1,841,514

(140,584
)

(8
%)
Sales and marketing of Solo, Trellis, and Ample
396,572

—

396,572

nm
Sales and marketing
2,097,502

1,841,514

255,988

14 %
Percentage of revenue
56%

58%

General and administrative salaries, excluding Solo, Trellis, and Ample

646,530

445,647

200,883

45
%
Transaction related costs
951,865

142,437

809,428

nm
Change in fair value of contingent consideration

(389,000
)

—

(389,000
)

nm
Bad debt expense

12,450

252,809

(240,359
)

(95
%)
Restructuring costs
68,190

—

68,190

nm
General and administrative expenses of Solo, Trellis, and Ample
330,538

—

330,538

nm
General and administrative stock-based compensation
346,059

41,542

304,517

733 %)
Other general and administrative
503,555

859,866

(356,311 )
(41 %)
General and administrative

2,470,187

1,742,301

727,886

42
%
Percentage of revenue

67%

55%

Total operating expenses
$
7,497,537

$
4,212,616

$
3,284,921

78
%
Percentage of revenue

202%

132%

~~nm – percentage change not meaningful~~

~~Our operating expenses~~ ~~increased~~ ~~to $7.5~~ ~~million for the three months ended September 30, 2020~~, ~~from $4.2~~ ~~million for~~ ~~the three months ended September 30, 2019, an~~ ~~increase~~ ~~of $3.3~~ ~~million, or~~ 78~~%. The increased level of operating expenses for the~~ ~~three~~ ~~months endedSeptember 30, 2020~~, ~~was the result of~~ investments made in personnel, technology and other infrastructure as we continue to position ourselves for growth both organically and through strategic acquisitions, and transactional costs associated with acquisitions and financing activities.

~~Product development expenses~~ ~~increased~~ ~~to $1.8million for the~~ ~~three months ended September 30, 2020~~, ~~from $0.6million for the~~ ~~three months ended September 30, 2019, an~~ ~~increase~~ ~~of $1.2~~ ~~million, or188%. Salary~~bad debt expense ~~for product development functions~~ ~~increased~~ ~~by $0.6~~ ~~million, primarily due to the reduced usage of third party contractors associated with software development. Our acquisitions~~ also ~~contributed to the increase in product development spend for the three months ended September 30, 2020.~~

~~Sales and marketing expenses increased $0.3~~ ~~million during the three months ended September 30, 2020~~, ~~as compared to September 30, 2019, primarily as a result of our acquisitions.~~

~~General and administrative expenses increased to $2.5 million for the three months ended September 30, 2020~~, ~~from $1.7~~ ~~million for the three months ended September 30, 2019, an increase of $0.7~~ ~~million, or~~ 42~~%. This increase was primarily due to transactional costs we are required to expense as incurred and an increase in other general and administrative costs. During the~~ ~~three months ended September 30, 2020~~, ~~we incurred legal and other costs totaling $1.0~~ ~~million primarily in connection with our acquisition of Ample. We also recognized a $0.4~~ ~~million reduction in the estimated fair value of contingent consideration paid for our acquisition of Solo in July 2020. Bad debt expense~~ decreased by $0.2 million ~~during the~~ ~~three months ended September 30, 2020,~~ ~~as compared to~~ ~~2019~~, due to our improvement in the overall quality of our revenue and client portfolio as well as enhancement of our sales and marketing ~~team has resulted~~team. Partially offsetting these decreases is a $2.2 million restructuring charge incurred during the nine months ended September 30, 2021 related to a lease settlement agreement for relinquishing office space in ~~a steady decline in~~Toronto and the ~~number~~related write off of leasehold improvements associated with the lease termination.

Results of Operations for the Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

The following table highlights the various sources of revenues and ~~amount of delinquent accounts resulting in bad debt expense since~~expenses for the three months ended September 30, 2019. During the three months ended September 30, 2020, we have an additional $0.3 million in general and administrative expenses associated with Solo, Trellis, and Ample compared to the three months ended September 30, 2019. ~~Other general and administrative expenses decreased by $0.4~~ ~~million, most notably due to lower technology costs~~2021 as compared to the three months ended September 30, ~~2019.~~ 2020:

	Three Months Ended September 30,						Change
	2021			2020			Period over Period
Revenues:
Software	$	4,557,960		$	3,323,592		$	1,234,368		37	%
Consulting		551,402			332,587			218,815		66	%
Other		26,140			57,825			(31,685	)	(55	)%
Total revenue		5,135,502			3,714,004			1,421,498		38	%

Cost of revenues		1,971,382			1,739,937			231,445		13	%
Gross profit		3,164,120			1,974,067			1,190,053		60	%
Gross profit margin		62	%		53	%

Operating expenses:
Product development:		1,566,478			1,758,826			(192,348	)	(11	)%
Sales and marketing		2,002,461			2,097,502			(95,041	)	(5	)%
General and administrative		2,077,474			2,470,187			(392,713	)	(16	)%
Depreciation and amortization		1,238,420			1,171,022			67,398		6	%
Total operating expenses		6,884,833			7,497,537			(612,704	)	(8	)%

Loss from operations	$	(3,720,713	)	$	(5,523,470	)	$	1,802,757		(33	)%

Software Revenue

Our total software revenueincreasedto $4.6million for the three months ended September 30, 2021from $3.3million for the three months ended September 30, 2020, for an increaseof $1.2million, or 37%. Software revenue accounted for 89% and 89% of total revenue for the three months ended September 30, 2021and2020, respectively. The increase in software revenue during the three months ended September 30, 2021 was primarily attributable to revenue generated from our acquisition, Viridian, in the amount of $0.9 million as well as an increase of $0.4 million in data revenue.

Consulting Revenue

Our consulting revenue was $0.6million for the three months ended September 30, 2021compared to $0.3million for the three months ended September 30, 2020. Consulting revenue was 11% and 9% of total revenue for the three months ended September 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 September 30, 2021 and 2020 and comprised less than 1% of total revenue for the three months ended September 30, 2021 and less than 2% of total revenue for the three months ended September 30, 2020.

Cost of Revenue and Gross Profit

Our cost of revenue was $2.0million, or 38% of total revenue, for the three months ended September 30, 2021 compared to $1.7million, or 47% of total revenue, for the three months ended September 30, 2020. Our gross profit margin improved to 62% for the three months ended September 30, 2021 from 53% for the three months ended September 30, 2020. This improvement in gross margin was primarily due operating synergies realized from our acquired assets, our ongoing initiatives to drive operating effectiveness and acquiring additional B2B customers, of which have a higher gross margin.

Operating Expenses

Product development expense was $1.6million for thethree months ended September 30, 2021, compared to $1.8million for the three months ended September 30, 2020, adecreaseof $0.2 million, or 11%. Product development expense decreased as a result of slightly lower salary expense and reduced usage of third-party contractors associated with software development.

Sales and marketing expense was $2.0 million for the three months ended September 30, 2021, compared to $2.1 million for the three months ended September 30, 2020, a slight decrease of $0.1 million, or 5%. Sales and marketing decreased primarily due to a reduction in customer event spend and third-party consultants due primarily to cancelling all in-person customer activities and events as a result of the COVID-19 pandemic.

General and administrative expense was $2.1 million for the three months ended September 30, 2021, compared to $2.5million for the three months ended September 30, 2020, a decrease of $0.4million, or 16%. This decrease is primarily related to a reduction in acquisition related expenses of $0.8 million, as we completed one acquisition, Viridian, during the nine months ended September 30, 2021 compared to acquisitions of Solo, Trellis, and Ample during 2020. During the three months ended September 30, 2021, there was also a decrease of $0.3 million in rental expenses compared to the three months ended September 30, 2020 which is related to the termination of our office spaces in Denver in December 2020 and Toronto in June 2021. These decreases were partially offset by slight increases in franchise and sales and use tax, as well as bad debt expense.

Non-GAAP Financial Measures

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

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

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

2632

EBITDA and Adjusted EBITDA

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

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

	●	~~share-based~~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 ~~debt issuance when we elect~~non-recurring financing, including fees incurred as a direct result of electing the fair value option to account for ~~the~~our debt ~~instrument because if we had not elected the fair value option such costs would be recognized as an adjustment to the effective interest and excluded from EBITDA;~~instruments;
	●	restructuring charges, which includes costs ~~because~~to terminate a lease and the related writeoff of leasehold improvements and furniture, as we believe these costs are not representative of operating performance; ~~and~~
	●	gain on forgiveness of PPP loan, as this is a one-time forgiveness of debt that is not recurring across all periods and we believe inclusion of the gain is not representative of operating performance;
	●	equity in 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.~~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.

The reconciliation of net loss to EBITDA and Adjusted EBITDA ~~for the three months ended September 30, 2020and~~ ~~2019~~is as follows:

							Nine Months Ended September 30,
	2020			2019			2021			2020
Net loss	$	(4,750,691	)	$	(2,326,332	)	$	(14,116,401	)	$	(14,657,539	)
Adjustments:
Interest (income) expense and change in fair value of convertible notes		(774,313	)		(73,382	)
Interest expense (income)								1,175,789			(27,751	)
Change in fair value of convertible notes								2,030,904			(1,544,000	)
Change in fair value of derivative liability								(151,175)			(392,605	)
Income tax expense								10,570			30,985
Depreciation and amortization		1,171,022			17,899			3,605,435			2,387,629
EBITDA	$	(4,353,982	)	$	(2,381,815	)	$	(7,444,878	)	$	(14,203,281	)

Stock-based compensation expense		681,419			161,165			1,502,339			1,354,898
Business combination and merger related costs		951,865			—			290,357			3,197,226
Debt issuance costs related to fair value option debt instruments		43,167			—
Non-recurring financing fees								410,362			1,220,557
Restructuring charges		68,190			—			2,453,776			68,190
Changes in fair value of contingent consideration		(389,000	)		—			—			(1,387,000	)
Gain on forgiveness of PPP Loan								(2,234,730	)		—
Equity in losses of investee		1,534			—			7,564			5,226
Adjusted EBITDA	$	(2,996,807	)	$	(2,220,650	)	$	(5,015,210	)	$	(9,744,184	)

Since our inception, we have incurred recurring operating losses, used cash infrom operations, and relied on capital raising transactions to continue ongoing operations. During the three and nine months ended September 30, ~~2020,~~2021, we incurred a loss from operations of $~~5.5~~3.7 million and $13.3 million, respectively, and for the nine months ended September 30, 2021, we used cash in operations of $~~4.2~~$5.1 million. As of September 30, ~~2020,~~2021, we had cash of $~~14.3~~$9.6 million, excluding restricted cash, and working capital of $~~0.9~~$7.7 million.

During the ~~quarter~~September months ended September 30, ~~2020,~~2021, the Company incurred a number of ~~one-time,~~one-time, non-recurring expenses of approximately $~~1.1~~ ~~million.~~2.9 million. These expenses include business combination ~~expenses,~~and merger related costs, restructuring charges, and other non-recurring charges. ~~Additionally, on October~~

On July 23, 2021, we entered into an Equity Distribution Agreement with Oppenheimer & Co. Inc. and A.G.P./Alliance Global Partners ("ATM Program"). Pursuant to the terms of the Agreement, we may offer and sell from time to time, up to $25 million of shares of our common stock. As of September 30, ~~2020,~~2021, we ~~closed on~~have raised $1.9 million through the ~~public offering~~issuance of 5 ~~million~~556,388 shares through the ATM program. While no assurance can be provided that we will be able to raise further capital under the program, we intend to use the net proceeds from the sale of our shares of common stock, if any, for general corporate purposes, including working capital, marketing, product development, capital expenditures and merger and acquisition activities.

Subsequent to yearend, on October 5, 2021, we entered into a securities purchase agreement with the two institutional investors that held the Company's convertible notes issued in June of 2020 (the "2020 Notes") to sell senior secured notes in a private placement (the "Senior Convertible Notes"). The Senior Convertible Notes have an aggregate principal amount of $20,000,000, an aggregate original issue discount of 10%, and rank senior to all our other outstanding and future indebtedness. Approximately $3.3 million of the proceeds from the Senior Convertible Notes were used to payoff the 2020 Notes, which were then to be cancelled. The net proceeds from the issuance of the Senior Convertible Notes was approximately $~~11.0~~14.6 million, ~~net~~following the original issue discount and deductions for expenses and paydown of ~~offering costs, which~~the 2020 Notes. These net proceeds will be used ~~for general corporate purposes. During~~to support Akerna's ongoing growth initiatives and continued investment in current and future technology infrastructure. The Senior Convertible Notes are convertible into shares of common stock of Akerna at a conversion price of $4.05 per share. The Senior Convertible Notes mature on October 5, 2024 and are to be repaid in monthly installments beginning on January 1, 2022. The Senior Convertible Notes can be repaid in common shares or cash.

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, the ~~three months ended September 30, 2020, we implemented a number of cost reduction~~funds raised from the ATM Program and the Senior Convertible Notes, as well as our ongoing initiatives ~~reducing costs and identifying cost savings~~to drive operating effectiveness, that we ~~expect to result in annual savings of an additional $3.0~~ ~~million to $4.0~~ ~~million. As a result, we expect that our current~~have sufficient working capital ~~is sufficient~~ to ~~fund our~~sustain operations ~~and commitments~~ for a period of at least twelve months from the date ~~these~~that our September 30, 2021 financial statements ~~are~~were issued.

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 resources.

Our cash and restricted cash balances were ~~$14.8 million and $24.7~~$9.6 million as of September 30, ~~2020 and 2019, respectively.~~2021. Cash flow information for the ~~three~~nine months ended September 30, ~~2020,~~2021 and ~~2019~~2020 is as follows:

Sources and Uses of Cash for the ~~three~~Nine months ended September 30, ~~2020~~2021and ~~2019~~2020

Net cash used in operating activities ~~increased~~ decreasedto $~~4.2~~$5.1million during the ~~three~~nine months ended September 30, 2021, from $12.5million during the nine months ended September 30, 2020, ~~from $3.1 million during the three months ended September 30, 2019, an~~ ~~increase~~adecreaseof $~~1.0~~$7.3million. The ~~increase~~decrease in cash used in operating activities was primarily ~~driven by the increase~~due to improvements in ~~net loss~~cash flows from ~~operations of $3.1 million described above, partially offset by the effect of the timing of cash received from clients relative to when we recognize revenue.~~working capital changes.

Net cash used in investing activities totaled $~~5.7~~$3.4million during the ~~three~~nine months ended September 30, 2021, as a result of amounts invested in the development of our software products. Net cash used by investing activities during the nine months ended September 30, 2020,was $8.0million as a result of acquisitions and investment in software products.

Net cash provided by financing activities totaled $0.2 million during the nine months ended September 30, 2021 and represents proceeds from our ATM program stock offerings of $1.8 million offset by cash pay downs on our convertible debt in the amount of $1.2 million and $0.4 million of cash paid for the value of shares withheld for tax withholdings on restricted stock units that vested. Our net cash provided by financing activities was $15.9 million for the September months ended September 30, 2020 as a result of net ~~cash paid~~proceeds from our convertible debt offering.

As discussed in Note 9 to the accompanying financial statements, we determined that our Private Warrants, previously recorded in stockholders’ equity, were not properly classified as ~~consideration~~derivative liabilities, which resulted in primarily the overstatement of net losses attributable to Akerna’s shareholders for each of the ~~Ample acquisition~~reporting periods identified in that note. We assessed the materiality of these errors on prior periods’ financial statements and ~~amounts invested~~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 ~~development of our software products. Net cash used by investing activities during~~period in which the ~~three months ended September 30, 2019~~,~~was $0.5~~ ~~million as~~errors were identified. In accordance with GAAP, we are revising the prior periods’ financial statements when they are next issued.

As a result of ~~amounts invested~~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 previously filed Form 10-KT for the ~~development of our software products~~.

~~Net cash used in financing activities totaled $13,000~~ ~~during~~six-month transition period ended December 31, 2020 have been revised. Our net loss for the ~~three months~~year ended ~~September~~June 30, 2019 was revised from $12,403,215 to $14,419,027.Our net loss for the year ended June 30, 2020 ~~and represents cash paid in connection with our common stock offering that closed~~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 fair value of derivative liability for the Private Warrants.The revisions had no impact on ~~October 30, 2020. Net cash provided by financing activities totaled $4.2~~ ~~million and represents the proceeds~~revenue, gross profit, operating expenses or losses from ~~the exercise of warrants.~~
operations.

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

We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule15d-15(e) under the Exchange Act) as of September 30, ~~2020~~2021 with the participation, and under the supervision, of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, ~~2020,~~2021, our disclosure controls and procedures were ineffective in ensuring that: (i) information required to be disclosed by us in reports that we file or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

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 ~~existed~~ 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:

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

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

We believe these actions will remediate the control weaknesses. However, the weaknesses will not be considered fully remediated until the applicable controls operate for a sufficient period of time for management to test the results for operating effectiveness. Once implemented, we intend to continue periodic testing and reporting of the internal controls to ensure continuity of compliance.

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.

During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than the remediation of a previously identified material weakness as ~~described above~~discussed below.

We recognize the importance of the control environment as it sets the overall tone for the organization and is the foundation for all other components of internal control. Consequently, we designed and implemented remediation measures to address the material weakness related to our ~~remediation efforts.~~ improper evaluation of accounting for complex instruments that was identified during Q2 2021. In light of this material weakness, we contracted an outside consultant to assist in determining the appropriate accounting for complex instruments and have sufficiently enhanced our internal controls and process for accounting for the warrants.

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.

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2020			2019			2021			2020
Cash flows from operating activities
Net loss	$	(4,750,691	)	$	(2,326,332	)	$	(14,116,401	)	$	(14,657,539	)
Adjustment to reconcile net loss to net cash used in operating activities:
Equity in losses of investment		1,534			—			7,564			5,226
Bad debt		12,450			252,809			254,029			382,607
Stock-based compensation expense		681,419			161,165			1,584,751			1,524,935
Loss on write off of fixed assets								1,045,179			0—
Gain on forgiveness of PPP loan								(2,234,730	)		0—
Amortization of deferred contract cost								356,528			0—
Non-cash interest expense								1,161,393			0—
Depreciation and amortization		1,171,022			17,899			3,605,434			2,387,629
Debt issuance costs								0—			1,220,557
Foreign currency loss		4,901			—			21,496			4,901
Change in fair value of convertible notes		(778,000	)		—			2,030,904			(1,544,000	)
Change in fair value of derivative liability								(151,175	)		(392,605	)
Change in fair value of contingent consideration		(389,000	)		—			0—			(1,387,000	)
Changes in operating assets and liabilities:
Accounts receivable		(9,298	)		(1,508,217	)		462,482			(423,850	)
Prepaid expenses and other current assets		(74,023	)		(292,272	)		66,246			(232,180	)
Accounts payable and accrued liabilities		(296,802	)		274,566			1,756,672			914,712
Deferred revenue		245,329			278,208			(927,916	)		(261,760)
Net cash used in operating activities		(4,181,159	)		(3,142,174	)		(5,077,544	)		(12,458,367	)

Cash flows from investing activities
Developed software additions		(624,863	)		(519,739	)		(3,354,453	)		(2,698,379	)
Furniture, fixtures, and equipment additions		(12,203	)		—			(11,535	)		(168,839	)
Cash paid for business combination, net of cash acquired		(5,067,740	)		—			0—			(5,142,159	)
Net cash used in investing activities		(5,704,806	)		(519,739	)		(3,365,988	)		(8,009,377	)

Cash flows from financing activities
Cash paid for deferred stock offering costs		(12,668	)		—
Cash received in connection with exercise of warrants		—			4,242,454
Net cash (used in) provided by financing activities		(12,668	)		4,242,454
Value of shares withheld for related to tax withholdings								(437,554	)		0—
Proceeds from stock offering, net								1,828,116			0—
Proceeds from issuance of long term debt								0—			17,164,600
Payments of principal amounts of debt								(1,164,706	)		0—
Cash paid for debt issuance costs								0—			(1,220,557	)
Net cash provided by financing activities								225,856			15,944,043
Effect of exchange rate changes on cash and restricted cash		663			—			(5,915	)		662

Net change in cash and restricted cash		(9,897,970	)		580,541			(8,223,591	)		(4,523,039	)

Cash and restricted cash - beginning of period		24,655,828			22,367,289			18,340,640			19,280,897

Cash and restricted cash - end of period	$	14,757,858		$	22,947,830		$	10,117,049		$	14,757,858

Cash paid for interest		—			1,974			105,882			1,559

Cash paid for taxes								10,570			30,985
Supplemental Disclosure of non-cash investing and financing activity:
Capitalized software included in accrued expense		807,218			—
Settlement of convertible notes in common stock								10,448,932			0—
Conversion of exchangeable shares to common stock								17,452,497			4,798,208
Settlement of other liabilities in common stock								377,315			0—
Acquisition of noncontrolling interest		4,695,437			—			0—			4,695,357
Special voting preferred stock issued in business combination		25,203,490			—			0—			25,203,490
Conversion of exchangeable shares to common stock		4,798,271			—
Assets acquired and liabilities assumed in business combinations:
Cash								0—			445,269
Accounts receivable								556,234			994,710
Prepaid expenses and other current assets								148,417			176,441
Fixed assets								0—			1,329,406
Intangible assets								1,733,000			12,180,000
Goodwill								4,915,491			46,500,030
Accounts payable and accrued liabilities								349,735			2,414,930
Deferred revenue								1,001,408			580,531
Contingent consideration								0—			2,204,000

	Three Months Ended September 30, 2020
	As reported			Adjustment		As revised
Consolidated Statements of Operations
Change in fair value of derivative liability	$	0—		$	762,646	$	762,646
Net loss attributable to Akerna shareholders		(4,741,876	)		762,646		(3,979,230	)
Net loss per share		(0.28	)		0—		(0.28	)

	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		(1.01	)		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
Accumulated deficit		(57,872,599	)		693,074			(57,179,525	)

	Three Months Ended September 30,
	2020		2019
Shares issuable upon exchange of Exchangeable Shares		2,667,349	—
Shares of common stock issuable in upon conversion of Convertible Notes		1,542,632	—
Warrants		5,813,804	5,814,205
Unvested restricted stock units		824,143	—
Unvested restricted stock awards		64,296	215,063
Total		10,912,224	6,029,268

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

Balance – July 1, 2020	$	—			13,203,806	$	1,321	$	72,906,924	$	63,000		$	(41,101,091	)	$	31,870,154		$	4,704,252		$	36,574,406
Special voting preferred stock issued in business combination		25,203,490			—		—		—		—			—			25,203,490			—			25,203,490
Conversion of Exchangeable Shares to common stock		(4,798,271	)		627,225		63		4,798,208		—			—			—			—			—
Acquisition of noncontrolling interest		—			800,000		80		4,695,357		—			—			4,695,437			(4,695,437	)		—
Amortization of stock-based compensation		—			—		—		764,351		—			—			764,351			—			764,351
Restricted stock unit vesting		—			3,025		—		—		—			—			—			—			—
Change in fair value of convertible notes		—			—		—		—		(70,000	)		—			(70,000	)		—			(70,000	)
Net loss		—			—		—		—		—			(4,741,876	)		(4,741,876	)		(8,815	)		(4,750,691	)
Balance – September 30, 2020	$	20,405,219			14,634,056	$	1,464	$	83,164,840	$	(7,000	)	$	(45,842,967	)	$	57,721,556		$	—		$	57,721,556

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

Balance – July 1, 2019	$	—		10,589,746	$	1,059	$	47,325,421	$	—	$	(25,566,746	)	$	21,759,734		$	—	$	21,759,734
Amortization of stock-based compensation		—		—		—		161,165		—		—			161,165			—		161,165
Cash received in connection with exercise of warrants		—		368,910		37		4,242,417		—		—			4,242,454			—		4,242,454
Net loss		—		—		—		—		—		(2,326,332	)		(2,326,332	)		—		(2,326,332	)
Balance – September 30, 2019	$	—		10,958,656	$	1,096	$	51,729,003	$	—	$	(27,893,078	)	$	23,837,021		$	—	$	23,837,021

Fair value balance as of June 30, 2020	$	14,131,000
Change in fair value reported in the statements of operations		(778,000	)
Change in fair value reported in other comprehensive income		70,000
Fair value balance as of September 30, 2020	$	13,423,000


Fair Value Assumptions - Convertible Notes	September 30, 2020			June 30, 2020
Face value principal payable	$	17,000,000		$	17,000,000
Original conversion price	$	11.50		$	11.50
Value of Common Stock	$	3.64		$	8.80
Expected term (years)		2.67			2.90
Volatility		68	%		45	%
Market yield		28.0	%		23.9	%
Risk free rate		0.1% to 0.2	%		0.2	%

	As of September 30,
	2021		2020
Shares issuable upon exchange of Exchangeable Shares		385,947	2,667,349
Shares of common stock issuable upon conversion of Convertible Notes		1,278,421	1,542,632
Warrants		5,813,804	5,813,804
Unvested restricted stock units		859,860	824,143
Unvested restricted stock awards		32,394	64,296
Total		8,370,426	10,912,224

Three months ending December 31, 2020	$	226,687
2021		918,847
2022		439,633
2023		421,418
2024		426,495
2025		464,575
Thereafter		983,731
Total	$	3,881,386

	Three Months Ended September 30, 2019
	As reported			Adjustment			As revised
Condensed Consolidated Statements of Operations
Cost of revenue	$	1,397,361		$	(17,660	)	$	1,379,701
Gross profit		1,795,529			17,660			1,813,189
Product development		1,130,880			(519,978	)		610,902
Selling, general and administrative		3,583,815			17,899			3,601,714
Net loss		(2,846,071	)		519,739			(2,326,332	)
Net loss per share		(0.26	)		—			(0.21	)

	Three Months Ended December 31, 2019
	As reported			Adjustment			As revised
Condensed Consolidated Statements of Operations
Cost of revenue	$	1,638,840		$	(23,601	)	$	1,615,239
Gross profit		1,667,363			23,601			1,690,964
Product development		1,261,509			(638,008	)		623,501
Selling, general and administrative		4,796,404			86,768			4,883,172
Net loss		(4,338,536	)		574,841			(3,763,695	)
Net loss per share		(0.40	)		—			(0.34	)

	Six Months Ended December 31, 2019
	As reported			Adjustment			As revised
Condensed Consolidated Statements of Operations
Cost of revenue	$	3,036,201		$	(41,261	)	$	2,994,940
Gross profit		3,462,892			41,261			3,504,153
Product development		2,392,389			(1,157,986	)		1,234,403
Selling, general and administrative		8,380,219			104,667			8,484,886
Net loss		(7,184,607	)		1,094,580			(6,090,027	)
Net loss per share		(0.66	)		—			(0.56	)

	Three Months Ended March 31, 2020
	As reported			Adjustment			As revised
Condensed Consolidated Statement of Operations
Cost of revenue	$	1,420,909		$	(24,690	)	$	1,396,219
Gross profit		1,649,637			24,690			1,674,327
Product development		1,632,353			(757,566	)		874,787
Selling, general and administrative		5,500,837			177,405			5,678,242
Net loss		(5,348,980	)		604,851			(4,744,129	)
Net loss per share		(0.43	)		—			(0.38	)

	Nine Months Ended March 31, 2020
	As reported			Adjustment			As revised
Condensed Consolidated Statements of Operations
Cost of revenue	$	4,457,110		$	(65,951	)	$	4,391,159
Gross profit		5,112,529			65,951			5,178,480
Product development		4,024,742			(1,915,552	)		2,109,190
Selling, general and administrative		13,881,056			282,072			14,163,128
Net loss		(12,533,587	)		1,699,431			(10,834,156	)
Net loss per share		(1.11	)		—			(0.96	)

3.1		Amended and Restated Certificate of Incorporation of Akerna Corp. (incorporated by reference to Exhibit 3.1 to Akerna Corp.’s Form 8-K as filed with the Commission on June 21, 2019)
3.2		Amended and Restated Bylaws of Akerna Corp. (incorporated by reference to Exhibit ~~3.1~~3.2 to Akerna Corp.’s Form ~~8-K~~10-KT as filed with the Commission on ~~June 21, 2019)~~March 31, 2021)
~~3.3~~		~~Certificate of Designation for the Special Voting Share (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Akerna on July 8, 2020)~~
~~10.1~~31.1		~~Exchangeable Share Support Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Akerna on July 8, 2020)~~
~~10.2~~		~~Escrow Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Akerna on July 8, 2020)~~
~~10.3~~		~~Rights Indenture (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by Akerna on July 8, 2020)~~
~~31.1~~		Section 302 Certification of Principal Executive Officer.
31.2		Section 302 Certification of Principal Financial Officer.
32.1		Section 906 Certification of Principal Executive Officer
32.2		Section 906 Certification of Principal Financial Officer.
101		XBRL (Extensible Business Reporting Language). The following materials from Akerna Corp’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, ~~2020,~~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)

		November 12, 2021
	~~November 16, 2020~~
	By:	/s/ John Fowle
	~~By:~~	John Fowle,
		Chief Financial Officer (Principal Financial and Accounting Officer)

		November ~~16, 2020~~ 12, 2021

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