American Bitcoin Corp.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023, and the related notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Akerna Corp., herein referred to as “we”, “us”, “our,” the “Company” or “Akerna”, through our wholly-owned subsidiaries MJ Freeway, LLC (“MJF”), Ample Organics, Inc. (“Ample”), Trellis Solutions, Inc. (“Trellis”), solo sciences, inc. (“Solo”) and Viridian Sciences Inc. (“Viridian”) provides software as a service (“SaaS”) solutions within the cannabis industry that enable regulatory compliance and inventory management.

Forward-Looking Statements

This Quarterly Report on Form 10-Q including all exhibits hereto contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding future events or our future results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management. In some cases, forward-looking statements can be identified because they contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “likely,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements are based on information available to our management as of the date of this Quarterly Report and our 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. Important factors that could cause such differences include, but are not limited to:

• Our merger transaction (the “Merger”) with Gryphon Digital Mining Inc. (“Gryphon”) is subject to a number of risks, including risks regarding whether the Merger will be completed, the timing for completion and the market price of the common stock following completion of the Merger;
• our sale transaction (the “Sale Transaction”) with MJ Freeway Acquisition Co (“MJ Acquisition”), an affiliate of Alleaves, Inc., (“Alleaves”) is subject to a number of risks, including risks regarding whether the Sale Transaction will be completed and the timing for completion;
• our Merger and Sale Transaction are subject two lawsuits filed on behalf of stockholders of the Company which could affect our ability to close either transaction;
• our ability to continue as a going concern and manage our cash flow;
• our ability to sustain revenues, to achieve or maintain profitability, and to effectively manage our 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;
• our ability to respond to changes within the cannabis industry, including legal and regulatory changes;
• the effects of adverse changes in, or the enforcement of, federal laws regarding our clients’ cannabis operations or our receipt of proceeds from such operations;
• our ability to manage unique risks and uncertainties related to government contracts;
• our ability to manage and protect our information technology systems;
• our ability to maintain and expand our strategic relationships with third parties;
• our ability to deliver our solutions to clients without disruption or delay;
• our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance;
• our ability to expand our international reach;
• our ability to retain or recruit officers, key employees, and directors;
• our ability to raise additional capital or obtain financing in the future;
• our 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 and meet ongoing covenants;
• risks related to our shares of common stock remaining listed on the Nasdaq Capital Market;
• other factors discussed in other sections of this Quarterly Report on Form 10-Q, including the sections of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Part II, Item 1A. “Risk Factors” and in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission, or the SEC, on March 20, 2023 under Part I, Item 1A, “Risk Factors.”

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

Business Overview

Akerna is a leading provider of software solutions within the cannabis industry that enable regulatory compliance and inventory management through our wholly-owned subsidiaries MJF, Ample, Trellis, Solo and Viridian. Our proprietary suite of solutions are adaptable for industries in which interfacing with government regulatory agencies for compliance purposes is required, or where the tracking of organic materials from seed or plant to end products is desired. We also develop products intended to assist states in monitoring licensed businesses’ compliance with state regulations and to help state-licensed businesses operate in compliance with such law. We provide our commercial software platform, MJ Platform®, Trellis®, Ample and Viridian to state-licensed businesses, and our regulatory software platform, Leaf Data Systems®, to state government regulatory agencies. Our MJF, Ample, Solo and Trellis solutions are considered non-enterprise offerings (“Non- Enterprise”) that meet the needs of our small and medium business (“SMB”) and government regulatory agency customers while our Viridian solutions are considered enterprise offerings (“Enterprise”). We offer our software solutions to our customers as a subscription-based service. Subscription fees are based upon the chosen package which includes differentiated platform capabilities, support and user accounts. As customers recognize the value of our platform, we increasingly engage with them to facilitate broad adoption across other parts of their business.

As discussed in further detail below, we committed to a strategic shift in business strategy that resulted in the disposition and sale of two of our business units, The NAV People, Inc. d.b.a. 365 Cannabis (“365 Cannabis”) and Last Call Analytics (“LCA”), in January of 2023. The sale of 365 Cannabis in addition to the planned discontinuation of Viridian represents our exit from the Enterprise software business. The sale of LCA, also in January 2023, represents a sale of certain non-core assets in advance of the Sale Transaction (as defined below) for our remaining SMB and government regulatory software service business conducted through MJF and Ample. Absent any offers for the acquisition of our Solo and Trellis platforms prior to the end of the second quarter of 2023, we plan to discontinue these business units as most of their contracts with existing clients expired in the second quarter of 2023. We have terminated these businesses during the third quarter of 2023 in advance of the Merger and Sale Transaction.

Key Developments

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

Strategic Shift in Business Strategy

During the fourth quarter of 2022, we committed to a number of significant actions described below that collectively represent a strategic shift in our business strategy for 2023 and beyond.

Exiting the Enterprise Software Business

The development of our Enterprise software business unit, which began with the acquisitions of Viridian and 365 Cannabis in 2021, did not achieve a sustainable scale in a timely manner consistent with our original plans. Accordingly, we committed to an effort to market this business unit during the fourth quarter and on January 11, 2023, we completed the sale of 365 Cannabis to 365 Holdco (the “Buyers”) pursuant to a stock purchase agreement (the “365 SPA”) for (i) cash in the amount of $0.5 million and the (ii) the termination and release of our obligation to the Buyers for contingent consideration in connection with our original acquisition of 365 Cannabis from the Buyers in 2021(the “Earn-out Obligation”). In accordance with the 365 SPA, we and the Buyers agreed that the value of the Earn-out Obligation was $2.3 million for purposes of the sale of 365 Cannabis and was reflected on our condensed consolidated balance sheets as Contingent consideration payable on December 31, 2022. In connection with the sale of 365 Cannabis, we terminated certain employees that were not requested to transfer with the business by the Buyers or whose positions were no longer necessary to support our reduced level of operations. We incurred and paid restructuring charges associated with this action for less that $0.1 million, primarily in the form of severance and related employee benefits, during the first quarter of 2023. The charges were included as a component of Cost of revenues in our condensed consolidated statements of operations.

While we explored similar sale options for Viridian, we were unable to commit to any definitive transaction. Accordingly, we informed Viridian’s customers that we do not plan to continue software and support services beyond the date of existing contracts, most of which expired during the first half of 2023. With the sale of 365 Cannabis and our commitment to wind down the operations of Viridian, we have effectively exited the Enterprise software business. Accordingly, we have suspended efforts to seek any new revenue generating opportunities and will only service the existing customers of Viridian in connection with our contractual commitments. We have terminated this business during the third quarter of 2023 in advance of the Merger and Sale Transaction.

Disposal of Non-Core SMB Software Products and Brands

In addition to the our exit from the Enterprise software business, we initiated efforts to explore a sales process for the non-core components and brands of our SMB/Non-Enterprise business unit, including Trellis, a cultivation and compliance software platform, Solo, a seed-to-sale tagging and tracking software platform and LCA, a retail analytics platform and wholly-owned subsidiary of Ample. On January 31, 2023, we completed the sale of LCA for cash in the amount of $0.1 million. While we pursued sale opportunities for Trellis and Solo, we were ultimately unable to commit to any definitive transactions. Accordingly, we have communicated with the remaining customers of those businesses that we will discontinue software service and support upon the expiration of existing contracts, most of which occurred during the first half of 2023. Similar to Viridian, as discussed above, we have suspended efforts to seek any new revenue generating opportunities and will only service the existing customers of Solo and Trellis in connection with our contractual commitments. We have terminated these businesses during the third quarter of 2023 in advance of the Merger and Sale Transaction.

Exit Strategy

With the completion of the sales of 365 Cannabis and LCA and the termination of operations and service associated with Viridian, Solo and Trellis, our remaining core SMB and governmental business unit is comprised of MJF and Ample. Concurrent with the actions described above, we entered into letters of intent with two unrelated parties in the fourth quarter of 2022 to (i) explore the sale of our remaining core SMB and governmental business unit and (ii) realize the potential value of our publicly-held holding company through a merger or similar transaction. Collectively, pursuit of these transactions reflects our intention to fully exit the SaaS industry.

On January 27, 2023, we entered into a securities purchase agreement (“MJF-Ample SPA”) with POSaBIT Systems Corp (“POSaBIT”) to sell MJF and Ample for $4.0 million in cash. Subsequently, we received a superior offer from Alleaves, as described below, which was presented to POSaBIT for an opportunity to match or exceed Alleave’s offer in accordance with the MJF-Ample SPA. POSaBIT ultimately declined to present a counter-offer and on April 5, 2023, we terminated the MJF-Ample SPA. As a result of the termination, Akerna paid POSaBIT a termination fee and reimbursement for expenses of $0.2 million in June 2023. These costs were included as Other expense, net in our condensed consolidated statements of operations.

On January 27, 2023, we entered into an agreement and plan of merger (the “Merger Agreement”) with Gryphon and Akerna Merger Co. (“Akerna Merger”)(the “Merger”). Upon the terms and subject to the satisfaction of the conditions provided in the Merger Agreement, including the approval of the transaction by Akerna’s and Gryphon’s stockholders, the Merger will be effectuated with Akerna Merger merging with and into Gryphon, with Gryphon surviving the Merger as a wholly-owned subsidiary of Akerna. Following the closing of the Merger, the former Gryphon and Akerna stockholders immediately before the Merger are expected to own approximately 92.5 percent and 7.5 percent, respectively, of the outstanding capital stock on a fully diluted basis. Upon completion of the Merger, Akerna will change its name to Gryphon Digital Mining, Inc. The closing of the Merger is subject to customary closing conditions including the required approval of the stockholders of Akerna and Gryphon, the approval of the Nasdaq Capital Market (the “Nasdaq Market”) of the continued listing of Gryphon after the closing of the Merger and the simultaneous closing of the Sale Transaction, among others. We and Gryphon may terminate the Merger upon mutual consent and either party may terminate the Merger unilaterally under certain conditions. In the event either party terminates the Merger pursuant to certain conditions, we will be required to pay Gryphon a termination fee of $275,000 less any reimbursed expenses. The Merger is expected to be treated by Akerna as a reverse merger, or a change of control, whereby the stockholders of Gryphon will have majority ownership and control of Akerna after the transaction is complete.

On April 28, 2023, we entered into a securities purchase agreement (the “SPA”) with MJ Freeway Acquisition Co. (“MJ Acquisition”), an affiliate of Alleaves. Upon the terms and subject to the satisfaction of the conditions described in the SPA, including approval of the transaction by Akerna’s stockholders, Akerna will sell MJF and Ample to MJ Acquisition for a purchase price of $5.0 million, consisting of $4.0 million in cash at closing and a loan by MJ Acquisition to Akerna in the principal amount of $1.0 million evidenced by a note and security documents (as described in detail below) with such note to be deemed paid in full upon closing (the “Sale Transaction”). The purchase price is subject to adjustment at closing of the Sale Transaction attributable to variances from target working capital (as set forth in the SPA) and further adjustment post-closing upon delivery of a post-closing statement by MJ Acquisition within 75 days after the closing subject to a $0.5 million cap on any post-closing working capital adjustments. The closing of the Sale Transaction is subject to customary closing conditions as well as the required approval of the stockholders of Akerna and the simultaneous closing of the merger transaction, as described below. The obligation of MJ Acquisition to close on the Sale Transaction is also subject to satisfaction of certain additional conditions regarding employee retention and contractual matters associated with MJF’s and Ample’s customers, among others. Under the SPA, Akerna and MJ Acquisition have agreed to provide limited indemnification to each other with respect to certain tax matters, in each case capped at a maximum amount of $0.5 million. We or MJ Acquisition may terminate the SPA upon mutual consent and either party may terminate the SPA unilaterally under certain conditions as described in the SPA. In the event that MJ Acquisition or Akerna terminates the SPA pursuant to certain of the sections set forth above, Akerna will be required to pay MJ Acquisition a termination fee of $290,000 and reimburse MJ Acquisition for its reasonable fees and expenses up to $60,000.

On June 14, 2023, the Merger Agreement was amended to add the defined term “Closing Acquiror Share Price” and amend and restate the definition of “Merger Consideration.” The term “Closing Acquiror Share Price” means the last reported sale price per share of Akerna Common Stock on Nasdaq on the second business day prior to the closing date of the Merger and the term “Merger Consideration” means the greater of (a) a number of shares of Akerna Common Stock equal to (i) the quotient obtained by dividing (A) Akerna’s fully diluted share number, as defined in the Merger Agreement, by (B) 0.075, minus (ii) the Akerna’s fully diluted share number minus (iii) the adjusted warrant share reserve number, as defined in the Merger Agreement, and (b) a number of shares of Akerna’s Common Stock equal to the quotient obtained by dividing (i) $115,625,000 by (ii) the Closing Acquiror Share Price. The amendment effectively sets a floor of $115.6 million for the value attributable to Gryphon in the determination of post-Merger ownership.

Exchange Agreements

In connection with and in support of the Sale Transaction and the Merger, we and each of the holders of the 2021 Senior Secured Convertible Notes (the “Senior Convertible Notes”) entered into exchange agreements (the “Exchange Agreements”) whereby the holders would ultimately convert the principal amounts of each of their note holdings to a level that would represent 19.9 percent of the outstanding shares of our common stock, $0.0001 par value (“Common Stock”) prior to the closing of the Sale Transaction and the Merger. Immediately prior to the stockholder vote required for the closing of those transaction, the remaining Senior Convertible Notes outstanding would be converted into a special class of exchangeable preferred stock to facilitate the required stockholder vote and then be converted into shares of our Common Stock subject to the Merger. For a limited period, the conversion price of the Senior Convertible Notes was lowered to $1.20 per share from $4.75 per share. During the three months ended March 31, 2023, the holders of the Senior Convertible Notes converted a total of $1.4 million of principal for 1,164,251 shares of Common Stock at the lowered price of $1.20 per share. In connection with an equity offering in June 2023 (see below), the conversion price was further reduced to $0.50 per share. We anticipate scheduling a meeting of stockholders during the third quarter of 2023 to approve the Sale Transaction and the Merger and we expect these transactions to close shortly thereafter.

Secured Note and Ancillary Agreements

On May 3, 2023, we received a loan in the amount of $1.0 million from MJ Acquisition in connection with the Sale Transaction. Accordingly, we and MJ Acquisition entered into a $1.0 million secured promissory note (the “MJA Note”). The MJA Note bears simple interest at the rate of ten percent (10%) per annum from the date of issuance until repayment of the MJA Note which will be due and payable on April 28, 2024, or, upon completion Sale Transaction, in which case the MJA Note shall be deemed paid in full. Akerna’s obligations under the MJA Note have been secured pursuant to a Security and Pledge Agreement (the “Security Agreement”). The Security Agreement creates a security interest in all of the personal property of Akerna and certain of its subsidiaries. In addition, certain subsidiaries of Akerna entered into a guaranty agreement with MJ Acquisition (the “Guaranty Agreement”) under which they will guarantee the obligations of the Company under the Security Agreement and the MJA Note.

On September 28, 2023 Akerna, Akerna Exchange and MJA entered into a first amendment to the SPA (the “Amendment”) which amends certain of the terms of the SPA. Principally, the Amendment amends the “Outside Date” as defined therein from September 29, 2023 to December 31, 2023; amends the SPA to reduce the amount of cash to be paid at closing from $4 million to $2 million; amends the SPA to add to the items of business in relation to which Akerna will seek stockholder approval at a special meeting of the stockholders the issuance of shares of common stock of Akerna to MJA under the Amended and Restated Note; adds a new Section which provides that prior to closing under the SPA, MJA will work in good faith on a best efforts basis across multiple interested parties on behalf of and with the express approval of Akerna to secure for Akerna the highest purchase price possible for the shares of Ample. Akerna shall cause the proceeds from such sale to be included in the assets of MJF effective as of the closing. Notwithstanding the foregoing, in the event that the shares of Ample are sold to a third-party for a net purchase price above $700,000, Akerna shall be entitled to retain all net proceeds in excess of $700,000; provides that, within 3 business days of the Amendment, MJA will loan Akerna an additional $500,000 to fund Akerna’s working capital requirements; and provides that concurrently with the funding of the additional $500,000 loan to Akerna, Akerna will issue and amended and restated convertible secured promissory note (“Amended and Restated Note”) to MJA which amends and restates the Secured Promissory Note dated April 28, 2023 by and between Akerna and MJA (the ‘Original Note”) to (A) increase the principal amount of the Original Note from $1,000,000 to $1,500,000, (B) provide for the forfeiture by MJA of the accrued and unpaid interest at the consummation of the transaction under the SPA and (C) provide that contemporaneous with and immediately prior to the consummation of the transactions under the SPA provide that contemporaneous with and immediately prior to the consummation of the transactions under the SPA, the principal amount of the shall convert into such quantity of shares of common stock of the Company as equals (1) $1,500,000, multiplied by (2) the 5-day volume weighted average price of the common stock of the Company as quoted on The Nasdaq Capital Market for the 5 trading days immediately preceding the date of the consummation of the transactions under the SPA; provided however, that in no case shall Akerna be required to issue to MJA such number of shares of common stock as would in the aggregate with all shares issued pursuant to the SPA and/or held or controlled by MJA exceed 19.99% of the number of issued and outstanding shares of common stock of the Seller on the date hereof without first obtaining the approval of stockholders of Akerna as required pursuant to the rules of the Nasdaq Stock Exchange.

On October 11, 2023, Akerna issued an amended and restated convertible secured promissory note (“Amended and Restated Note”) to MJA which amends and restates the Secured Promissory Note dated April 28, 2023 by and between Akerna and MJA (the ‘Original Note”), whereby Akerna promises to pay to the order of MJA or its registered assigns the amount of $1,500,000. The Amended and Restated Note amended the Original Note to increase the principal amount of the Original Note from $1,000,000 to $1,500,000.

In connection to the MJA Note, the Security Agreement, and the Guaranty Agreement (collectively, “New Note Transaction Documents”) and solely to permit Akerna to issue the MJA Note and execute and perform its obligations under the New Note Transaction Documents and a Subordination Agreement (as defined below), each of the holders (each, a “Holder”) of the Senior Convertible Notes issued pursuant to a Securities Purchase Agreement dated October 5, 2021 (“2021 SPA”) agreed to waive the prohibition on issuing indebtedness other than Permitted Indebtedness (as defined in the Senior Convertible Notes) pursuant to Section 14(b) of the Senior Convertible Notes and the prohibition permitting Liens (as defined in the Senior Convertible Notes) to exist other than Permitted Liens (as defined in the Senior Convertible Notes) pursuant to Section 14(c) of the Senior Convertible Notes and Section 5(g)(v) of the 2021 SPA (the “Waiver”). In connection to the New Note Transaction Documents, MJ Acquisition, Akerna, and HT Investments MA LLC (the “Senior Agent”, together with the Holders, the “Senior Creditors”), as collateral agent under the 2021 SPA, each on behalf of the respective Holders, entered into a subordination and intercreditor agreement (the “Subordination Agreement”), whereby the parties agreed that the payment of any and all obligations, liabilities and indebtedness of every nature of Akerna, its applicable subsidiary and/or affiliates from time to time owed to MJ Acquisition under the Subordinated Debt Documents (as defined in the Subordination Agreement) will be subordinate and subject in right and time of payment, to the prior payment in full of all obligations under the Senior Convertible Notes.

Pursuant to the Amended and Restated Note, Akerna’s obligations under the Amended and Restated Note are to be secured pursuant to an Amended and Restated Security and Pledge Agreement entered into by and among Akerna, MJA and the other parties thereto dated October 11, 2023 (the “Amended and Restated Security Agreement”). The Amended and Restated Security Agreement amends and restated the Security Agreement entered into by and among Akerna, MJA and other parties thereto dated April 28, 2023 (the “Original Security Agreement”) to reflect the entry into the Amended and Restated Note and change reference therein from the Original Note to the Amended and Restated Note.

Private Placement of Common Stock

On June 14, 2023, we entered into a transaction for a private investment in our public equity (the “PIPE Investment”) whereby 1 million shares of Common Stock were issued to the investor at $0.50 per share for total cash proceeds of $0.5 million. The proceeds from the PIPE Investment were used to pay a termination fee and related expenses of $0.2 million to POSaBIT in connection with the termination of the MJF- Ample SPA and the remainder has been allocated for ongoing operating expenses.

Restructuring

In May 2022, we implemented a corporate restructuring initiative (the “Restructuring”) that resulted in a charge of $0.5 million associated with a reduction of our workforce by 59 employees, or approximately 33 percent of our headcount at that time. The charge associated with the Restructuring, all of which was settled in cash during the second quarter of 2022, was comprised primarily of severance benefits and related costs and was fully attributable to our continuing operations. Of the total amount incurred, $0.3 million was included in Sales and marketing costs, approximately $0.2 million was included in Product development costs and less than $0.1 million was included in each of Cost of revenue and General and administrative expenses in our condensed consolidated statements of operations, respectively.

Financial Reporting and Classification

As a result of the corporate actions described above, 365 Cannabis and LCA (together, the “Discontinued Group”) met the criteria to be considered “held for sale” as that term is defined in accounting principles generally accepted in the United States (“GAAP”). Accordingly. the assets and liabilities of these entities have been classified and reflected on our condensed consolidated balance sheets as “held for sale” as of December 31, 2022, and their results of operations and the effect of their sales have been classified as “discontinued operations” in the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022, respectively. Certain financial disclosures including major components of the assets and liabilities and results of operations of the Discontinued Group are provided in Note 12 to the condensed consolidated financial statements. Our core SMB and governmental business unit (MJF and Ample), the businesses for which we have committed to terminate operations (Viridian, Solo and Trellis) and our publicly-held parent holding company (Akerna Corp.) comprise our continuing operations. Collectively, these entities have been presented as continuing operations for all periods presented herein and until such time that stockholder approval is received for the Sale Transaction and the Merger.

The results of operations of our discontinued operations and the assets and liabilities of these operations that were held for sale and certain other additional disclosures are provided in Note 12 to the condensed consolidated financial statements.

Components of Results of Operations

Revenue

Historically, we have generated revenue from two primary sources: (1) software and (2) consulting services. Revenue from software comprised approximately 99 percent and 97 percent of our revenue for the nine months ended September 30, 2023 and 2022, respectively. While there was minimal revenue from consulting services during the nine months ended September 30, 2023, approximately 3 percent of our revenues were derived from consulting for the nine months ended September 30, 2022.

Software. Our software is solutioned for our key markets, SMB and government regulatory agencies. In these markets, software revenue is generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform®, and our government regulatory platform, Leaf Data Systems®. 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 many multi-year commercial software contracts. Leaf Data Systems® contracts are generally multi-year contracts payable annually or quarterly in advance of service. MJ Platform® 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.

Consulting. Consulting services revenue is generated by providing solutions for prospective and current cannabis, hemp and CBD business 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.

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

Cost of Revenue and Operating Expenses

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

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

Sales and Marketing Expenses. Sales and marketing expense is primarily salaries and related expenses, including commissions, for our sales, marketing, and client service staff. We also categorize payments to partners and marketing programs as sales and marketing expenses. Marketing programs consist of advertising, events, such as trade shows, corporate communications, brand building, and product marketing activities. We plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new clients, and sponsoring additional marketing events. The timing of these marketing events will affect our marketing costs in a particular quarter. We defer the portion of sales commissions that is considered a cost of obtaining a new contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit, currently one year. We expense the remaining sales commissions as incurred. The rates at which sales commissions are earned varies depending on a variety of factors, including the nature of the sale (new, renewal, or add-on service offering), the type of service or solution sold, and the sales channel.

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

Critical Accounting Policies and Estimates

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. Since the date of the Annual Report, there have been no material changes to our critical accounting policies.

Results of Operations for the Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The following table highlights our operating revenues and expenses attributable to our continuing operations for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022:

Revenue

Software Revenue

Total software revenue declined to $6.9 million for the nine months ended September 30, 2023 from $10.2 million for the nine months ended September 30, 2022, for a decrease of $3.2 million, or 32%. Software revenue accounted for substantially all of our revenues for the nine months ended September 30, 2023 and approximately 94 percent for the nine months ended September 30, 2022. The decline is primarily attributable to (i) customer churn in our MJ Platform ($0.6 million) and Ample ($0.9 million) service offerings, (ii) lower continuing Leaf Data Systems revenues and fewer change requests attributable to our two state clients and the transition of a key client’s business from implementation fees to traditional subscription service from the 2022 period to the 2023 period ($0.7 million) and (iii) the effects of the planned exit from our Solo, Trellis and Viridian platforms ($1.1 million).

Consulting Revenue

In connection with the pending Sale Transaction and the Merger, we have de-emphasized our consulting services during the nine months ended September 30, 2023.

Other Revenue

Other revenue includes retail/resale revenue, which is generated from point-of-sale hardware, and other non-recurring revenues. Other revenue was less than one percent of total revenues for each of the nine months ended September 30, 2023 and 2022, respectively.

Cost of Revenue

Our cost of revenue was $3.0 million for the nine months ended September 30, 2023, compared to $4.2 million for the nine months ended September 30, 2022, reflecting a decline of $1.1 million, or 28 percent. The decrease was due primarily to the following: (i) lower hosting services and platform license costs of $1.1 million during the 2023 period and (ii) lower salary-related and contractor and consultant costs of $0.7 million in the 2023 period partially offset by the effect of a $0.4 million reversal of a legal contingency in the 2022 period and $0.3 million of costs capitalized during the 2022 period while no such costs were capitalized during the 2023 period.

Gross Profit

Gross profit was $4.0 million for the nine months ended September 30, 2023, compared to $6.6 million for the nine months ended September 30, 2022, for a decrease of $2.6 million or 40 percent. The gross profit margin declined to 57 percent during the 2023 period from 61 percent in the 2022 period due primarily to a higher weighting of lower-margin contracts in the 2023 period as compared to the 2022 period as well as the effects of continuing to service the remaining products of Trellis, Solo and Viridian in the absence of any new revenue streams.

Operating Expenses

Product Development

Product development expense was $2.2 million for the nine months ended September 30, 2023, compared to $4.0 million for the nine months ended September 30, 2022, representing a decrease of $1.8 million, or 45 percent. The decrease is due primarily to lower salary-related and contractor expenses in the amount of $3.6 million and $0.2 million of restructuring charges. These declines were primarily attributable to the actions that we took in the second quarter of 2022 associated with the Restructuring which reduced our overall headcount. The decline was partially offset by $2.1 million of costs capitalized during the 2022 period while no such costs were capitalized during the 2023 period

Sales and Marketing

Sales and marketing expense was $2.0 million for the nine months ended September 30, 2023, compared to $5.0 million for the nine months ended September 30, 2022, a decrease of $3.0 million, or 60 percent. These declines were due primarily to lower salary-related and contractor expenses in the amount of $2.4 million, lower software application costs and trade show and related promotional expenses of $0.3 million and lower restructuring charges of $0.3 million. These declines were primarily attributable to the actions that we took in the second quarter of 2022 associated with the Restructuring which reduced our overall headcount. The decline was partially offset by $0.1 million of higher stock-based compensation expense during the 2023 period.

General and Administrative

General and administrative expense was $4.5 million for the nine months ended September 30, 2023, compared to $6.4 million for the nine months ended September 30, 2022, a decrease of $2.0 million, or 30 percent. The decrease was due primarily to the following: (i) lower overall compensation- related and contractor costs of $0.6 million during the 2023 period attributable to lower overall headcount and lower stock-based and performance-based incentive compensation, (ii) lower recurring professional fees of $0.9 million during the 2023 period, (iii) lower occupancy and support costs of $0.1 million during the 2023 period as we operated on a 100 percent remote basis and (iv) lower bad debt and franchise and sales and use tax expenses of $0.6 million. These declines were partially offset by $0.4 million of professional fees and related costs associated with the Sales Transaction and the Merger.

Depreciation and Amortization

Depreciation and amortization expense decreased to $0.7 million for the nine months ended September 30, 2023 from $4.5 million for the nine months ended September 30, 2022, representing a decrease of $3.7 million, or 83%. The decrease is due to the substantial impairments of capitalized software and intangible assets that were recorded during 2022.

Impairment of Long-lived Assets

Impairment charges for goodwill ($0.9 million) associated with Ample were recognized in the nine months ended September 30, 2023 while we impaired (i) goodwill associated with the Ample ($10.7 million), Solo ($11.2 million), Trellis ($1.6 million) and Viridian ($3.9 million) platforms and (ii) intangible assets ($2.2 million) and capitalized software ($1.0 million) associated with the Solo platform during the nine months ended September 30, 2022.

Results of Operations for the Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

The following table highlights our operating revenues and expenses attributable to our continuing operations for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022:

Revenue

Software Revenue

Total software revenue declined to $2.1 million for the three months ended September 30, 2023 from $3.0 million for the three months ended September 30, 2022, for a decrease of $0.9 million, or 31%. Software revenue accounted for substantially all of our revenues for the three months ended September 30, 2023 and approximately 97 percent for the three months ended September 30, 2022. The decline is primarily attributable to (i) customer churn in our MJ Platform ($0.2 million) and Ample ($0.3 million) service offerings and (ii) the effects of the planned exit from our Solo, Trellis and Viridian platforms ($0.4 million).

Consulting Revenue

In connection with the pending Sale Transaction and the Merger, we have de-emphasized our consulting services during the three months ended September 30, 2023.

Other Revenue

Other revenue includes retail/resale revenue, which is generated from point-of-sale hardware, and other non-recurring revenues. Other revenue was less than one percent of total revenues for each of the three months ended September 30, 2023 and 2022, respectively.

Cost of Revenue

Our cost of revenue was $1.0 million for the three months ended September 30, 2023, compared to $1.5 million for the three months ended September 30, 2022, reflecting a decline of $0.5 million, or 34 percent. The decrease was due primarily to the following: (i) lower hosting services and platform license costs of $0.2 million during the 2023 period, (ii) lower salary-related and contractor and consultant costs of $0.2 million in the 2023 period and (iii) lower support costs of $0.2 million during the 2023 period partially offset by $0.1 million of costs capitalized during the 2022 period while no such costs were capitalized during the 2023 period.

Gross Profit

Gross profit was $1.1 million for the three months ended September 30, 2023, compared to $1.6 million for the three months ended September 30, 2022, for a decrease of $1.5 million or 30 percent. The gross profit margin increased to 53 percent during the 2023 period from 52 percent in the 2022 period due primarily to the actions that we took during 2023 associated with the de-emphasizing of the consulting services which reduced our overall headcount.

Operating Expenses

Product Development

Product development expense was $0.6 million for the three months ended September 30, 2023, compared to $0.9 million for the three months ended September 30, 2022, representing a decrease of $0.3 million, or 32 percent. The decrease is due primarily to lower salary-related and contractor expenses in the amount of $0.2 million and the effect of $0.1 million of restructuring charges recorded in the 2022 period. These declines were primarily attributable to the actions that we took during 2023 associated with the planned exit from our Solo, Trellis and Viridian platforms which reduced our overall headcount.

Sales and Marketing

Sales and marketing expense was $0.6 million for the three months ended September 30, 2023, compared to $1.0 million for the three months ended September 30, 2022, a decrease of $0.4 million, or 41 percent. These declines were due primarily to lower salary-related and contractor expenses in the amount of $0.3 million, and lower software applications costs and trade show and related promotional expenses of $0.1 million. These declines were primarily attributable to the actions that we took during 2023 associated with the planned exit from our Solo, Trellis and Viridian platforms which reduced our overall headcount.

General and Administrative

General and administrative expense was $1.4 million for the three months ended September 30, 2023, compared to $1.8 million for the three months ended September 30, 2022, a decrease of $0.4 million, or 23 percent. The decrease was due primarily to the following: (i) lower overall compensation-related and contractor costs of $0.1 million during the 2023 period attributable to lower overall headcount and lower stock-based and performance-based incentive compensation, (ii) lower recurring professional fees of $0.2 million during the 2023 period, and (iii) lower credit loss expenses of $0.1 million. These declines were partially offset by $0.1 million of professional fees and related costs associated with the Sales Transaction and the Merger.

Depreciation and Amortization

Depreciation and amortization expense decreased to $0.2 million for the three months ended September 30, 2023 from $1.6 million for the three months ended September 30, 2022, representing a decrease of $1.4 million, or 89 percent. The decrease is due to the substantial impairments of capitalized software and intangible assets that were recorded during 2022.

Impairment of Long-lived Assets

Impairment charges for goodwill ($0.9 million) associated with Ample were recognized in the three months ended September 30, 2023. There were no impairment charges recognized in the three months ended September 30, 2022.

Non-GAAP Financial Measures

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

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

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

EBITDA and Adjusted EBITDA

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

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

• impairment of long-lived assets, as this is a non-cash, non-recurring item, which affects the comparability of results of operations and liquidity;
• stock-based compensation expense, because this represents a non-cash charge and our mix of cash and stock-based compensation may differ from other companies, which affects the comparability of results of operations and liquidity;
• cost incurred in connection with strategic transactions including the Sale Transaction, the Merger, the termination of the MJF-Ample SPA with POSaBIT and business combinations that are required to be expensed as incurred in accordance with GAAP, because such costs are specific to the complexity and size of the underlying transactions and these costs are not reflective of our ongoing operations;
• restructuring charges, which includes severance costs to terminate employees in functions that have been eliminated as we believe these costs are not representative of operating performance;

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

38

Going Concern and Management’s Liquidity Plans

In accordance with the Financial Accounting Standards Board’s (“FASB”) standard on going concern, Accounting Standard Update (“ASU”) No. 2014-15, *Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“*ASU 2014-15”), we assess going concern uncertainty in our consolidated financial statements to determine if we have sufficient cash, cash equivalents and working capital on hand, including marketable equity securities, and any available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions regarding implementing curtailments or delays in the nature and timing of programs and expenditures to the extent we deem probable that such implementations can be achieved and we have the proper authority to execute them within one year from the date the consolidated financial statements are issued.

The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. However, since our inception in 2019 we have incurred recurring losses from operations, used cash from operating activities, and relied on capital raising transactions to continue ongoing operations. As of September 30, 2023, we had a working capital deficit of $11.2 million with $0.2 million in cash available to fund future operations. Furthermore, on March 22 and 23, 2023, respectively, we received two notices (the “Notices”) from The Nasdaq Stock Market LLC (“Nasdaq”) indicating (i) that the bid price of the Company’s Common Stock is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share (the “Bid Price Notice”) and (ii) the Company’s stockholders’ equity is below the minimum listing standard requirement of $2.5 million for continued listing on the Nasdaq (the “Stockholders Equity Notice”). The Notices have no immediate effect on the continued listing status of our Common Stock on the Nasdaq, and, therefore, our listing remains fully effective. We are provided a compliance period of 180 calendar days from the date of the Bid Price Notice, or until September 18, 2023, to regain compliance with the minimum closing bid requirement. Regarding the Stockholders Equity Notice, we submitted the required compliance plan to the listings staff of the Nasdaq on May 8, 2023 which was conditioned upon the successful completion of the Merger. On June 15, 2023, we received a letter from Nasdaq granting an extension through September 19, 2023 to complete the Merger. On September 19, 2023, the Company received a determination letter (the “Determination Letter”) from the Staff stating that it had not regained compliance with the minimum bid price requirement or the minimum listing standard requirement of $2.5 million and is not eligible for an additional 180-day period to regain compliance. Further, the Determination Letter indicate that unless the Company requests an appeal of this determination the trading of the Company’s common stock will be suspended at the opening of business on September 28, 2023, and a Form 25-NSE will be filed with the Securities and Exchange Commission (the “SEC”), which will remove the Company’s securities from listing and registration on The Nasdaq Capital Market. The Company had a deadline to appeal the Staff’s determination, pursuant to the procedures set forth in the Nasdaq Listing Rule 5800 Series, no later than 4:00 pm Eastern Time on September 26, 2023. The Company successfully submitted a hearing request on September 25, 2023 and received a hearing date of November 9, 2023. This Hearing will stay any delisting or suspension action by the Staff pending the issuance of the Panel’s decision. The Company’s common stock will remain listed on Nasdaq, pending the outcome of the Hearing. There can be no assurance that the Panel will grant the Company’s request for continued listing, however on November 2, 2023 the Company received a document from the Nasdaq Staff indicating, based on their review it appears the that the post-transaction (referring to the Akerna Merger) entity will demonstrate compliance with the initial listing requirements, only in the event that the transaction successfully closes.

As described above and in Note 1 to the consolidated financial statements, we have committed to the Sale Transaction to complete our intended exit from the SaaS industry and to the Merger as the most favorable strategic alternative for our stockholders. There can be no assurance that we will be successful in executing and completing the Sale Transaction and the Merger and obtaining sufficient funding, if necessary, on terms acceptable to us to fund continuing operations through the anticipated closing of the aforementioned transactions, if at all. Our ability to continue as a going concern is dependent upon our ability to successfully execute the aforementioned transactions. Despite the comprehensive scope of our collective plans, the inherent risks associated with their successful execution are not sufficient to overcome substantial doubt about our ability to continue as a going concern for one year from the date of issuance of our consolidated financial statements. Accordingly, if we are unable to execute our plans within the timeframe described above, we may have to reduce or otherwise curtail our continuing operations which could significantly and adversely affect our results of operations or we may determine to dissolve and liquidate our assets. If we fail to meet the financial covenants of the Senior Convertible Notes and cannot obtain a waiver from such provisions or otherwise come to an agreement with the holders of the Senior Convertible Notes, such holders may declare a default which could subject our assets to seizure and sale, negatively impacting our business. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Cash Flows

Our cash balance was $0.2 million as of September 30, 2023. Cash flow information is as follows:

Operating Activities

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

Net cash used in operating activities declined to $5.2 million during the nine months ended September 30, 2023 from $10.4 million during the nine months ended September 30, 2022 due primarily to the elimination of costs associated with salaries and benefits and related support costs as a result of the actions taken during the second quarter of 2022 associated with the Restructuring which lowered our overall employee headcount. In addition, the 2023 period only includes one month of cash utilization by our discontinued operations 365 Cannabis and LCA and lower activity levels for all of our continuing operations including Solo, Trellis and Viridian which we have terminated prior to the Merger and Sale Transaction.

Investing Activities

Our primary investing activities have consisted of capitalization of internal-use software necessary to deliver significant new features and functionality in our platform which provides value to our customers. Other investing activities include cash outflows related to purchases of property and equipment, and from time-to-time, the cash paid for asset and business acquisitions as well as cash received from the disposition of assets and business units.

Net cash provided by investing activities totaled $0.6 million during the nine months ended September 30, 2023, as a result of sale of the 365 Cannabis and LCA business units in January 2023. Net cash used by investing activities during the nine months ended September 30, 2022, was $3.0 million which was related to the development of our software products.

Financing Activities

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

During the nine months ended September 30, 2023 and 2022 we made $4.9 million and $1.5 million of principal payments on the Senior Convertible Notes, respectively. The funds for the payments in the 2023 period were sourced from the proceeds of the sale of our discontinued operations and from releases from the restricted cash accounts while the payments in the 2022 period were sourced from cash on hand and from $0.8 million of proceeds received from the issuance of shares under our ATM program. In June 2023, we completed the PIPE Investment which provided proceeds of $0.5 million. In May 2023, we received proceeds of $1.0 million from the issuance of the MJA Note. During each of the nine months ended September 30, 2023 and 2022, the value of shares withheld for income taxes from the vesting of stock-based compensation awards was less than $0.1 million, respectively.

Evaluation of Disclosure Controls and Procedures

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

We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of September 30, 2023 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, 2023, our disclosure controls and procedures were ineffective in ensuring that: (i) information required to be disclosed by us in reports that we file or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

Material Weakness

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

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

Remediation Efforts

We are in the process of executing our remediation plans to address the material weakness described above. As of September 30, 2023, we have:

• Hired additional experienced resources with the appropriate skills to fill key accounting functions.
• Engaged an outside firm to assist in the overall evaluation and documentation of the design and operating effectiveness of our internal controls over financial reporting and have remediated past deficiencies in the design of our internal control framework for certain key process areas including revenue, capitalized software, business combinations, intangibles, goodwill, stock-based compensation, general financial reporting, and information technology.
• Developed a long-term plan to both (i) complete the remediation of the design of our internal control over financial reporting for our remaining process areas, and (ii) begin the remediation of the deficiencies in operating effectiveness of our internal controls over financial reporting across all process areas.

We believe these actions and the improvements we expect to achieve, when fully implemented, will strengthen our internal control over financial reporting and remediate the material weaknesses. However, the material weaknesses will not be considered fully remediated until the applicable controls operate for a sufficient period of time for management to test the results for operating effectiveness. While no assurance can be provided, the Company believes it will make further progress in remediating these material weaknesses during 2023.

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

Changes in Internal Control over Financial Reporting

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

Inherent Limitations on Effectiveness of Controls

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

Except for the additional risk factors set forth below, there have been no material changes to our Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 20, 2023.

Risks Related to Our Common Stock

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

On March 22, 2023, we received a notification letter from The Nasdaq Stock Market stating that we are not in compliance with the minimum bid price requirement, which requires our listed securities to maintain a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”). The notification stated that we have a compliance period of 180 calendar days, or until September 18, 2023, to regain compliance with the Minimum Bid Price Requirement. If at any time during this 180-day compliance period the closing bid price of our common stock is at least $1.00 per share for a minimum of ten consecutive business days, then the Nasdaq Stock Market will provide us with written confirmation of compliance and the matter will be closed.

If compliance cannot be demonstrated by September 18, 2023, we may be eligible for additional time. To qualify, we will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards on the Nasdaq Capital Market (except the bid price requirement). In addition, we would be required to provide written notice of our intention to cure the minimum bid price deficiency during this second 180-day compliance period by effecting a reverse stock split, if necessary. If we are not granted an additional 180-day compliance period, then Nasdaq will provide written notification that our securities will be subject to delisting. At that time, we may appeal the determination to delist our securities to a Nasdaq hearings panel. There can be no assurance that we will regain compliance with the Minimum Bid Price Requirement or otherwise maintain compliance with the other listing requirements.

On March 23, 2023, we received notice from The Nasdaq Stock Market advising us that we are not in compliance with the minimum stockholders’ equity requirement for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires companies listed on The Nasdaq Capital Market to maintain stockholders’ equity of at least $2,500,000 (the “Stockholders’ Equity Requirement”). In our Annual Report on Form 10-K for the year ended December 31, 2022, Akerna reported stockholders’ equity of ($4,825,528), which is below the Stockholders’ Equity Requirement for continued listing. Through September 30, 2023, our stockholders’ equity has declined further to a deficit of ($8,306,961).

Pursuant to the notice, Nasdaq provided us 45 calendar days, or until May 8, 2023, to submit to Nasdaq a plan to regain compliance. We submitted our plan on May 8, 2023 which was conditioned upon the successful completion of the Merger. On June 15, 2023, we received a letter from Nasdaq granting an extension through September 19, 2023 to complete the Merger. The terms of the extension include: (i) receiving approval from Nasdaq to list the post-Merger entity, (ii) completion of the Merger transaction and (iii) meeting all of the initial and continued listing requirements for the Nasdaq Capital Market.

On September 19, 2023, the Company received a determination letter (the “Determination Letter”) from the Staff stating that it had not regained compliance with the minimum bid price requirement or the minimum listing standard requirement of $2.5 million and is not eligible for an additional 180-day period to regain compliance. Further, the Determination Letter indicate that unless the Company requests an appeal of this determination the trading of the Company’s common stock will be suspended at the opening of business on September 28, 2023, and a Form 25-NSE will be filed with the Securities and Exchange Commission (the “SEC”), which will remove the Company’s securities from listing and registration on The Nasdaq Capital Market. The Company had a deadline to appeal the Staff’s determination, pursuant to the procedures set forth in the Nasdaq Listing Rule 5800 Series, no later than 4:00 pm Eastern Time on September 26, 2023. The Company successfully submitted a hearing request on September 25, 2023 and received a hearing date of November 9, 2023. This Hearing will stay any delisting or suspension action by the Staff pending the issuance of the Panel’s decision. The Company’s common stock will remain listed on Nasdaq, pending the outcome of the Hearing. There can be no assurance that the Panel will grant the Company’s request for continued listing, however on November 2, 2023 the Company received a document from the Nasdaq Staff indicating, based on their review it appears the that the post-transaction (referring to the Akerna Merger) entity will demonstrate compliance with the initial listing requirements, only in the event that the transaction successfully closes.

There can be no assurance that the Company’s plan as presented to the Panel will be accepted by the Panel or that, if it is, the Company will be able to regain compliance with the applicable Nasdaq listing requirements, or that a Panel will stay the suspension of the Company’s securities. If the Company’s securities are delisted from Nasdaq, it could be more difficult to buy or sell the Company’s common stock or to obtain accurate quotations, and the price of the Company’s common stock could suffer a material decline. Delisting could also impair the Company’s ability to raise capital and/or trigger defaults and penalties under outstanding agreements or securities of the Company.

Risks Related to the Proposed Sale Transaction

Certain provisions of the SPA may discourage third parties from submitting alternative proposals for the subsidiaries and assets being sold, including proposals that may be superior to the arrangements contemplated by the SPA.

The SPA contains “no-shop” restrictions on Akerna’s ability to solicit, initiate or knowingly encourage third party proposals relating to alternative transactions or to provide information to, or engage in discussions with, a third party in relation to an alternative transaction, subject to the ability of our Board of Directors to change their recommendation and terminate the SPA in accordance with their fiduciary duties. Before our Board Directors may change its recommendation to stockholders or terminate the SPA to accept a Superior Offer (as defined in the SPA), Akerna must, among other things, provide MJ Acquisition with notice. Upon the termination of the SPA, including in connection with a Superior Offer, we may be required to pay up to $140,000 as a termination fee plus $60,000 in reasonable fees and expenses.

These provisions could discourage a potential third party acquiror from considering or proposing an acquisition transaction, even if it were prepared to pay a higher price than what would be received in the Sale Transaction. These provisions might also result in a potential third party acquiror proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the $140,000 termination fee and $60,000 in fees and expenses that may become payable.

If the SPA is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Purchase Agreement.