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Fair Value | 12 Months Ended
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Dec. 31, 2022
Fair Value |
Fair Value | Note 15– Fair Value Fair Value Measurement – Contingent Consideration In connection with our acquisition of 365 Cannabis in October 2021, the 365 Cannabis selling shareholders had the potential to earn contingent consideration payable in Common Stock or cash if certain revenue criteria were met. The fair value of the contingent consideration, or Earn-out Obligation, on the date of acquisition of 365 Cannabis was $6.3 million. The Earn-out Obligation was reduced by $3.0 million in September 2022 in connection with the finalization of the purchase accounting associated with the acquisition of 365 Cannabis. The carrying amount of the Earn-out Obligation was further reduced to its fair value of $2.3 million on December 31, 2022 in connection with the sale of 365 Cannabis that was completed in January 2023. The corresponding adjustments have been reflected in the loss from discontinued operations for the year ended December 31, 2022. We value contingent consideration using a probability-weighted discounted cash flow model, which incorporates inputs that are not observable in the market and thus represents a Level 3 measurement as defined in GAAP. The unobservable inputs utilized for measuring the fair value of the contingent consideration reflect management’s own assumptions about the assumptions that market participants would use in valuing the contingent consideration as of the valuation date, as well as our knowledge of specific transactions that effect the calculation. Fair Value Option Election – Convertible Notes We elected to account for both the Senior Convertible Notes and the 2020 Notes by applying the fair value option. Under the fair value option, the financial liability is initially measured at its issue-date estimated fair value and subsequently remeasured at its estimated fair value on a recurring basis at each reporting period date. The change in estimated fair value resulting from changes in instrument-specific credit risk is recorded in Other comprehensive income as a component of stockholders’ equity (deficit). The remaining estimated fair value adjustment is presented as a single line item within Other income (expense) in our consolidated statement of operations under the caption, Change in fair value of convertible notes. For the 2020 Notes and Senior Convertible Notes, which are measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values for the periods presented:
2020 Notes |  |  |  |
Ending fair value balance - December 31, 2020 |  | $ | 13,398,000 |
Principal payments in cash and Common Stock |  |  | (15,172,727 | )
Change in fair value reported in the statements of operations |  |  | 2,030,904 |
Change in fair value reported in other comprehensive income |  |  | (70,000 | )
Gain on extinguishment of debt reported in the statement of operations |  |  | (186,177 | )
Ending fair value balance - October 5, 2021 |  | $ | — |
For the Senior Secured Notes, which are measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values from October 5, 2021 to December 31, 2022:
Senior Convertible Notes |  |  |  |
Beginning fair value balance on October 5, 2021 |  | $ | 18,000,000 |
Principal payments in cash and Common Stock |  |  | — |
Change in fair value reported in the statements of operations |  |  | (665,000 | )
Change in fair value reported in other comprehensive income |  |  | (30,000 | )
Ending fair value balance - December 31, 2021 |  | $ | 17,305,000 |
Principal payments in cash and Common Stock |  |  | (5,337,273 | )
Change in fair value reported in the statements of operations |  |  | 2,884,273 |
Change in fair value reported in other comprehensive income |  |  | (245,000 | )
Ending fair value balance - December 31, 2022 |  | $ | 14,607,000 |
The estimated fair value of the Senior Convertible Notes and the 2020 Notes were computed using Monte Carlo simulations, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined by GAAP. The unobservable inputs utilized for measuring the fair value of the Senior Convertible Notes and the 2020 Notes reflect our assumptions about the assumptions that market participants would use in valuing the Senior Convertible Notes and 2020 Notes as of the issuance date and subsequent reporting periods. We determined the fair value of the Senior Convertible Notes by using the following key inputs to the Monte Carlo Simulation Model:
|  | As of December 31, |
Fair Value Assumptions - Senior Convertible Notes |  | 2022 |  |  | 2021 |
Face value principal payable |  | $ | 14,662,727 |  |  | $ | 20,000,000 |
Conversion prices, as adjusted for the Reverse Stock Split and certain securities offerings |  | $ | 4.75 |  |  | $ | 4.05 |
Value of Common Stock on measurement date |  | $ | 0.69 |  |  | $ | 1.75 |
Expected term (years) |  |  | 1.8 |  |  |  | 2.8 |
Volatility |  |  | 77 | % |  |  | 75 | %
Market yield (range) |  |  | 44.3 to 43.9 | % |  |  | 37.1 to 0 | %
Risk free rate |  |  | 4.4 | % |  |  | 1.0 | %
Issue date |  |  | October 5, 2021 |  |  |  | October 5, 2021 |
Maturity date |  |  | October 5, 2024 |  |  |  | October 5, 2024 |
Fair Value Measurement – Private Warrants For the Private Warrants, which are classified as derivative liabilities on our consolidated balance sheets and measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values for the years ended December 31, 2022 and December 31, 2021:
| Year Ended December 31, |
| 2022 |  |  | 2021 |
Fair value balance at beginning of period | $ | 63,178 |  |  | $ | 311,376 |
Change in fair value reported in the statements of operations |  | (63,178 | ) |  |  | (248,198 | )
Fair value balance at end of period | $ | — |  |  | $ | 63,178 |
We utilized a binomial lattice model, which incorporates significant inputs, specifically the expected volatility, that are not observable in the market, and thus represents a Level 3 measurement as defined in GAAP. The unobservable inputs utilized for measuring the fair value of the Private Warrants reflect our estimates regarding the assumptions that market participants would use in valuing the 2019 Public Warrants as of the end of the reporting periods. We recognize changes to the derivative liability against earnings or loss each reporting period. Upon exercise of the Private Warrants, holders will receive a delivery of Akerna shares on a net or gross share basis per the terms of the Private Warrants and any exercise will reclassify the Private Warrants, at the time of exercise, to stockholders’ equity to reflect the equity transaction. There are no periodic settlements prior to the holder exercising the Private Warrants. There were no transfers in or out of Level 3 from other levels for the fair value hierarchy. We estimated the fair value by using the following key inputs:
|  | As of December 31, |
Fair Value Assumptions - Private Warrants |  | 2022 |  |  | 2021 |
Number of Private Warrants |  |  | 225,635 |  |  |  | 225,635 |
Exercise price, as adjusted for the Reverse Stock Split |  | $ | 230.00 |  |  | $ | 230.00 |
Value of Common Stock on measurement date |  | $ | 0.69 |  |  | $ | 1.75 |
Expected term (years) |  |  | 1.46 |  |  |  | 2.46 |
Volatility |  |  | NM |  |  |  | 85.8 | %
Risk free rate |  |  | NM |  |  |  | 0.8 | %
Fair Value Measurement – 2022 Unit Offering Common and Underwriter Warrants The fair value of the Common Warrants and Underwriter Warrants issued in connection with the 2022 Unit Offering represent a measurement within Level 3 of the fair value hierarchy and were estimated based on the following key inputs as of the date of the 2022 Unit Offering:
Fair Value Assumptions - 2022 Common and Underwriter Warrants |  | July 5, 2022 |
Exercise price as adjusted for the Reverse Stock Split | $ | 4.60 |
Expected term (years) |  | 5.0 |
Volatility |  | 136.9 | %
We utilized a Black-Scholes-Merton option pricing model, which incorporates significant inputs, specifically the expected volatility, that are not observable in the market, and thus represents a Level 3 measurement as defined in GAAP. The unobservable inputs utilized for measuring the fair value of the Common and Underwriter Warrants reflect our estimates regarding the assumptions that market participants would have used in valuing the Warrants as of the date of the 2022 Unit Offering or July 5, 2022. The fair value of the Common Warrants and Underwriter Warrants was recorded in equity as a component of the net proceeds received from the 2022 Unit Offering (see Note 13).

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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