Symptoms

We have successfully upgraded our PROD environment and now upgrading our QA environment. This is a distributed environment with 2 Smartform Servers, 2 Blackpearl Servers, and 2 MSSQL DB in "Always On" configuration. K2 service stopped on both K2 BlackPearl servers and the first BlackPearl server is being upgraded. BlackPearl, SmartForm, SmartForm Control Packs all installed successfully in that order. But on the K2 for SharePoint upgrade, it fails on the configuration portion.
 

Diagnoses

The issue was caused permission setting on the SmartObjects and Default Environment Library setting.
 

Resolution

We resolved the issue by performing the following steps:
-Remove all security settings in SmartObjects > Security > SmartObjects Administration
-Set the default environment to Development to match the web.config for the smartforms > Designer > workflow
-Remove security setting for Development Environment
-Remove all security for the following SmartObjects in SmartBox > Security
--SmartBox Administration
--FormsImage
--K2 Process Field Management
--PDF File
--SharePoint Integration Settings Events
--SharePoint Integration Workflows Events