Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 1 - Description of Business, Liquidity
and Capital Resources
Description of Business
Akerna Corp. (the “Company”
or “Akerna”), through its wholly-owned subsidiary MJ Freeway, LLC (“MJF”) is a regulatory compliance and
inventory management technology company. The Company’s proprietary software platform is adaptable for industries in which
interfacing with government regulatory agencies for compliance purposes is required, or where the tracking of organic materials
from seed or plant to end products is desired. The Company developed products intended to assist states in monitoring licensed
businesses’ compliance with state regulations, and to help state-licensed businesses operate in compliance with such law.
The Company provides its regulatory software platform, Leaf Data Systems®, to state government regulatory agencies, and its
commercial software platform, MJ Platform®, to state-licensed businesses.
The accompanying financial statements and related
notes reflect the historical results of MJF prior to the mergers completed in June 2019 (“the Mergers”) with MTech
Acquisition Corp. (“MTech”) and other related entities, which resulted in the combined company, and do not include
the historical results of MTech prior to the completion of the Mergers.
Liquidity and Capital Resources
Since its inception, the Company has incurred
recurring operating losses, used cash from operations, and relied on capital raising transactions to continue ongoing operations.
Although we have continuing negative cash flow from operations, the Company anticipates that its current cash will be sufficient
to meet the working capital requirements for the next twelve months. From time to time, we may pursue various strategic business
opportunities. These opportunities may include investment in or ownership of additional technology companies through direct
investments, acquisitions, joint ventures and other arrangements. We are currently exploring such opportunities and have
entered into three non-binding letters of intent. We can provide no assurance that we will successfully identify such opportunities
or that, if we identify and pursue any of these opportunities, any of them will be consummated. Consequently, the Company
may raise additional equity or debt capital or enter into arrangements to secure necessary financing to fund the completion of
such strategic business opportunities, although no assurance can be provided that we will be successful in completing a future
capital raise. The sale of additional equity could result in additional dilution to the Company’s existing stockholders,
and financing arrangements may not be available to us, or may not be available in sufficient amounts or on acceptable terms. Our
future operating performance will be subject to future economic conditions and to financial, business and other factors, many of
which are beyond our control. See “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June
30, 2019 for a discussion of the risks related to our liquidity and capital structure.
AKERNA
CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 2 - Summary of Significant
Accounting Policies
Basis of Presentation
These unaudited condensed consolidated
financial statements have been prepared following the requirements of the Securities and Exchange Commission (“SEC”),
for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required
by accounting principles generally accepted in the United States of America (“U.S. GAAP”) can be condensed or omitted.
The condensed consolidated balance sheet for the year ended June 30, 2019 was derived from the Company’s audited financial
statements, but does not include all disclosures required by U.S. GAAP. The information included in this quarterly report
on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the
year ended June 30, 2019 which were included in the annual report on Form 10-K filed by the Company on September
23, 2019.
In the opinion of management, these condensed
consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes
thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for
the fair presentation of the Company’s financial position and operating results. The results for the three months ended September
30, 2019 are not necessarily indicative of the operating results for the year ending June 30, 2020, or any other interim
or future periods.
Accounts Receivable, Net
The Company provides an allowance for
doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection
experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s
estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the
amounts estimated in determining the allowance. The allowance for doubtful accounts was $357,419 as September 30, 2019 and $190,088
as of June 30, 2019.
Concentrations of Credit Risk
The Company grants credit in the normal
course of business to its customers. The Company periodically performs credit analysis and monitors the financial condition of
its customers to reduce credit risk.
During the three months ended September
30, 2019, one customer accounted for 24% of total revenues. At September 30, 2019, the same customer accounted for 63% of net
accounts receivable. During the three months ended September 30, 2018, two customers accounted for 35% and 10% of total revenues,
respectively. There were no accounts receivable outstanding as of September 30, 2018.
Revenue Recognition
The Company recognizes revenue only when
all of the following criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred or services have
been performed, the fee for the arrangement is fixed or determinable, and collectability is reasonable assured.
The Company’s software-as-a-service
fees are earned through arrangements in which customers pay the Company a recurring subscription fee based upon the terms of their
respective contracts. The Company’s software revenues generated from government customers totaled $1,089,395 and $1,020,392
of total revenues during the three months ended September 30, 2019 and 2018, respectively. Total costs of government revenues
incurred by the Company, which are included in cost of revenues on the statements of operations, were $665,303 and $528,270 during
the three months ended September 30, 2019 and 2018, respectively.
The Company also offers various software
consulting services to its customers, including implementation services, business planning, support, and other customer services.
From time to time, the Company purchases equipment for resale to customers. Such equipment is generally drop-shipped to the Company’s
customers. The Company recognizes revenue as the services are performed
or products are delivered, or in the case of up-front implementation fees, over the longer of the contract term or estimated customer
life.
AKERNA
CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
In most arrangements, the Company bills the
customer prior to performing services, which requires the Company to record deferred revenue on the accompanying balance sheets.
Reclassifications
Certain prior year financial statement
amounts have been reclassified for consistency with the current year presentation.
Recently Issued Accounting Pronouncements
ASU 2014-09, Revenue from Contracts with
Customers (Topic 606), supersedes the revenue recognition requirements and industry-specific guidance under Revenue Recognition
(Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in
an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. ASU No.
2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising
from customer contracts. As an Emerging Growth Company, ASU No. 2014-09 is effective for the Company’s fiscal 2020 annual
reporting period and for interim periods thereafter, with early adoption permitted, and allows for either full retrospective or
modified retrospective adoption. The Company is evaluating the impact of adoption of the new standard on its consolidated financial
statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments
- Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires certain equity investments
to be measured at fair value with changes in fair value recognized in net income, to record changes in instrument-specific credit
risk for financial liabilities measured under the fair value option in other comprehensive income. The new standard is expected
to reduce diversity in practice. The new standard is effective for the Company’s fiscal 2020 annual reporting period and
for interim periods thereafter. The Company is evaluating the impact of adoption of the new standard on its consolidated financial
statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases. The new standard, as subsequently amended, establishes a right-of-use model that requires a lessee to record a right-of-use
asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as
either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The
new standard is effective for the Company beginning July 1, 2020 with early adoption permitted. The Company is evaluating the impact
of adoption of the new standard on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. Among other things, these
amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now
use forward-looking information to better inform their credit loss estimates. The new standard is effective for the Company beginning
July 1, 2021 with early adoption permitted. The Company is evaluating the impact of adoption of the new standard on its consolidated
financial statements.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which eliminates
the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based
payment transactions with nonemployees in the same way as share-based payment transactions with employees. Under the new guidance,
nonemployee share-based payment transactions are measured at the grant-date fair value and are no longer remeasured at the then-current
fair values at each reporting date until the share options have vested. The amended guidance is effective for the Company’s
fiscal 2020 annual reporting period and for interim periods thereafter, with early adoption permitted. The Company is evaluating
the impact of adoption of the new standard on its consolidated financial statements.
In August 2018, the FASB issued ASU No.
2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customers Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which broadens the scope of
existing guidance applicable to internal-use software development costs. The update requires costs to be capitalized or
expensed based on the nature of the costs and the project stage in which they are incurred subject to amortization and
impairment guidance consistent with existing internal-use software development cost guidance. The guidance is applicable for
the Company beginning July 1, 2021 with early adoption permitted, including adoption in an interim period. The Company is
evaluating the impact of adoption of the new standard on its financial statements.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Balance Sheet Disclosures
Prepaid expenses consist of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Software and technology
|
|
$
|
321,432
|
|
|
$
|
237,930
|
|
Professional services
|
|
|
428,348
|
|
|
|
169,804
|
|
Insurance
|
|
|
68,241
|
|
|
|
159,940
|
|
Deposit
|
|
|
51,925
|
|
|
|
10,000
|
|
|
|
$
|
869,946
|
|
|
$
|
577,674
|
|
The Company deferred approximately $164,000
in professional services costs related to the contract with the State of Utah. These costs will be recognized at the same time
as the related revenue is recognized, under the matching principle.
Accrued liabilities consist of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Professional fees
|
|
$
|
85,000
|
|
|
$
|
49,205
|
|
Sales taxes
|
|
|
41,104
|
|
|
|
36,358
|
|
Compensation
|
|
|
298,585
|
|
|
|
354,724
|
|
Leaf Data Systems contractors
|
|
|
19,557
|
|
|
|
19,557
|
|
Other
|
|
|
49,272
|
|
|
|
40,706
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
493,518
|
|
|
$
|
500,550
|
|
The accrued compensation as of June 30, 2019,
and September 30, 2019, includes approximately $215,000 of accrued bonus earned by the Company’s Chief Executive Officer
with respect to fiscal year 2019. The balance was paid in October, 2019.
Note 4 - Loss Per Share
Basic net loss per share is calculated based
on the weighted-average number of shares of common stock outstanding in accordance with ASC Topic 260, Earnings per Share. Diluted
net loss per common share is calculated based on the weighted-average number of shares of common stock outstanding plus the effect
of potentially dilutive issuances of common stock. When the Company reports a net loss, the calculation of diluted net loss per
common stock excludes issuances of common stock as the effect would be anti-dilutive. For the three months ended September 30,
2019, 6,029,268 potentially dilutive issuances of shares of common stock have been excluded from the computation of diluted weighted
average shares outstanding because the effect would be anti-dilutive. Of the total securities excluded, 5,814,205 shares of common
stock are underlying outstanding warrants to purchase common stock and 215,063 were related to the unvested shares of restricted
common stock. For the three months ended September 30, 2018, 5,993,750 potentially dilutive issuances of shares of common stock
all related to warrants to purchase shares of common stock have been excluded from the computation of diluted weighted average
shares of common stock outstanding because the effect would be anti-dilutive.
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 5 - Stockholders’ Equity
Issuances for Cash
In August 2018, MJF issued 4,115,042 Series
C Preferred Units (1,099,376 shares of common stock after retroactively applying the exchange ratio) for cash consideration of
$10,000,000. Following the Mergers, all the Units were converted into Akerna’s common stock.
Restricted Shares
Prior to the Mergers, MJF had in place
a Profit Interest Incentive Plan (the “Profits Interest Plan”) whereby it could grant profit interest units (“PIUs”)
to employees or consultants and other independent advisors of the Company. PIUs granted under the Profits Interest Plan would generally
vest once a year over four years commencing on the date granted, or based on specified performance targets. MJF had the right,
but not the obligation, to repurchase vested PIUs from holders upon their termination of employment. Unvested PIUs were to be forfeited
upon termination of employment. If the holder was terminated for cause, as defined, all vested and unvested units would be forfeited.
PIUs repurchased or canceled or forfeited by the award recipient were available for reissuance. Upon completion of the Mergers
in June 2019, the non-vested PIUs were exchanged for restricted shares of common stock (“Restricted Shares”) subject
to restricted stock agreements with varying vesting terms that reflect the vesting conditions applicable to PIUs of the applicable
MJF equity holders at the time of the Mergers.
During the three months ended September 30,
2018, 185,324 PIUs were granted (which were exchanged for 49,519 Restricted Shares in the Mergers) and 30,000 PIUs (which would
equate to 8,016 Restricted Shares after applying the exchange ratio) were forfeited.
At September 30, 2019, there were 498,147 Restricted
Shares outstanding, of which 215,063 were vested. During the three months ended September 30, 2019, no Restricted Shares were forfeited.
For the three months ended September 30, 2019,
stock-based compensation expense related to the ratable amortization of the unvested Restricted Shares was $161,165. Approximately
$2.6 million of total unrecognized costs related to Restricted Shares will be ratably recognized over an estimated weighted average
remaining vesting period of 1.17 years.
Warrants
A summary of the status of outstanding
warrants to purchase common stock at September 30, 2019 and the changes during the three months then ended, is presented in the
following table:
|
|
Shares issuable upon exercise of warrants
|
|
|
Weighted average exercise
price
|
|
|
Weighted average remaining
life
|
|
Outstanding at July 1, 2019
|
|
|
6,183,115
|
|
|
$
|
11.50
|
|
|
|
3.72
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(368,910
|
)
|
|
|
11.50
|
|
|
|
-
|
|
Expired/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2019
|
|
|
5,814,205
|
|
|
$
|
11.50
|
|
|
|
3.40
|
|
There was no aggregate intrinsic value
for the warrants outstanding as of September 30, 2019.
Note 6 - Commitments and Contingencies
Operating Leases
The Company leases facilities, equipment,
and vehicles under non-cancelable operating leases. Rent expense for the three months ended September 30, 2019 and 2018 was $35,247
and $43,475, respectively.
On September 30, 2019, the
Company entered into an office service agreement (the “Office Lease”) effective and commencing February 1, 2020 and
expiring January 31, 2022, unless earlier terminated by either party in accordance with the terms of the Office Lease. The Office
Lease relates to new office space located at 1630 Welton Street, Denver, Colorado, 80202. The Company was required to pay a security
deposit equal to a one-month payment and initial set-up fees of $43,925. The monthly payments will be in the amount of $41,925
subject to a 4% annual indexation increase at each anniversary of the commencement date during the term of the Office Lease.
Future minimum lease payments to be made pursuant
to the Office Lease and the current leases are approximately $276,000 for the remainder of the year ended June 30, 2020, approximately
$530,000 for the year ended June 30, 2021, and approximately $316,000 for the year ended June 30, 2022.
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Letter-of-Credit
As of September 30, 2019, the Company had a
standby letter-of-credit with a bank in the amount of $500,000, which was classified as restricted cash on the balance sheets.
The beneficiary of the letter-of-credit is an insurance company. Upon its termination on June 22, 2019, the letter-of-credit was
renewed with the required balance reduced to $500,000. Accordingly, the restricted cash on the balance sheet as of September 30,
2019 is $500,000. The letter-of-credit will expire on June 22, 2020.
Litigation
From time to time, the Company may be
involved in litigation relating to claims arising out of its operations in the normal course of business. The Company will accrue
a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated.
When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this
range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for
a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly
related costs expected to be incurred. As of September 30, 2019, and through the date these financial statements were issued,
there were no legal proceedings requiring recognition or disclosure in the financial statements.
Note 7 – Revisions of
Previously Issued Financial Statements
During the course of preparing this Quarterly
Report on Form 10-Q for the three months ended September 30, 2019, the Company identified certain previously duplicated revenues,
which resulted in the overstatement of total assets and revenue during the periods outlined below, and the understatement of net
losses for the periods outlined below. Additionally, during the course of preparing its Annual Report on Form 10-K for the fiscal
year ended June 30, 2019, the Company identified certain costs of revenue related to consulting services previously being recorded
in operating expenses, which resulted in the overstatement of the gross profit for each of the quarters during the fiscal year
ended June 30, 2019.
|
|
June 30, 2018
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,017,731
|
|
|
$
|
(223,766
|
)
|
|
$
|
2,793,965
|
|
Total liabilities
|
|
|
1,393,902
|
|
|
|
-
|
|
|
|
1,393,902
|
|
Total stockholders’ equity
|
|
|
1,623,829
|
|
|
|
(223,766
|
)
|
|
|
1,400,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
12,090,810
|
|
|
|
(296,267
|
)
|
|
|
11,794,543
|
|
Total liabilities
|
|
|
2,090,163
|
|
|
|
-
|
|
|
|
2,090,163
|
|
Total stockholders’ equity
|
|
|
10,000,647
|
|
|
|
(296,267
|
)
|
|
|
9,704,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,371,900
|
|
|
|
(72,501
|
)
|
|
|
2,299,399
|
|
Cost of revenue
|
|
|
956,123
|
|
|
|
107,012
|
|
|
|
1,063,135
|
|
Gross profit
|
|
|
1,415,777
|
|
|
|
(179,513
|
)
|
|
|
1,236,264
|
|
Operating expenses
|
|
|
3,055,976
|
|
|
|
(107,012
|
)
|
|
|
2,948,964
|
|
Net loss
|
|
|
(1,623,182
|
)
|
|
|
(72,501
|
)
|
|
|
(1,695,683
|
)
|
Net loss per share
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
9,836,178
|
|
|
|
(320,434
|
)
|
|
|
9,515,744
|
|
Total liabilities
|
|
|
2,205,735
|
|
|
|
-
|
|
|
|
2,205,735
|
|
Total stockholders’ equity
|
|
|
7,630,443
|
|
|
|
(320,434
|
)
|
|
|
7,310,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,598,079
|
|
|
|
(24,167
|
)
|
|
|
2,573,912
|
|
Cost of revenue
|
|
|
1,198,911
|
|
|
|
122,084
|
|
|
|
1,320,995
|
|
Gross profit
|
|
|
1,399,168
|
|
|
|
(146,251
|
)
|
|
|
1,252,917
|
|
Operating expenses
|
|
|
3,826,539
|
|
|
|
(122,084
|
)
|
|
|
3,704,455
|
|
Net loss
|
|
|
(2,370,204
|
)
|
|
|
(24,167
|
)
|
|
|
(2,394,371
|
)
|
Net loss per share
|
|
|
(0.39
|
)
|
|
|
|
|
|
|
(0.40
|
)
|
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
|
|
March
31, 2019
|
|
|
|
As
reported
|
|
|
Adjustment
|
|
|
As
revised
|
|
Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
8,199,718
|
|
|
|
(320,434
|
)
|
|
|
7,879,284
|
|
Total liabilities
|
|
|
3,059,378
|
|
|
|
-
|
|
|
|
3,059,378
|
|
Total stockholders’ equity
|
|
|
5,140,340
|
|
|
|
(320,434
|
)
|
|
|
4,819,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,327,880
|
|
|
|
-
|
|
|
|
2,327,880
|
|
Cost of revenue
|
|
|
1,042,403
|
|
|
|
124,079
|
|
|
|
1,166,482
|
|
Gross profit
|
|
|
1,285,477
|
|
|
|
(124,079
|
)
|
|
|
1,161,398
|
|
Operating expenses
|
|
|
3,788,644
|
|
|
|
(124,079
|
)
|
|
|
3,664,565
|
|
Net loss
|
|
|
(2,490,103
|
)
|
|
|
-
|
|
|
|
(2,490,103
|
)
|
Net loss per share
|
|
|
(0.41
|
)
|
|
|
|
|
|
|
(0.41
|
)
|
|
|
June
30, 2019
|
|
|
|
As
reported
|
|
|
Adjustment
|
|
|
As
revised
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
24,522,671
|
|
|
|
(320,434
|
)
|
|
|
24,202,237
|
|
Total liabilities
|
|
|
2,442,503
|
|
|
|
-
|
|
|
|
2,442,503
|
|
Total stockholders’ equity
|
|
|
22,080,168
|
|
|
|
(320,434
|
)
|
|
|
21,759,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
10,919,785
|
|
|
|
(96,668
|
)
|
|
|
10,823,117
|
|
Cost of revenue
|
|
|
4,633,844
|
|
|
|
-
|
|
|
|
4,633,844
|
|
Gross profit
|
|
|
6,285,941
|
|
|
|
(96,668
|
)
|
|
|
6,189,273
|
|
Operating expenses
|
|
|
18,701,619
|
|
|
|
-
|
|
|
|
18,701,619
|
|
Net loss
|
|
|
(12,306,547
|
)
|
|
|
(96,668
|
)
|
|
|
(12,403,215
|
)
|
Net loss per share
|
|
|
(2.04
|
)
|
|
|
|
|
|
|
(2.05
|
)
|
In accordance
with SEC Staff Accounting Bulletin No 108, the Company has evaluated these errors, based on an analysis of quantitative and qualitative
factors, as to whether it was material to the condensed consolidated statements of operations for the three months ended September
30, 2018, December 31, 2018, and March 31, 2019, and consolidated statements of operations for the year ended June 30, 2019, as
well as to the consolidated balance sheets as of June 30, 2019 and 2018, condensed consolidated balance sheets as of September
30, 2018, December 31, 2018, and March 30, 2019, and as to whether amendments of previously filed financial statements with the
SEC are required. The Company has determined that quantitatively and qualitatively, the errors have no material impact to the
above mentioned financial statements.
Note
8 - Subsequent Events
Appointment of Chief Revenue
Officer
On October 1, 2019, the Company entered into a letter agreement
with Nina Simosko pursuant to which Ms. Simosko will serve as the Company’s Chief Revenue Officer effective as of September
23, 2019. The letter agreement provides for an at-will employment relationship. Ms. Simosko will receive an annual base salary
of $200,000 and Ms. Simosko may be eligible for a bonus. On October 7, 2019, Ms. Simosko was granted 125,156 of Restricted Stock
Units, which will vest as to 25% on the first anniversary of the grant date, as to the next 25% on the second anniversary of the
grant date, as to the next 25% on the third anniversary of the grant date and as to the remaining 25% on the fourth anniversary
of the grant date. In accordance with the terms of the letter agreement, upon a change of control transaction, Ms. Simosko’s
unvested restricted stock units or any other equity interests that she may be granted, will immediately vest. If Ms. Simosko’s
employment is terminated by the Company without cause or by her with good reason, she is entitled to her base salary through the
date of termination and the immediate vesting of 33% of the restricted stock units that are unvested on the date of termination.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
License Agreement with Zol
Solutions, Inc.
The Company
entered into a license agreement with Zol Solutions, Inc. (“ZolTrain”), effective October 24, 2019, to provide ZolTrain’s
online cannabis training platform as a co-branded integration option into the Company’s MJ Platform and Leaf Data Systems.
The Company and ZolTrain will share subscription-based
revenue generated from the Company’s customers. The share of revenue for each of the Company and ZolTrain will be based on
the number of training modules accessed by a customer and which of the Company and ZolTrain created the accessed content. Preceding
the entry into the license agreement, on October 7, 2019, the Company participated in a series seed preferred stock purchase offering
of ZolTrain along with other investors. The Company purchased approximately 203,000 shares of preferred stock for a purchase price
of $250,000, which represents a minority investment in ZolTrain. The definitive agreements provide the Company with rights of first
refusal with respect to newly issued securities of ZolTrain as well as issued and outstanding securities of ZolTrain that are offered
to third parties. In connection with the investment, Nina Simosko, our Chief Revenue Officer, was appointed as a member of ZolTrain’s
board of directors. In the event that Ms. Simosko or any other representative of the Company is not a member of ZolTrain’s
board of directors, the Company is entitled to consult with and advise ZolTrain’s management on significant business issues.
Compensation Agreement with Jessica Billingsley
On November
11, 2019, the Compensation Committee of the Board of Directors of the Company established the terms on which Ms. Billingsley,
the Company’s Chief Executive Officer, may earn a bonus for the fiscal year ended June 30, 2020. The Compensation Committee
determined that Ms. Billingsley will be eligible for a bonus derived from the same targets with respect to her bonuses in fiscal
year 2019, which were as follows:
The annual
bonus was determined based upon the following four (4) budget components, each of which scales linearly between achieving 75%
to 100%, and greater than 100% with respect to platform recurring revenue and government recurring revenue budget components respectively,
of the applicable fiscal year’s budget for each such component (with 50% of the target bonus payable upon achievement of
75% of budget, 100% of the target bonus payable upon achievement of budget (and, with respect to the platform recurring revenue
and government recurring revenue budget components, with 200% of each weighted portion of the target bonus payable upon achievement
of 125% of the corresponding component of budget (the “Accelerator”), with linear interpolation between points)).
However,
during fiscal year 2020 the Accelerator may be paid at the sole discretion of the Compensation Committee in cash, stock, or a
combination thereof.
In addition,
the Compensation Committee determined that, during fiscal year 2020, Ms. Billingsley is eligible to earn a performance based incentive
of $250,000, payable in stock, whereby (a) 50% of the bonus is automatically granted if the Company’s stock price/shareholder
return increases by 15% (measuring point starts at $10 per share) with respect to the consecutive 20-day volume weighted average
price prior to and including June 30, 2020, and (b) the remaining 50% of the bonus may be paid at the sole discretion of the Compensation
Committee.