UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2022
ORended: September 30, 2023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-40701
ECOARK HOLDINGS,RISKON INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Nevada | 30-0680177 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
303 Pearl Parkway, Suite 200, San Antonio, TX | 78215 | (800) 762-7293 | ||
(Address of principal executive offices) | (Zip Code) | (Registrant’s telephone number, including area code) |
(800) 762-7293
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, $0.001 par value per share | The Nasdaq Stock Market LLC (The Nasdaq Capital Market) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the precedingpast 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec.232.405(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by checkmarkcheck mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
AsState the number of February 15, 2023, there were 37,666,772shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,555,247 shares of common stock par value $0.001 per share, outstanding.as of November 20, 2023.
TABLE OF CONTENTS
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management’s expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Annual Report on Form 10-K for the year ended March 31, 2023, particularly the “Risk Factors” sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of filing of this Quarterly Report on Form 10-Q. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.
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PART I —I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTSSTATEMENTS.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Table of Content
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ECOARK HOLDINGS,RISKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2022 (UNAUDITED) AND MARCH 31, 2022
DECEMBER 31, | MARCH 31, | |||||||
2022 | 2022 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash ($16,000 pledged as collateral for credit as of December 31, 2022 and March 31, 2022, respectively) | $ | 32,642 | $ | 85,073 | ||||
Investment - White River Energy Corp. | 30,000,000 | - | ||||||
Secured note receivable and accrued interest receivable | 1,177,604 | - | ||||||
Intangible assets, cryptocurrencies | - | 19,267 | ||||||
Prepaid expenses and other current assets, current portion | 829,071 | 862,944 | ||||||
Current assets of discontinued operations/held for sale | 1,509,292 | 2,412,842 | ||||||
Total current assets | 33,548,609 | 3,380,126 | ||||||
NON-CURRENT ASSETS: | ||||||||
Property and equipment, net | 4,122,365 | 7,226,370 | ||||||
Power development costs | 1,000,000 | 2,000,000 | ||||||
Secured note receivable and accrued interest receivable, net of current portion | 3,187,500 | - | ||||||
Right of use assets - operating leases | 370,315 | 461,138 | ||||||
Other assets | 10,905 | 11,189 | ||||||
Non-current assets of discontinued operations/held for sale | 7,829,596 | 22,898,420 | ||||||
Total non-current assets | 16,520,681 | 32,597,117 | ||||||
TOTAL ASSETS | $ | 50,069,290 | $ | 35,977,243 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 2,998,876 | $ | 2,723,865 | ||||
Accrued liabilities | 1,026,100 | 668,659 | ||||||
Warrant derivative liabilities | 44,447 | 4,318,630 | ||||||
Preferred stock derivative liability | 4,811,875 | - | ||||||
Current portion of long-term debt | 303,136 | 608,377 | ||||||
Note payable - related parties | 125,000 | - | ||||||
Current portion of lease liability - operating leases | 119,975 | 117,451 | ||||||
Current liabilities of discontinued operations/held for sale | 3,047,164 | 3,337,994 | ||||||
Total current liabilities | 12,476,573 | 11,774,976 | ||||||
NON-CURRENT LIABILITIES | ||||||||
Lease liability - operating leases, net of current portion | 256,305 | 345,976 | ||||||
Long-term debt, net of current portion | 58,662 | 67,802 | ||||||
Non-current liabilities of discontinued operations/held for sale | 394,852 | 1,653,901 | ||||||
Total non-current liabilities | 709,819 | 2,067,679 | ||||||
Total Liabilities | 13,186,392 | 13,842,655 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
Series A Preferred stock, $0.001 par value; 5,000,000 shares authorized; 882 and 0 shares issued and outstanding as of December 31, 2022 and March 31, 2022, respectively | - | - | ||||||
Common stock, $0.001 par value, 100,000,000 shares authorized, 29,456,342 and 26,364,099 shares issued and 29,456,342 and 26,246,984 shares outstanding as of December 31, 2022 and March 31, 2022, respectively | 29,456 | 26,364 | ||||||
Additional paid in capital | 195,532,152 | 183,246,061 | ||||||
Accumulated deficit | (157,440,304 | ) | (158,868,204 | ) | ||||
Treasury stock, at cost | - | (1,670,575 | ) | |||||
Total stockholders’ equity before non-controlling interest | 38,121,304 | 22,733,646 | ||||||
Non-controlling interest | (1,238,406 | ) | (599,058 | ) | ||||
Total stockholders’ equity | 36,882,898 | 22,134,588 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 50,069,290 | $ | 35,977,243 |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE AND THREE MONTHS ENDED DECEMBER 31, 2022 AND 2021
NINE MONTHS ENDED | THREE MONTHS ENDED | |||||||||||||||
DECEMBER 31, | DECEMBER 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
CONTINUING OPERATIONS: | ||||||||||||||||
REVENUES | $ | - | $ | 17,455 | $ | - | $ | 17,455 | ||||||||
COST OF REVENUES | 229,534 | 92,823 | 47,460 | 92,823 | ||||||||||||
GROSS PROFIT | (229,534 | ) | (75,368 | ) | (47,460 | ) | (75,368 | ) | ||||||||
OPERATING EXPENSES | ||||||||||||||||
Salaries and salaries related costs | 10,998,108 | 5,504,833 | 1,280,078 | 3,159,979 | ||||||||||||
Professional and consulting fees | 743,403 | 649,119 | 287,630 | 385,576 | ||||||||||||
Selling, general and administrative costs | 4,440,902 | 4,455,788 | 1,424,435 | 1,092,819 | ||||||||||||
Depreciation, amortization, and impairment | 1,718,308 | 164,266 | 13,779 | 53,474 | ||||||||||||
Cryptocurrency impairment losses | 9,122 | 1,047 | - | 1,047 | ||||||||||||
Total operating expenses | 17,909,843 | 10,775,053 | 3,005,922 | 4,692,895 | ||||||||||||
LOSS FROM CONTINUING OPERATIONS BEFORE OTHER INCOME (EXPENSE) | (18,139,377 | ) | (10,850,421 | ) | (3,053,382 | ) | (4,768,263 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Change in fair value of warrant derivative liabilities | 4,274,183 | 15,294,814 | 1,381,711 | 10,979,137 | ||||||||||||
Change in fair value of preferred stock derivative liabilities | 1,864,777 | - | 1,864,777 | - | ||||||||||||
Derivative income (expense) | 2,878,345 | - | 2,878,345 | - | ||||||||||||
Loss on conversion of derivative liability to common stock in conversion of preferred stock | (3,923 | ) | - | (3,923 | ) | - | ||||||||||
Gain (loss) on disposal of fixed assets | (570,772 | ) | - | - | - | |||||||||||
Interest expense, net of interest income | (491,075 | ) | (553,561 | ) | (172,347 | ) | 3,594 | |||||||||
Total other income (expense) | 7,951,535 | 14,741,253 | 5,948,563 | 10,982,731 | ||||||||||||
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES AND DISCONTINUED OPERATIONS | (10,187,842 | ) | 3,890,832 | 2,895,181 | 6,214,468 | |||||||||||
DISCONTINUED OPERATIONS: | ||||||||||||||||
(Loss) income from discontinued operations | (11,020,812 | ) | (2,908,619 | ) | (468,210 | ) | (1,937,100 | ) | ||||||||
(Loss) on disposal of discontinued operations | (11,823,395 | ) | - | - | - | |||||||||||
Total discontinued operations | (22,844,207 | ) | (2,908,619 | ) | (468,210 | ) | (1,937,100 | ) | ||||||||
(LOSS) INCOME FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES | (33,032,049 | ) | 982,213 | 2,426,971 | 4,277,368 | |||||||||||
PROVISION FOR INCOME TAXES | - | - | - | - | ||||||||||||
NET (LOSS) INCOME | (33,032,049 | ) | 982,213 | 2,426,971 | 4,277,368 | |||||||||||
NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | 2,642,559 | 322,635 | 322,351 | 322,635 | ||||||||||||
NET (LOSS) INCOME TO CONTROLLING INTEREST | $ | (30,389,490 | ) | $ | 1,304,848 | $ | 2,749,322 | $ | 4,600,003 | |||||||
Less: Preferred Stock Dividends | 484,213 | - | 99,737 | - | ||||||||||||
NET (LOSS) INCOME TO CONTROLLING INTEREST OF COMMON STOCKHOLDERS | $ | (30,873,703 | ) | $ | 1,304,848 | $ | 2,649,585 | $ | 4,600,003 | |||||||
NET (LOSS) INCOME PER SHARE - BASIC | ||||||||||||||||
Continuing operations | $ | (0.28 | ) | $ | 0.17 | $ | 0.11 | $ | 0.25 | |||||||
Discontinued operations | (0.83 | ) | (0.12 | ) | (0.02 | ) | (0.07 | ) | ||||||||
$ | (1.11 | ) | $ | 0.05 | $ | 0.09 | $ | 0.18 | ||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED | 27,369,610 | 24,727,970 | 28,499,875 | 26,364,099 | ||||||||||||
NET (LOSS) PER SHARE - DILUTED (see NOTE 1) | $ | (1.11 | ) | $ | (0.57 | ) | $ | (0.12 | ) | $ | (0.24 | ) | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (see NOTE 1) | 27,369,610 | 24,727,970 | 72,747,922 | 26,364,099 |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2022 AND 2021
Additional | ||||||||||||||||||||||||||||||||||||
Preferred | Common Stock | Paid-In | Accumulated | Treasury | Non-controlling | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Interest | Total | ||||||||||||||||||||||||||||
Balance - March 31, 2021 | - | $ | - | 22,705,775 | $ | 22,705 | $ | 167,587,659 | $ | (148,912,810 | ) | $ | (1,670,575 | ) | $ | - | $ | 17,026,979 | ||||||||||||||||||
Shares issued in the exercise of stock options, including cashless exercises | - | - | 20,265 | 20 | 28,277 | - | - | - | 28,297 | |||||||||||||||||||||||||||
Shares issued for services rendered, net of amounts prepaid | - | - | 114,796 | 114 | 674,886 | - | - | - | 675,000 | |||||||||||||||||||||||||||
Share-based compensation | - | - | - | - | 399,173 | - | - | - | 399,173 | |||||||||||||||||||||||||||
Net income for the period | - | - | - | - | - | 2,559,524 | - | - | 2,559,524 | |||||||||||||||||||||||||||
Balance - June 30, 2021 | - | - | 22,840,836 | 22,839 | 168,689,995 | (146,353,286 | ) | (1,670,575 | ) | - | 20,688,973 | |||||||||||||||||||||||||
Shares issued for services rendered, net of amounts prepaid | - | - | 45,000 | 45 | 91,955 | - | - | - | 92,000 | |||||||||||||||||||||||||||
Shares issued in registered direct offering, net of amount allocated to derivative liability | - | - | 3,478,261 | 3,478 | 8,023,602 | - | - | - | 8,027,080 | |||||||||||||||||||||||||||
Share-based compensation | - | - | - | - | 819,009 | - | - | - | 819,009 | |||||||||||||||||||||||||||
Fractional adjustment | - | - | 2 | 2 | - | - | - | - | 2 | |||||||||||||||||||||||||||
Net loss for the period | - | - | - | - | - | (5,854,679 | ) | - | - | (5,854,679 | ) | |||||||||||||||||||||||||
Balance - September 30, 2021 | - | - | 26,364,099 | 26,364 | 177,624,561 | (152,207,965 | ) | (1,670,575 | ) | - | 23,772,385 | |||||||||||||||||||||||||
Vesting of shares issued in prior quarter | - | - | - | - | 114,190 | - | - | - | 114,190 | |||||||||||||||||||||||||||
Shares issued by Agora Digital Holdings, Inc. for services rendered, net of amounts prepaid | - | - | - | - | 2,280,969 | - | - | - | 2,280,969 | |||||||||||||||||||||||||||
Share-based compensation | - | - | - | - | 493,284 | - | - | - | 493,284 | |||||||||||||||||||||||||||
Recognition of non-controlling interest | - | - | - | - | - | (30,000 | ) | - | 30,000 | - | ||||||||||||||||||||||||||
Net income (loss) for the period | - | - | - | - | - | 4,600,003 | - | (322,635 | ) | 4,277,368 | ||||||||||||||||||||||||||
Balance - December 31, 2021 | - | $ | - | 26,364,099 | $ | 26,364 | $ | 180,513,004 | $ | (147,637,962 | ) | $ | (1,670,575 | ) | $ | (292,635 | ) | $ | 30,938,196 | |||||||||||||||||
Balance - March 31, 2022 | - | $ | - | 26,364,099 | $ | 26,364 | $ | 183,246,061 | $ | (158,868,204 | ) | $ | (1,670,575 | ) | $ | (599,058 | ) | $ | 22,134,588 | |||||||||||||||||
Shares issued for commitment for preferred stock offering, net of expenses | - | - | 102,881 | 103 | 193,313 | - | - | - | 193,416 | |||||||||||||||||||||||||||
Shares issued by Agora Digital Holdings, Inc. for services rendered, net of amounts prepaid | - | - | - | - | 5,215,287 | - | - | - | 5,215,287 | |||||||||||||||||||||||||||
Share-based compensation | - | - | - | - | 182,561 | - | - | - | 182,561 | |||||||||||||||||||||||||||
Net loss for the period | - | - | - | - | - | (10,153,383 | ) | - | (571,261 | ) | (10,724,644 | ) | ||||||||||||||||||||||||
Preferred stock dividends | - | - | - | - | - | (43,151 | ) | - | - | (43,151 | ) | |||||||||||||||||||||||||
Balance - June 30, 2022 | - | - | 26,466,980 | 26,467 | 188,837,222 | (169,064,738 | ) | (1,670,575 | ) | (1,170,319 | ) | 16,958,057 | ||||||||||||||||||||||||
Shares issued in conversion of preferred stock to common stock | - | - | 1,276,190 | 1,276 | 2,635,528 | - | - | - | 2,636,804 | |||||||||||||||||||||||||||
Shares issued in settlement | - | - | 432,885 | 433 | (626,008 | ) | - | 1,670,575 | - | 1,045,000 | ||||||||||||||||||||||||||
Shares issued by Agora Digital Holdings, Inc. for services rendered, net of amounts prepaid | - | - | - | - | 2,956,921 | - | - | - | 2,956,921 | |||||||||||||||||||||||||||
Share-based compensation | - | - | - | - | 160,040 | - | - | - | 160,040 | |||||||||||||||||||||||||||
Disposal of subsidiaries in reverse merger transactions | - | - | - | - | - | 32,301,782 | - | 2,003,211 | 34,304,993 | |||||||||||||||||||||||||||
Net loss for the period | - | - | - | - | - | (22,985,608 | ) | - | (1,748,947 | ) | (24,734,555 | ) | ||||||||||||||||||||||||
Preferred stock dividends | - | - | - | - | - | (341,325 | ) | - | - | (341,325 | ) | |||||||||||||||||||||||||
Balance - September 30, 2022 | - | - | 28,176,055 | 28,176 | 193,963,703 | (160,089,889 | ) | - | (916,055 | ) | 32,985,935 | |||||||||||||||||||||||||
Shares issued in conversion of preferred stock to common stock | - | - | 1,140,447 | 1,140 | 544,449 | - | - | - | 545,589 | |||||||||||||||||||||||||||
Shares issued for preferred stock dividends | - | - | 139,840 | 140 | 104,423 | - | - | - | 104,563 | |||||||||||||||||||||||||||
Shares issued by Agora Digital Holdings, Inc. for services rendered, net of amounts prepaid | - | - | - | - | 791,491 | - | - | - | 791,491 | |||||||||||||||||||||||||||
Share-based compensation | - | - | - | - | 128,086 | - | - | - | 128,086 | |||||||||||||||||||||||||||
Net income (loss) for the period | - | - | - | - | - | 2,749,322 | - | (322,351 | ) | 2,426,971 | ||||||||||||||||||||||||||
Preferred stock dividends | - | - | - | - | - | (99,737 | ) | - | - | (99,737 | ) | |||||||||||||||||||||||||
Balance - December 31, 2022 | - | $ | - | 29,456,342 | $ | 29,456 | $ | 195,532,152 | $ | (157,440,304 | ) | $ | - | $ | (1,238,406 | ) | $ | 36,882,898 |
September 30, 2023 | March 31, 2023 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 1,554 | $ | 66,844 | ||||
Accounts receivable | 63,700 | - | ||||||
Investment - White River Energy Corp. (“WTRV”) | 9,224,785 | 9,224,785 | ||||||
Prepaid expenses and other current assets | 449,398 | 1,210,157 | ||||||
Current assets of discontinued operations held for sale | 60,860 | 1,302,709 | ||||||
TOTAL CURRENT ASSETS | 9,800,297 | 11,804,495 | ||||||
Property and equipment, net | 471,329 | 4,432,403 | ||||||
Intangible assets, net | 5,996,372 | 6,204,339 | ||||||
Right-of-use assets, operating leases | 276,136 | 339,304 | ||||||
Other non-current assets | - | 10,905 | ||||||
Non-current assets of discontinued operations/held for sale | 259,790 | 984,071 | ||||||
TOTAL ASSETS | $ | 16,803,924 | $ | 23,775,517 | ||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 9,134,059 | $ | 6,225,887 | ||||
Dividends payable | 3,150,680 | - | ||||||
Accrued liabilities | 2,863,118 | 1,026,079 | ||||||
Derivative liabilities | 2,200,951 | 19,862,226 | ||||||
Current portion of long-term debt | 325,699 | 323,818 | ||||||
Advances - former parent of Bitnile.com, Inc. (“BNC”) | 11,453,163 | 5,782,643 | ||||||
Current portion of convertible note payable | 3,397,567 | - | ||||||
Current portion of lease liability - operating leases | 69,073 | 110,120 | ||||||
Current liabilities of discontinued operations/held for sale | 1,750,910 | 3,569,672 | ||||||
TOTAL CURRENT LIABILITIES | 34,345,220 | 36,900,445 | ||||||
LONG TERM LIABILITIES | ||||||||
Operating lease liability, non-current | 215,150 | 235,856 | ||||||
Long-term debt net of current portion | 187,782 | 205,554 | ||||||
Non-current liabilities of discontinued operations/held for sale | 1,108,955 | 377,786 | ||||||
TOTAL LIABILITIES | 35,857,107 | 37,719,641 | ||||||
SHAREHOLDERS’ DEFICIT: | ||||||||
Preferred stock, $0.001 par value, 5,000,000 shares authorized; Series A Preferred stock, 882 shares issued and outstanding as of September 30, 2023 and March 31, 2023 | - | - | ||||||
Series B Preferred stock, 8,637.5 shares issued and outstanding as of September 30, 2023 and March 31, 2023 | - | - | ||||||
Series C Preferred stock, 1,362.5 shares issued and outstanding as of September 30, 2023 and March 31, 2023 | - | - | ||||||
Common Stock, $0.001 par value, 500,000,000 shares authorized, 2,359,306 and 1,383,832 shares issued and outstanding as of September 30, 2023 and March 31, 2023, respectively | 2,359 | 1,384 | ||||||
Additional paid-in capital | 203,752,371 | 199,062,577 | ||||||
Accumulated deficit | (217,249,742 | ) | (208,677,438 | ) | ||||
Total shareholders’ deficit before non-controlling interest | (13,495,012 | ) | (9,613,477 | ) | ||||
Non-controlling interest | (5,558,171 | ) | (4,330,647 | ) | ||||
TOTAL SHAREHOLDERS’ DEFICIT | (19,053,183 | ) | (13,944,124 | ) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | 16,803,924 | $ | 23,775,517 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
RISKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Hospitality and VIP experience revenue | $ | 17,700 | $ | - | $ | 62,850 | $ | - | ||||||||
Gaming revenue | 1,500 | - | 1,500 | - | ||||||||||||
Cost of revenue | 28,422 | 88,212 | 114,722 | 182,074 | ||||||||||||
Gross loss | (9,222 | ) | (88,212 | ) | (50,372 | ) | (182,074 | ) | ||||||||
Operating expenses: | ||||||||||||||||
Depreciation, amortization and impairment | 4,032,157 | 1,668,555 | 4,169,039 | 1,713,651 | ||||||||||||
Bad debt | 55,548 | - | 108,963 | - | ||||||||||||
Selling, general and administration | 7,030,891 | 1,621,728 | 16,864,801 | 2,460,929 | ||||||||||||
Salaries and professional consulting fees | 2,619,762 | 3,625,044 | 4,211,660 | 9,582,893 | ||||||||||||
Total operating expenses | 13,738,358 | 6,915,327 | 25,354,463 | 13,757,473 | ||||||||||||
Operating loss | (13,747,580 | ) | (7,003,539 | ) | (25,404,835 | ) | (13,939,547 | ) | ||||||||
Other income (expense) | ||||||||||||||||
Change in fair value of derivative liabilities | 1,862,290 | 3,286,004 | 22,982,843 | 2,892,472 | ||||||||||||
Dividend expense | (1,553,458 | ) | - | (3,150,680 | ) | - | ||||||||||
Amortization of discounts | (2,161,211 | ) | - | (2,584,384 | ) | - | ||||||||||
Loss on disposal of fixed assets | - | (570,772 | ) | - | (570,772 | ) | ||||||||||
Interest income (expense), net of interest income | 41,499 | (281,900 | ) | (221,036 | ) | (318,728 | ) | |||||||||
Total other (expense) income | (1,810,880 | ) | 2,433,332 | 17,026,743 | 2,002,972 | |||||||||||
Loss from continuing operations before discontinued operations | (15,558,460 | ) | (4,570,207 | ) | (8,378,092 | ) | (11,936,575 | ) | ||||||||
Discontinued operations | ||||||||||||||||
Loss from discontinued operations | (385,242 | ) | (7,629,448 | ) | (2,104,888 | ) | (11,699,050 | ) | ||||||||
Gain (loss) on disposal of discontinued operations | 683,152 | (12,534,900 | ) | 683,152 | (11,823,395 | ) | ||||||||||
Total gain (loss) discontinued operations | 297,910 | (20,164,348 | ) | (1,421,736 | ) | (23,522,445 | ) | |||||||||
Net loss | (15,260,550 | ) | (24,734,555 | ) | (9,799,828 | ) | (35,459,020 | ) | ||||||||
Net loss attributable to non-controlling interest | 742,645 | 1,748,947 | 1,227,524 | 2,320,208 | ||||||||||||
Net loss to controlling interest | (14,517,905 | ) | (22,985,608 | ) | (8,572,304 | ) | (33,138,812 | ) | ||||||||
Less preferred stock dividends | - | 341,325 | - | 384,476 | ||||||||||||
Net loss to controlling interest of common shareholders | $ | (14,517,905 | ) | $ | (23,326,933 | ) | $ | (8,572,304 | ) | $ | (33,523,288 | ) | ||||
Net loss per share – basic and diluted | ||||||||||||||||
Net loss continuing operations | $ | (6.59 | ) | $ | (5.07 | ) | $ | (4.02 | ) | $ | (13.40 | ) | ||||
Net gain (loss) discontinued operations | $ | 0.13 | $ | (22.35 | ) | $ | (0.68 | ) | $ | (26.40 | ) | |||||
Net loss per share | $ | (6.47 | ) | $ | (27.42 | ) | $ | (4.70 | ) | $ | (39.80 | ) | ||||
Weighted average common shares – basic and diluted | 2,359,306 | 902,115 | 2,084,672 | 890,959 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ECOARK HOLDINGS,RISKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)CHANGES IN SHAREHOLDERS’ DEFICIT
FOR THE NINETHREE AND SIX MONTHS ENDED DECEMBER 31,SEPTEMBER 30, 2023 AND 2022 AND 2021
(UNAUDITED)
Common Stock | Additional Paid in | Accumulated | Non-controlling | Total Shareholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | interest | Deficit | |||||||||||||||||||
Balance, March 31, 2023 | 1,383,832 | $ | 1,384 | $ | 199,062,577 | $ | (208,677,438 | ) | $ | (4,330,647 | ) | $ | (13,944,124 | ) | ||||||||||
Shares issued for cash under at-the-market (“ATM”), net of fees | 935,452 | 935 | 1,779,505 | - | - | 1,780,440 | ||||||||||||||||||
Shares issued for preferred stock dividends | 40,022 | 40 | 300,118 | - | - | 300,158 | ||||||||||||||||||
Shares issued by Agora Digital Holdings, Inc. (“Agora”) for services rendered, net of amounts prepaid | - | - | 630,206 | - | - | 630,206 | ||||||||||||||||||
Share-based compensation | - | - | 258,655 | - | - | 258,655 | ||||||||||||||||||
Net income | - | - | - | 5,945,601 | (484,879 | ) | 5,460,722 | |||||||||||||||||
Balance, June 30, 2023 | 2,359,306 | 2,359 | 202,031,061 | (202,731,837 | ) | (4,815,526 | ) | (5,513,943 | ) | |||||||||||||||
Shares issued by Agora for services rendered, net of amounts prepaid | - | - | 1,721,310 | - | - | 1,721,310 | ||||||||||||||||||
Net loss for the period | - | - | - | (14,517,905 | ) | (742,645 | ) | (15,260,550 | ) | |||||||||||||||
Balance, September 30, 2023 | 2,359,306 | $ | 2,359 | $ | 203,752,371 | $ | (217,249,742 | ) | $ | (5,558,171 | ) | $ | (19,053,183 | ) |
DECEMBER 31, | ||||||||
2022 | 2021 | |||||||
CASH FLOW FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS | ||||||||
Net (loss) income | $ | (30,873,703 | ) | $ | 1,304,848 | |||
Adjustments to reconcile net (loss) income to net cash used in operating activities | ||||||||
Change in non-controlling interest | (2,642,559 | ) | (322,635 | ) | ||||
Depreciation, amortization, and impairment | 1,718,308 | 164,266 | ||||||
Cryptocurrency impairment losses | 9,122 | 1,047 | ||||||
Debt modification expense | 879,368 | - | ||||||
Share-based compensation | 470,687 | 1,711,466 | ||||||
Change in fair value of warrant derivative liabilities | (4,274,183 | ) | (15,294,814 | ) | ||||
Change in fair value of preferred stock derivative liabilities | (1,864,777 | ) | - | |||||
Derivative (income) expense | (2,878,345 | ) | - | |||||
Loss on conversion of derivative liabilities to common stock | 3,923 | - | ||||||
Loss on disposal of fixed assets | 570,772 | - | ||||||
(Gain) on disposal of White River and Pinnacle Frac | 12,534,900 | - | ||||||
(Gain) on disposal of Trend Discovery Holdings | (711,505 | ) | - | |||||
Common shares issued for services | 1,045,000 | 881,190 | ||||||
Common shares issued for services - Agora | 8,963,699 | 2,280,969 | ||||||
Amortization of discount | 47,515 | - | ||||||
Development expenses reduced from refund of power development fee | 155,292 | - | ||||||
Warrants granted for interest expense | - | 545,125 | ||||||
Warrants granted for commissions | - | 744,530 | ||||||
Commitment fees on long-term debt | 17,681 | - | ||||||
Changes in assets and liabilities | ||||||||
Prepaid expenses and other current assets | 34,157 | (42,436 | ) | |||||
Intangible assets - cryptocurrencies | 10,145 | (17,455 | ) | |||||
Amortization of right of use asset - financing leases | - | - | ||||||
Amortization of right of use asset - operating leases | 90,823 | 15,912 | ||||||
Accrued interest receivable | (115,104 | ) | - | |||||
Operating lease expense | (87,147 | ) | (14,996 | ) | ||||
Accounts payable | 1,130,011 | 1,758,231 | ||||||
Accrued liabilities | 1,154,714 | (1,140,846 | ) | |||||
Total adjustments | 16,262,497 | (8,730,446 | ) | |||||
Net cash used in operating activities of continuing operations | (14,611,206 | ) | (7,425,598 | ) | ||||
Net cash provided by (used in) discontinued operations | 2,225,257 | (989,135 | ) | |||||
Net cash used in operating activities | (12,385,949 | ) | (8,414,733 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from the sale of power development costs | 844,708 | (2,000,000 | ) | |||||
Purchase of fixed assets | (40,074 | ) | (7,065,639 | ) | ||||
Net cash provided by (used in) investing activities of continuing operations | 804,634 | (9,065,639 | ) | |||||
Net cash (used in) investing activities of discontinued operations | (287,413 | ) | (327,032 | ) | ||||
Net cash provided by (used in) investing activities | 517,221 | (9,392,671 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from the issuance of common stock in a registered direct offering, net of fees | - | 19,228,948 | ||||||
Proceeds from exercise of stock options | - | 28,300 | ||||||
Proceeds from notes payable - related parties | 741,000 | - | ||||||
Repayments of notes payable - related parties | (616,000 | ) | (327,500 | ) | ||||
Proceeds from long-term debt | 487,500 | - | ||||||
Repayment of long-term debt | (819,562 | ) | (23,966 | ) | ||||
Proceeds from the sale of preferred stock | 12,000,000 | - | ||||||
Net cash provided by financing activities of continuing operations | 11,792,938 | 18,905,782 | ||||||
Net cash provided by (used in) financing activities of discontinued operations | 23,359 | (1,474,708 | ) | |||||
Net cash provided by financing activities | 11,816,297 | 17,431,074 | ||||||
NET (DECREASE) IN CASH AND RESTRICTED CASH | (52,431 | ) | (376,330 | ) | ||||
CASH - BEGINNING OF PERIOD | 85,073 | 809,811 | ||||||
CASH - END OF PERIOD | $ | 32,642 | $ | 433,481 | ||||
SUPPLEMENTAL DISCLOSURES | ||||||||
Cash paid for interest expense | $ | 11,173 | $ | 20,106 | ||||
Cash paid for income taxes | $ | - | $ | - | ||||
SUMMARY OF NON-CASH ACTIVITIES: | ||||||||
Reclassification of assets of discontinued operations to current operations in fixed assets | $ | - | $ | 193,904 | ||||
Recognition of non-controlling interest - Agora | $ | - | $ | 30,000 | ||||
Lease liability recognized for ROU asset | $ | - | $ | 506,610 | ||||
Issuance costs on mezzanine equity | $ | 193,416 | $ | - | ||||
Preferred stock dividend paid in common shares | $ | 104,563 | $ | - | ||||
Non-controlling interest recorded in consolidation of Enviro Technologies US, Inc. | $ | 2,003,211 | $ | - | ||||
Preferred shares/derivative liability converted into common stock | $ | 3,182,416 | $ | - | ||||
Mezzanine equity reclassified to liability upon amendment | $ | 9,551,074 | $ | - |
Common Stock | Additional Paid in | Accumulated | Treasury | Non-controlling | Total Shareholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | interest | Deficit | ||||||||||||||||||||||
Balance, March 31, 2022 | 878,803 | $ | 879 | $ | 183,246,061 | $ | (158,868,204 | ) | $ | (1,670,575 | ) | $ | (599,058 | ) | $ | 22,134,588 | ||||||||||||
Shares issued for commitment for preferred stock offering, net of expenses | 3,429 | 3 | 193,413 | - | - | - | 193,416 | |||||||||||||||||||||
Shares issued by Agora for services rendered, net of amounts prepaid | - | - | 5,215,287 | - | - | - | 5,215,287 | |||||||||||||||||||||
Share-based compensation | - | - | 182,561 | - | - | - | 182,561 | |||||||||||||||||||||
Net loss | - | - | - | (10,153,204 | ) | - | (571,261 | ) | (10,724,465 | ) | ||||||||||||||||||
Preferred dividends | - | - | - | (43,151 | ) | - | - | (43,151 | ) | |||||||||||||||||||
Balance, June 30, 2022 | 882,232 | 882 | 188,862,807 | (169,064,559 | ) | (1,670,575 | ) | (1,170,319 | ) | 16,958,236 | ||||||||||||||||||
Shares issued in conversion of preferred stock to common stock | 42,540 | 43 | 2,636,761 | - | - | - | 2,636,804 | |||||||||||||||||||||
Shares issued in settlement | 14,430 | 14 | (625,589 | ) | - | 1,670,575 | - | 1,045,000 | ||||||||||||||||||||
Shares issued by Agora for services rendered, net of amounts prepaid | - | - | 2,956,922 | - | - | - | 2,956,922 | |||||||||||||||||||||
Share-based compensation | 160,040 | 160,040 | ||||||||||||||||||||||||||
Disposal of subsidiaries in reverse merger transactions | - | - | - | 28,871,171 | - | 532,949 | 29,404,120 | |||||||||||||||||||||
Net loss | - | - | - | (22,985,608 | ) | - | (1,748,947 | ) | (24,734,555 | ) | ||||||||||||||||||
Preferred stock dividends | - | - | - | (341,325 | ) | - | - | (341,325 | ) | |||||||||||||||||||
Balance, September 30, 2022 | 939,202 | $ | 939 | $ | 193,990,941 | $ | (163,520,321 | ) | $ | - | $ | (2,386,317 | ) | $ | 28,085,242 |
The accompanying notes are an integral part of these unauditodensed consolidated financial statements.
ECOARK HOLDINGS,RISKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended September 30, | ||||||||
Cash flows from operating activities: | 2023 | 2022 | ||||||
Net loss | $ | (8,572,304 | ) | $ | (33,523,288 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Change in non-controlling interest | (1,227,524 | ) | (2,320,208 | ) | ||||
Amortization of discount | 2,584,384 | 41,086 | ||||||
Depreciation, amortization and impairment | 4,169,039 | 1,713,651 | ||||||
Legal costs for ATM facility | 110,000 | - | ||||||
Share-based compensation | 258,655 | 342,601 | ||||||
(Gain) loss on disposal of Zest Labs, Inc. (“Zest Labs”) and other fixed assets | (683,152 | ) | 570,772 | |||||
Loss on disposal of WTRV and Banner Midstream Corp. (“Banner Midstream”) | - | 12,534,900 | ||||||
Gain on disposal of Trend Discovery Holdings, LLC (“Trend Discovery”) | - | (711,505 | ) | |||||
Common shares issued for services | - | 1,045,000 | ||||||
Development expenses reduced from refund of power development costs | - | 155,292 | ||||||
Change in fair value of derivative liabilities | (22,982,843 | ) | (2,892,472 | ) | ||||
Shares issued for preferred dividend | 300,158 | - | ||||||
Common stock issued for services - Agora | 2,351,518 | 8,172,208 | ||||||
Commitment fees on long-term debt | - | 17,681 | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | (63,700 | ) | - | |||||
Prepaid expenses and other current assets | 774,119 | 111,050 | ||||||
Accrued interest receivable | - | (61,979 | ) | |||||
Amortization of right of use asset - operating leases | 63,168 | 60,187 | ||||||
Accounts payable | 2,375,644 | 631,723 | ||||||
Accrued expenses | 1,751,903 | 616,521 | ||||||
Dividends payable | 3,150,680 | - | ||||||
Operating lease | (61,753 | ) | (57,440 | ) | ||||
Total adjustments | (7,129,704 | ) | 19,969,068 | |||||
Net cash used in operating activities of continued operations | (15,702,008 | ) | (13,554,220 | ) | ||||
Net cash provided by discontinued operations | 2,176,649 | 2,544,857 | ||||||
Net cash used in operating activities | (13,525,359 | ) | (11,009,363 | ) | ||||
Cash flows from investing activities: | ||||||||
Proceeds from the sale of power development costs | - | 844,708 | ||||||
Purchase of fixed assets | - | (40,074 | ) | |||||
Net cash provided by investing activities of continuing operations | - | 804,634 | ||||||
Net cash used in investing activities of discontinued operations | - | (664,902 | ) | |||||
Net cash provided by investing activities | - | 139,732 | ||||||
Cash flows from financing activities: | ||||||||
Proceeds from former parent of BNC | 7,510,520 | - | ||||||
Redemption of preferred stock | (1,205,000 | ) | - | |||||
Proceeds from note - related party | - | 616,000 | ||||||
Payments on note - related party | - | (616,000 | ) | |||||
Payments of long-term debt | (15,891 | ) | (716,644 | ) | ||||
Proceeds from long-term debt | - | 487,500 | ||||||
Proceeds from the sale of common stock under ATM, net | 1,780,440 | - | ||||||
Proceeds from convertible note | 5,390,000 | - | ||||||
Proceeds from the sale of preferred stock | - | 12,000,000 | ||||||
Net cash provided by financing activities of continuing operations | 13,460,069 | 11,770,856 | ||||||
Net cash used in financing activities of discontinued operations | - | - | ||||||
Net cash provided by financing activities | 13,460,069 | 11,770,856 | ||||||
Net (decrease) increase in cash and cash equivalents | (65,290 | ) | 901,225 | |||||
Cash at beginning of period | 66,844 | 85,073 | ||||||
Cash at end of period | $ | 1,554 | $ | 986,298 | ||||
SUPPLEMENTAL DISCLOSURES | ||||||||
Cash paid for interest expense | $ | 8,018 | $ | 11,173 | ||||
SUMMARY OF NON-CASH ACTIVITIES | ||||||||
Issuance costs on mezzanine equity | $ | - | $ | 193,416 | ||||
Reclassification of convertible notes and warrants to derivative liability | $ | 4,686,817 | $ | - | ||||
Non-controlling interest recorded in consolidation of Enviro Technologies US, Inc. | $ | - | $ | 532,949 | ||||
Preferred shares converted into common stock | $ | - | $ | 2,636,827 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
RISKON INTERNATIONAL, INC. AND SUBSIDIAIRES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
DECEMBER 31, 2022
NOTE 1: ORGANIZATION AND SUMMARY1. DESCRIPTION OF SIGNIFICANT ACCOUNTING POLICIESBUSINESS
Overview
On March 15, 2023, Ecoark Holdings Inc. changed its name to BitNile Metaverse Inc. and subsequently on November 1, 2023, it changed its name to RiskOn International, Inc (“Ecoark Holdings”ROI” or the “Company”). The Company is a holding company, incorporated in the State of Nevada on November 19, 2007. On February 8, 2023, the Company entered into a Share Exchange Agreement (the “SEA”) by and among Ault Alliance, Inc. (“AAI”), the former owner of 100% of BNC and a significant shareholder of the Company, and the minority shareholders of BNC (the “Minority Shareholders”). BNC was transferred to the Company upon the closing of the SEA. The SEA provides that, subject to the terms and conditions set forth therein, the Company will acquire all of the outstanding shares of capital stock of BNC as well as the securities of Earnity, Inc. (“Earnity”) beneficially owned by BNC (which represents approximately 19.9% of the outstanding common stock of Earnity as of the date of the SEA), in exchange for the following: (i) 8,637.5 shares of newly designated Series B Convertible Preferred Stock of the Company to be issued to AAI (the “Series B”), and (ii) 1,362.5 shares of newly designated Series C Convertible Preferred Stock of the Company to be issued to the Minority Shareholders (the “Series C,” and together with the Series B, the “Preferred Stock”). The Series B and the Series C, the terms of which are summarized in more detail below, each have a stated value of $10,000 per share (the “Stated Value”), for a combined stated value of $100,000,000, and subject to adjustment are convertible into a total of up to 13,333,333 shares of the Company’s common stock. The Company has independently valued the Preferred Stock as of the date of acquisition. The combined value of the Preferred Stock issued to AAI was $53,913,000 using a blended fair value of the discounted cash flow method and option pricing method. See Note 5 for the details on the asset purchase as BNC did not meet the accounting definition of a business and Note 17 for details on the Series B and C Preferred Stock.
Through December 31, 2022, Ecoark Holdings’September 30, 2023, the Company’s former wholly owned subsidiaries, with the exception of Agora, Digital Holdings, Inc., a Nevada corporation (“Agora”) and Zest Labs, Inc. (“Zest Labs”) have been treated for accounting purposes as divested. See belowPlease refer to our Annual Report for the year ended March 31, 2023 (“2023 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on July 14, 2023 for details on all of our prior subsidiaries that were divested in this Note 1the year ended March 31, 2023 and Note 2 “Discontinued Operations.” As a resultan overview of the divestitures, allbusiness conducted in those subsidiaries. This quarterly report on Form 10-Q (the “Report”) includes only those subsidiaries as of September 30, 2023. The comparative financial statements for the three and six months ended September 30, 2022 reflect the operations of those subsidiaries that were sold during the year ended March 31, 2023 as discontinued operations in the condensed consolidated statements of operations and as assets and liabilities of the former subsidiaries have been reclassified to discontinued operations on the condensed consolidated balance sheet for March 31, 2022 and all operations of these companies have been reclassified to discontinued operations and gain on disposal on the condensed consolidated statements of operations for the nine and three months ended December 31, 2022.sheets.
The Company’s principal subsidiaries consisted of Ecoark, Inc. (“Ecoark”), a Delaware corporation which was the parent offormer subsidiary Zest Labs, Banner Midstream Corp., a Delaware corporation (“Banner Midstream”) and Agora which was assigned the membership interest in Trend Discovery Holdings LLC, a Delaware limited liability corporation (all references to “Trend Holdings” or “Trend” are now synonymous with Agora) from the Company on September 17, 2021 upon its formation, which includes Bitstream Mining, LLC, the Company’s Bitcoin mining subsidiary.
As disclosed in these Notes, the Company had decided it was in the best interests of its stockholders that it divest all of its principal operating assets through a series of spin-offs or stock dividends to the Company’s stockholders. It intended to do so either by engaging in business combinations with existing public companies which have trading symbols and markets like White River Energy Corp (formerly Fortium Holdings Corp.) (“WTRV”) which acquired White River Holdings Corp on July 25, 2022, and Wolf Energy Services, Inc. (formerly Enviro Technologies US, Inc.) (“Wolf Energy”) which acquired Banner Midstream Corp. on September 7, 2022, or by direct dividends. The Company’s plan was also driven by the dividends it must pay to an investor which provided $12 million on June 8, 2022 in exchange for preferred stock and a warrant, the former of which was subsequently amended, and the latter of which was subsequently cancelled. Because all spin-offs require the transactions to be registeredalong with the Securities and Exchange Commission, the Company did not complete any spin-offs in calendar 2022. Because of the plans to spin-off its principal operating subsidiaries, the Company is searching for one or more operating businesses to acquire. See Note 20. “Subsequent Events” concerning a proposed acquisition. The Company has decided to leave Agora and Zest Labs inHoldings, LLC (owned by Gary Metzger, a current board member of the Company and to not proceed with the spin-offs of these entities, although it intends to createtherefore a trust to distribute at least 95% of the net proceeds of the pending Zest Labs litigation recoveries, if any, to the Company’s stockholders as of September 30, 2022.
On March 27, 2020, the Company and Banner Energy Services Corp., a Nevada corporation (“Banner Parent”related party) (the “Purchaser”), entered into a Stock Purchasestock purchase agreement dated August 25, 2023, whereby the Purchaser purchased 100% of the issued and Sale Agreement (the “Banner Purchase Agreement”)outstanding common stock of Zest Labs from the Company in exchange for the Purchaser agreeing to acquire Banner Midstream Corp., a Delaware corporation (“Banner Midstream”). Pursuantdistribute any net proceeds from any new or ongoing intellectual property litigation or the sale or licensing of any intellectual property of Zest Labs to the acquisition, Banner Midstream becameCompany’s shareholders of record as of November 15, 2022. The Company recorded a wholly-ownedgain on disposal of Zest Labs of $683,152 in this transaction. Zest Labs is no longer a subsidiary of the Company, and Banner Parent received shares of the Company’s common stock in exchange for all of the issuedassets and outstanding sharesliabilities of Banner Midstream.have been assumed by the Purchaser.
Banner Midstream had four operating subsidiaries: Pinnacle Frac Transport LLC (“Pinnacle Frac”The BitNile.com metaverse (the “Metaverse”), Capstone Equipment Leasing LLC (“Capstone”), White River Holdings Corp (“White River”), represents a significant development in the online metaverse landscape, offering immersive, interconnected digital experiences that are inclusive, engaging, and Shamrock Upstream Energy LLC (“Shamrock”). Pinnacle Frac provides transportation of frac sanddynamic. By integrating various elements such as virtual markets, real world goods marketplaces and logistics servicesVIP experiences, gaming, social activities, sweepstakes, gambling, and more, the Company aims to major hydraulic fracturingrevolutionize the way people interact online. The Company’s growing virtual world, BitNile.com (the “Platform”) is accessible via any device using any web browser, without requiring permissions, downloads, or apps, and drilling operations. Capstone procuresthe Platform can be enjoyed without the need for bulky and finances equipment to oilfield transportation service contractors. White River is and Shamrock was engaged in oil and gas exploration, production, and drilling operations on over 30,000 cumulative acres of active mineral leases in Louisiana, and Mississippi. All of these operating subsidiaries have since been divested in two separate transactions that occurred in July and September 2022.costly virtual reality headsets.
ECOARK HOLDINGS, INC. AND SUBSIDIARIESThe Platform games operate on a free-to-play model, whereby game players may collect coins free of charge through the passage of time and if a game player wishes to obtain coins above and beyond the level of free coins available to that player, the player may purchase additional coin packages (“Freemium” gaming model). Once obtained, Nile Tokens (“NT”) and Nile Coins (“NC”) (either free or purchased), cannot be redeemed for cash nor exchanged for anything outside of the Metaverse. When coins are used and played in the games, the game player could “win” and would be awarded additional coins or could “lose” and lose the future use of those coins. The Company has concluded that the coins represent both consumable goods and durables, because 1) the game player does not receive any additional benefit from the game and is not entitled to any additional rights once the coins are consumed and 2) because once coins are used for the purchase of durable goods, those goods will continue to benefit the player throughout their gaming life cycle.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
For a full description of the operations of White River as well as Pinnacle Frac and Capstone, refer to the Annual Report filed on Form 10-K for the year ended March 31, 2022 filed on July 7, 2022.2. LIQUIDITY AND GOING CONCERN
On July 25, 2022,For the Company entered intothree and closed a Share Exchange Agreement, by and among the Company, White River and WTRV. As a result, White River became a wholly-owned subsidiary of WTRV and issued the Company non-voting Series A Convertible Preferred Stock (the “Series A”) which is convertible into approximately 82% of WTRV’s common stock (not giving effect to the conversion of outstanding common stock equivalents) after the Company elects to spin-off WTRV common stock to the Company’s stockholders and a registration statement covering the spin-off has been declared effective. The Company’s Chief Executive Officer is also the Executive Chairman of WTRV, and the Company’s Chief Financial Officer is the Chief Executive Officer of WTRV. The former Chief Executive Officer and director of WTRV is the son-in-law of the Company’s Executive Chairman, and he resigned from all positions with WTRV in connection with the closing. The new Board of Directors (the “Board”) of WTRV includes the Company’s Chief Executive Officer and the Chief Executive Officer’s daughter as well as three other designees. The Company has determined that it is not the primary beneficiary in this transaction and has concluded that no consolidation is required for White River as a variable interest entity.
On August 23, 2022 the Company entered into a Share Exchange Agreement (the “Agreement”) with Wolf Energy and Banner Midstream. Pursuant to the Agreement, upon the terms and subject to the conditions set forth therein, the Company acquired 51,987,832 shares of the Wolf Energy common stock in exchange for all of the capital stock of Banner Midstream owned by the Company, which represents 100% of the issued and outstanding shares (the “Exchange”). Following the closing of the Agreement which occurred on September 7, 2022, Banner Midstream continues as a wholly-owned subsidiary of Wolf Energy. On September 7, 2022, the Exchange was completed, and Banner Midstream became a wholly-owned subsidiary of Wolf Energy. The shares the Company that were issued by Wolf Energy represented approximately 70% of the total voting shares of Wolf Energy that were outstanding as of that time. As a result, the Company consolidates Wolf Energy in its condensed consolidated financial statements; however because it is the intent of the Company to distribute these shares in Wolf Energy to the stockholders of the Company upon the effectiveness of a registration statement filed by Wolf Energy, the Company has classified the assets and liabilities of Wolf Energy and the results of operations of Wolf Energy in discontinued operations. See Note 2.
On April 9, 2021, a Little Rock, Arkansas jury awarded Ecoark and Zest a total of $115 million in damages (later reduced to $110 million) which includes $65 million in compensatory damages and $50 million in punitive damages and found Walmart Inc. (“Walmart”) liable on three counts. The federal jury found that Walmart misappropriated Zest’s trade secrets, failed to comply with a written contract, and acted willfully and maliciously in misappropriating Zest’s trade secrets. See Note 15 – Commitments and Contingencies – Legal Proceedings.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Trend Holdings formed four subsidiaries, including Bitstream Mining, LLC, a Texas limited liability company (“Bitstream”), on May 16, 2021. In addition, Trend Holdings owned Barrier Crest, LLC (“Barrier Crest”) which was acquired along with Trend Capital Management, Inc. (“TCM”) which was acquired by Ecoark Holdings on May 31, 2019. On June 17, 2022, Agora sold Trend Holdings to an entity formed by the investment manager of Trend Discovery LP and Trend Discovery SPV and sold Trend Discovery Exploration LLC (“Trend Exploration”) to the Company. See Note 2, “Discontinued Operations”. The Company reclassified the operations of Barrier Crest and TCM, as discontinued operations as the disposal represents a strategic shift that will have a major effect on the Company’s operations and financial results as of March 31, 2022.
The Company made this determination for these segments to be held for sale as the criteria established under ASC 205-20-45-1E have been satisfied as of June 8, 2022. Under ASC 855-10-55, the Company has reflected the reclassification of assets and liabilities of these entities as held for sale and the operations as discontinued operations as of and for the year ended March 31, 2022. The Company accounted for this sale as a disposal of the business under ASC 205-20-50-1(a) upon the closing of the sale on June 17, 2022 at which time the gain was recognized.
The Company assigned its membership interest in Trend Holdings and its related wholly owned subsidiaries to Agora on September 22, 2021, for the sale of the initial 100 shares for $10. On October 1, 2021, the Company purchased 41,671,121 shares of Agora common stock for $4,167,112 which Agora used to purchase equipment to commence the Bitstream operations.
Agora was organized by Ecoark Holdings to enter the Bitcoin mining business. Because of the plunge in the price of Bitcoin in 2022 and the type of miners Agora acquired during its attempt to close an initial public offering, Agora determined it was not presently feasible to conduct Bitcoin mining operations and ceased such activities on March 3, 2022. In September 2022, Agora determined to become a power-centric hosting company and thus, subject to raising capital, will focus its attention on generating revenues in this capacity.
On August 4, 2021, the Company’s common stock commenced trading on the Nasdaq Capital Market.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
On October 6, 2021, the Company held a Special Meeting of Stockholders, at which the stockholders approved (a) an amendment to the Articles of Incorporation to increase the number of shares of authorized common stock of the Company from 30,000,000 shares to 40,000,000 shares; (b) an amendment to the Ecoark Holdings 2017 Omnibus Incentive Plan to increase the number of shares of common stock authorized for issuance under this plan from 800,000 shares to 1,300,000 shares; and (c) the issuance of 272,252 restricted stock units and an additional 63,998 restricted stock units to the then President of Zest Labs and director of the Company under this Plan, in exchange for the cancellation of 672,499 previously issued stock options.
On September 9, 2022, the Company held an annual meeting of its stockholders, and the stockholders approved the issuance of the shares of common stock issuable upon conversion of the Series A Redeemable Convertible Preferred Stock sold on June 8, 2022. Additionally, the stockholders approved increasing authorized common stock to 100,000,000 shares. Articles of Amendment were filed that day.
On October 28, 2022, the Company and Ecoark, Inc. assigned all of its residual intellectual property rights and rights in the Zest Labs lawsuits to Zest Labs in connection with the anticipated spin-off of Zest Labs common stock to the Company’s stockholders. The Board of Directors subsequently determined not to proceed with the Zest Labs spin-off, however the assignment was not affected by that determination.
Overview of Agora Digital Holdings, Inc.
Bitstream
Bitstream was organized to be our principal Bitcoin mining subsidiary. Bitstream entered into a series of agreements and arrangements including arranging for a reliable and economical electric power source needed to efficiently mine Bitcoin, order miners, housing infrastructure and other infrastructure to mine Bitcoin and locate a third-party hosting service to operate the miners and the service’s more advanced miners.
As discussed in this Note 1, Agora has refocused its efforts and will become a power-centric hosting company rather than a Bitcoin mining company and will not hold any Bitcoin in its digital wallets. To that end, Agora entered into a Master Services Agreement (“MSA”) on December 7, 2022 with BitNile, Inc. (“BitNile”), whereby BitNile agreed to provide mining equipment which Agora would host at its West Texas location and supply the electricity for the cryptocurrency mining. The MSA requires Agora to initially provide up to 12MW of electricity at the West Texas site for BitNile’s use. An additional 66MW of power can be made available to BitNile as well for a total of 78MW. To meet this obligation, the Company is required to raise at least $5,000,000 to enable the build out of the hosting facility, including the initial 12MW of power within 45 days of the date of the MSA. As of the date of this Report, this requirement has not been met.
All significant accounting policies related to Pinnacle Frac, Capstone, White River, Shamrock, Barrier Crest and Trend Discovery Capital Management have been removed as these entities are reflected in discontinued operations. For full details on the policies refer to the Annual Report on Form 10-K for the year ended March 31, 2022 filed on July 7, 2022.
Principles of Consolidation
On May 31, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Trend Discovery Holdings Inc., a Delaware corporation for the Company to acquire 100% of Trend Discovery Holdings, LLC pursuant to a merger of Trend with and into the Company (the “Merger”). Trend Discovery Holdings, Inc. ceased doing business upon completion of the merger and Trend Discovery Holdings LLC is the subsidiary of the Company. Upon the formation of Agora on September 17, 2021, Ecoark assigned the membership interest it owned in Trend Holdings to Agora on September 22, 2021 when the Company purchased 100 shares of Agora common stock for $10.
On March 27, 2020, the Company and Banner Parent, entered into the Banner Purchase Agreement to acquire Banner Midstream. Pursuant to the acquisition, Banner Midstream became a wholly owned subsidiary of the Company and Banner Parent received shares of the Company’s common stock in exchange for all of the issued and outstanding shares of Banner Midstream. The Company sold all divisions of Banner Midstream in July 2022 and September 2022 as discussed herein.
The Company applies the guidance of Topic 810 Consolidation of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—are consolidated except when control does not rest with the parent.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Pursuant to ASC Paragraph 810-10-15-8, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.
The Company has utilized the guidance under ASC 810-10-55-4B, Case A for a Change that has resulted in the recognition of non-controlling interest. On October 1, 2021, Agora issued restricted common stock to non-employee directors, management, employees and advisors. As a result of the restricted common share issuances, the Company owns now owns less than 100% of Agora (approximately 89%). The Company expects it will continue to control Agora until it completes the distribution of Agora common stock to its security holders described above; after that event occurs, it may still have sufficient equity ownership to control Agora unless one or more third parties acquire a larger equity position.
During the six months ended September 30, 2022, Agora issued 400,000 shares of common stock to consultants and management. As a result of these issuances, the Company’s ownership percentage in Agora dropped from approximately 90% to approximately 89%.
The Company sold both White River and Banner Midstream (Pinnacle/Capstone) in July and September 2022, respectively. These entities are no longer subsidiaries of the Company. The Company has investments in WTRV and Wolf Energy that represent the shares it received for the sale of these entities. The investment in WTRV is in non-voting preferred shares, and Management has concluded that the Company is not the primary beneficiary in this transaction, and thus no consolidation is required for White River as a variable interest entity. The Company currently owns approximately 65% of the total issued common shares of Wolf Energy and has consolidated Wolf Energy; however, the Company expects to distribute these shares to its stockholders of record as of September 30, 2022, and thus has reflected Wolf Energy in the discontinued operations of the Company for the nine months ended December 31, 2022.
Reclassifications
The Company has reclassified certain amounts in the December 31, 2021 condensed consolidated financial statements to be consistent with the December 31, 2022 presentation, including the reclassification of Barrier Crest, TCM, White River, Pinnacle Frac, and Capstone assets and liabilities from continuing operations to held for sale and reclassifications of operations of Barrier Crest, TCM, White River, Pinnacle Frac, and Capstone to discontinued operations. The March 31, 2022 consolidated balance sheet has been reclassified to include the assets and liabilities sold for White River, Pinnacle Frac, and Capstone as well. Additionally, we have removed all rounding of amounts and shares from the December 31, 2021 presentation to conform to the December 31, 2022 presentation. These changes had no impact on the Company’s financial position or result of operations for the periods presented.
Noncontrolling Interests
In accordance with ASC 810-10-45 Noncontrolling Interests in Consolidated Financial Statements, the Company classifies noncontrolling interests as a component of equity within the consolidated balance sheet. In October 2021 and July 2022, with the issuance of restricted common stock to directors, management and advisors, the Company no longer owns 100% of Agora. As of December 31, 2022 and March 31, 2022, approximately 11% and 9.1% is reflected as non-controlling interest of that entity. In addition, we have reflected 30% of Wolf Energy as noncontrolling interests as the Company represents approximately 65% of the voting interests in Wolf Energy.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, management’s estimate of provisions required for uncollectible accounts receivable, fair value of assets held for sale and assets and liabilities acquired, impaired value of equipment and intangible assets, including goodwill, asset retirement obligations, estimates of discount rates in lease, liabilities to accrue, fair value of derivative liabilities associated with warrants, cost incurred in the satisfaction of performance obligations, permanent and temporary differences related to income taxes and determination of the fair value of stock awards.
Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
The following five steps are applied to achieve that core principle:
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The standalone selling price is the price at which the Company would sell a promised service separately to a customer. The relative selling price for each performance obligation is estimated using observable objective evidence if it is available. If observable objective evidence is not available, the Company uses its best estimate of the selling price for the promised service. In instances where the Company does not sell a service separately, establishing standalone selling price requires significant judgment.
The Company estimates the standalone selling price by considering available information, prioritizing observable inputs such as historical sales, internally approved pricing guidelines and objectives, and the underlying cost of delivering the performance obligation. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
Management judgment is required when determining the following: when variable consideration is no longer probable of significant reversal (and hence can be included in revenue); whether certain revenue should be presented gross or net of certain related costs; when a promised service transfers to the customer; and the applicable method of measuring progress for services transferred to the customer over time.
Although, Agora since March 3, 2022, has not recognized revenue from its mining operations, prior to this time, it recognized revenue upon satisfaction of its performance obligation over time in accordance with ASC 606-10-25-27 for its contracts with mining pool operators.
The Company accounts for incremental costs of obtaining a contract with a customer and contract fulfillment costs in accordance with ASC 340-40, Other Assets and Deferred Costs. These costs should be capitalized and amortized as the performance obligation is satisfied if certain criteria are met. The Company elected the practical expedient, to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would otherwise have been recognized is one year or less, and expenses certain costs to obtain contracts when applicable. The Company recognizes an asset from the costs to fulfill a contract only if the costs relate directly to a contract, the costs generate or enhance resources that will be used in satisfying a performance obligation in the future and the costs are expected to be recovered. The Company recognizes the cost of sales of a contract as expense when incurred or when a performance obligation is satisfied. The incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained, are not considered recoverable, or the practical expedient applies.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Bitcoin Mining
The discussion here should be understood as being applicable while Agora was conducting mining operations which it ceased beginning March 3, 2022. On September 16, 2022, the Company determined to conduct operations as a power-centric hosting company, rather than a Bitcoin mining company. For the past revenue recognition, refer to the Company’s Annual Report on Form 10-K filed on July 7, 2022.
Hosting Revenues
Agora effective in September 2022 began efforts to generate revenue via hosting agreements. Agora entered into a MSA on December 7, 2022 with BitNile, whereby BitNile agreed to provide mining equipment which Agora would host at its West Texas location and supply the electricity for the cryptocurrency mining, subject to the Company raising $5 million to support the hosting operations. See Note 1. “Organization and Summary of Significant Accounting Policies.”
When Agora generates hosting revenues, it will follow ASC 606 as outlined above and recognize revenue upon the completion of the performance obligations as stipulated under the MSA. For the nine months ended December 31, 2022 and 2021, no revenue has been recognized under any hosting agreements.
All Bitcoin that is mined under these arrangements will be transmitted directly into the third-party digital wallets and the Company will not hold any Bitcoin in its accounts.
Accounts Receivable and Concentration of Credit Risk
The Company considers accounts receivable, net of allowance for doubtful accounts, to be fully collectible. The allowance is based on management’s estimate of the overall collectability of accounts receivable, considering historical losses, credit insurance and economic conditions. Based on these same factors, individual accounts are charged off against the allowance when management determines those individual accounts are uncollectible. Credit extended to customers is generally uncollateralized, however credit insurance is obtained for some customers. Past-due status is based on contractual terms.
Fair Value Measurements
ASC 820 Fair Value Measurements defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles (“GAAP”), and expands disclosure about fair value measurements. ASC 820 classifies these inputs into the following hierarchy:
The carrying values of the Company’s financial instruments such as cash, investments, prepaid expenses, accounts payable, and accrued expenses approximate their respective fair values because of the short-term nature of those financial instruments.
Bitcoin assets will be presented in current assets. Fair value will be determined by taking the price of the coins from the trading platforms which Agora will most frequently use.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Bitcoin
Prior to March 3, 2022 when the Company was mining Bitcoin, it included the Bitcoin in current assets in the consolidated balance sheets as intangible assets with indefinite useful lives. Bitcoin was recorded at cost less impairment. For the past Bitcoin accounting policies, refer to the Company’s Annual Report on Form 10-K filed on July 7, 2022. As of December 31, 2022, the Company neither owns nor mines any Bitcoin.
Impairment of Long-lived Assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Segment Information
The Company follows the provisions of ASC 280-10 Segment Reporting. The Company classified its reporting segments in these three divisions through March 31, 2022, when the Company determined that pursuant to ASC 205-20-45-1E that the operations related to the Financial Services segment would be reclassified as held for sale as those criteria identified in the pronouncement had been satisfied as of June 8, 2022. Under ASC 855-10-55, the Company has reflected the reclassification of assets and liabilities of these entities as held for sale and the operations as discontinued operations as of and for the year ended March 31, 2022. As a result of this reclassification, the Company’s segment reporting has removed the Financing segment for the nine months ended December 31, 2021. Effective April 1, 2022, the Company has classified its segments in the Commodity Segment, Technology Segment and Bitcoin Mining Segment. It now charges a monthly overhead charge to the Technology Segment and to the Transportation component and Oil and Gas Production component (each part of the Commodities Segment). On July 25, 2022, the Company sold its oil and gas production business (White River) which is part of the Commodities segment, and on September 7, 2022, the Company sold the remaining part (Pinnacle Frac and Capstone) of the Commodities Segment. Under ASC 855-10-55, the Company has reflected the sale of these entities and the operations as discontinued operations as of and for the nine months ended December 31, 2022. As a result of the share exchanges involving White River and Wolf Energy, and the immaterial nature of the operations of Zest Labs, the Company no longer segregates its operations as most of the limited continuing operations are related to Agora.
Earnings (Loss) Per Share of Common Stock
Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings (loss) per share (“EPS”) include additional dilution from common stock equivalents, such as convertible notes, preferred stock, stock issuable pursuant to the exercise of stock options and warrants.
Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented, so only the basic weighted average number of common shares are used in the computations.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
The Company has adjusted the diluted EPS for the nine and three months ended December 31, 2021 and three months ended December 31, 2022 for warrants classified as derivative liabilities as well as the preferred stock classified as derivative liabilities in accordance with ASC 260-10-45 as follows. No calculation is necessary for the nine months ended December 31, 2022 because to do so would be anti-dilutive.
December 31, 2021 | ||||
Nine months ended December 31, 2021 | ||||
Diluted EPS: | ||||
Net income to controlling interest | $ | 1,304,848 | ||
Change in fair value of derivative liability | (15,294,814 | ) | ||
Adjusted net loss | $ | (13,989,966 | ) | |
Weighted Average Shares Outstanding | 24,727,970 | |||
Adjusted (loss) per share | $ | (0.57 | ) |
December 31, 2021 | ||||
Three months ended December 31, 2021 | ||||
Diluted EPS: | ||||
Net income to controlling interest | $ | 4,600,003 | ||
Change in fair value of derivative liability | (10,979,137 | ) | ||
Adjusted net loss | $ | (6,379,134 | ) | |
Weighted Average Shares Outstanding | 26,364,099 | |||
Adjusted (loss) per share | $ | (0.24 | ) |
December 31, 2022 | ||||
Three months ended December 31, 2022 | ||||
Diluted EPS: | ||||
Net income to controlling interest | $ | 2,749,322 | ||
Change in fair value of derivative liability and derivative income | (6,124,833 | ) | ||
Adjusted net loss | $ | (3,375,511 | ) | |
Weighted Average Shares Outstanding | 28,499,875 | |||
Adjusted (loss) per share | $ | (0.12 | ) |
Derivative Financial Instruments
The Company does not currently use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Management evaluates all of the Company’s financial instruments, including warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company generally uses a Black-Scholes model, as applicable, to value the derivative instruments at inception and subsequent valuation dates when needed. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-measured at the end of each reporting period. The Black-Scholes model is used to estimate the fair value of the derivative liabilities.
Recently Issued Accounting Standards
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contract’s in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU simplifies the diluted net income per share calculation in certain areas.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
The ASU is effective for annual and interim periods beginning after December 31, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not believe this new guidance will have a material impact on its consolidated financial statements.
In May 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as follows: i) for a modification or an exchange that is a part of or directly related to a modification or an exchange of an existing debt instrument or line-of-credit or revolving-debt arrangements (hereinafter, referred to as a “debt” or “debt instrument”), as the difference between the fair value of the modified or exchanged written call option and the fair value of that written call option immediately before it is modified or exchanged; ii) for all other modifications or exchanges, as the excess, if any, of the fair value of the modified or exchanged written call option over the fair value of that written call option immediately before it is modified or exchanged. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The Company does not believe this new guidance will have a material impact on its consolidated financial statements.
The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
Liquidity
For the nine months ended December 31, 2022 and 2021,2023, the Company had a net (loss) incomeloss to controlling interest of common stockholdersshareholders of $(30,389,490)$(14,517,905) and $1,304,848, respectively, has$(8,572,304), respectively. In addition, the Company had a working capital (deficit)deficit of $21,072,036$(24,544,923) and $(8,394,850)$(25,095,950) as of December 31, 2022September 30, 2023 and March 31, 2022,2023, respectively, and hashad an accumulated deficit as of December 31, 2022September 30, 2023 of $(157,440,304)$(217,249,742). As of December 31, 2022,September 30, 2023, the Company has $32,642had $1,554 in cash and cash equivalents. The working capital at December 31, 2022 is the direct result of the investment in WTRV valued at $30,000,000. This positive working capital is based upon Generally Accepted Accounting Principles and should not be viewed as reflecting available cash or other short term assets. These represent the value of the 1,200 shares of Series A that are expected to be distributed to the Company’s stockholders, as discussed in Note 5.
The Company’s financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company sold its interests in Banner Midstream in two separate transactions on July 25, 2022 and September 7, 2022. In addition, it sold the non-core business of Trend Discovery on June 17, 2022. The Company expects to distribute the common stock it received (or issuable upon conversion of preferred stock) in the sales to its stockholdersshareholders upon the effective registration statements for the two entities the companies were sold to. See Note 13, “Series A Convertible Redeemable Preferred17, “Preferred Stock” for information on the Company’s recent $12 million convertibleSeries A preferred stock financing. Thatissued to Ault Lending, LLC (formerly Digital Power Lending, LLC) (“Ault Lending”) in conjunction with a $12,000,000 financing has restrictive covenants that require approvalin June 2022, and the Company’s Series B and C preferred stock issued to AAI in conjunction with the purchase of the investor formajority of the Company to engage in any equity or debt financing.issued and outstanding stock of BNC.
The Company believes that the current cash on hand is not sufficient to conduct planned operations for one year from the issuance of the condensed consolidated financial statements, and it needs to raise capital to support their operations. The Company has recently established a potential source of revenue upon entering into the MSA with BitNile If revenue is generated from the MSA, management expects that it will go towards covering the Company’s operating costs and to allow itits operations, raising substantial doubt about its ability to continue as a going concern. However, in order to proceed under the MSA, the Company will require additional financing to fund its future planned operations. Under the terms of the MSA, the Company was required to raise a minimum of $5,000,000 by January 21, 2023, although the parties have verbally agreed to extend that deadline. Based on the Company’s relationship with Ault alliance, Inc. (“Ault”) which is described in this Report, the Company expects Ault will not terminate the MSA, although it could elect to do so for any reason whether related to the Company or Ault. See Note 20. “Subsequent Events” concerning a significant pending transaction with Ault. The MSA contemplates the Company providing services and infrastructure to BitNile to enable the build out of the hosting facility, including the initial 12MW of power within 45 days of the date of the MSA which as disclosed above was not met. We have generated no revenue to date under any hosting arrangement. The accompanying financial statements for the periodthree and six month periods ended December 31, 2022September 30, 2023 have been prepared assuming the Company will continue as a going concern, but the ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it establishes continued revenue streams and becomes profitable. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. If the Company is not able to obtain the necessary additional financing on a timely basis, the Company will be required to delay, reduce or perhaps even cease the operation of its business. The ability of the Company to continue as a going concern is dependent upon its ability to successfully secure other sources of financing and attain profitable operations. The Company raised approximately $3,500,000 in an At-the-Market capital raise during the fourth fiscal quarter of the year ended March 31, 2023 and the six months ended September 30, 2023. In addition, on April 27, 2023, the Company sold $6.875 million of principal face amount senior secured convertible notes with an original issue discount to sophisticated investors for gross proceeds to the Company of $5.5 million. The notes mature on April 27, 2024 and are secured by all of the assets of the Company and certain of its subsidiaries, including BNC.
On October 30, 2023, the registration statement related to the $100,000,000 equity line of credit purchase agreement was declared effective by the SEC. See Note 19, “Commitments and Contingencies”, for more information. On November 8, 2023, the Company issued a term note (“Term Note”) in a principal amount of $660,000 with an institutional investor and received $600,000 in proceeds. See Note 22, “Subsequent Events,” for more information.
3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do not include anyall the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The Company has made estimates and judgments affecting the amounts reported in the Company’s condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from the Company’s estimates. The condensed consolidated financial information is unaudited but reflects all normal adjustments that mightare, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These condensed consolidated financial statements should be necessary if read in conjunction with the consolidated financial statements in the Company’s 2023 Annual Report filed with the SEC on July 14, 2023. The consolidated balance sheet as of March 31, 2023 was derived from the Company’s audited 2023 financial statements contained in the 2023 Annual Report. Results of the three and six months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year ending March 31, 2024.
Noncontrolling Interests
In accordance with Accounting Standards Codification (“ASC”) 810-10-45 Noncontrolling Interests in Consolidated Financial Statements, the Company is unable to continueclassifies noncontrolling interests as a going concern. See “Risk Factors” includedcomponent of equity within the condensed consolidated balance sheet. In October 2021 and July 2022, with the issuance of restricted common stock to directors, management and advisors, the Company no longer owns 100% of Agora. As of September 30, 2023 and 2022, approximately 11% and 9.1%, respectively, is reflected as non-controlling interest of that entity. In addition, the Company reflected 34% of Wolf Energy Services, Inc. (“Wolf Energy”) as noncontrolling interests as the Company currently represents approximately 66% of the voting interests in thisWolf Energy.
Significant Accounting Policies
Other than as noted below, there have been no material changes to the Company’s significant accounting policies previously disclosed in the 2023 Annual Report.
Gaming Revenue
Gaming revenue is recognized from the Metaverse website primarily through the sale of tokens or coins that provide the end user with interactive entertainment (game play) and durable goods principally for the PC and mobile platforms. The Company primarily offers the following:
1. | Metaverse access – Provide access to main game content. |
2. | Sale of NTs – NT’s can be used for additional digital game play only. |
3. | Sale of NCs –NC’s can be used to participate in games of skill, buy durable goods, etc. all within the digital platform. | |
4. | Rewarded – SweepCoins (“SC”) – Users can use SC to enter sweepstakes type games with a potential to win both digital goods and real world cash redemptions. |
While the revenue received from the sale of NT and NC’s (collectively the “coins”) is currently nominal, the Company believes that its operation of the BitNile.com website could be a scalable source of revenue in the future. Additionally, the Company expects the website will be a mechanism to help increase its brand reputation and recognition by participants, which the Company believes will result in the acquisition and monetization of new users to the site.
During the three and six month periods ended September 30, 2023 and 2022, the Company recognized $1,500 of revenue from Metaverse coin sales.
ECOARK HOLDINGS, INC. AND SUBSIDIARIESHospitality and VIP Services Revenue
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Hospitality revenue currently consists of revenue from services provided to groups at certain social functions and sporting events. The Company also sells real world VIP experiences and one-of-a-kind products. Hospitality and VIP service revenue is generated through contracts with customers whereby the customer agrees to pay a contract rate, determined based on common industry prices, for the services the Company provides.
The Company recognizes revenue when performance obligations to provide food and services are satisfied at the point in time when the food and services are received by the customer, which is when the event is held and services are complete.
The Company recognizes revenue on a gross basis due to the fact that it has control over the food and services and the ability to direct the offerings to multiple end consumers while also ultimately determining the relative pricing offered for the services. For certain events, The Company also uses certain subcontractors that it selects and hires to help transfer services to the end customer. The Company has evaluated its agreements with its food and service subcontractors and based on the preceding, the Company determined that it is the principal in such arrangements and the third-party food and service suppliers are the agent in accordance with ASC 606, Revenue from Contracts with Customers. As the principal, the Company recognizes revenue in the gross amount and as such, recognizes any fees paid to subcontractors as cost of revenues. Any future changes in these arrangements or to the Company’s games and related method of distribution may result in a different conclusion.
Concentrations
The Company occasionally maintains cash balances in excess of the Federal Deposit Insurance Corporation insured limit. The Company does not consider this risk to be material.
Net Loss Per Share
Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted loss per share includes additional dilution from common stock equivalents, such as convertible notes, preferred stock, stock issuable pursuant to the exercise of stock options and warrants.
Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented, so only the basic weighted average number of common shares are used in the computations.
Recently Issued Accounting Standards
The Company does not expect that any recently issued accounting guidance will have a significant effect on its condensed consolidated financial statements.
Impact of COVID-19
COVID-19 may continue to affect the economy and the industries in which we operate, depending on the vaccine and booster rollouts and the emergence of virus mutations.
COVID-19 did not have a material effect on the Consolidated Statements of Operations or the Consolidated Balance Sheets for the nine months ended December 31, 2022 or year ended March 31, 2022 in contrast to the material impact it had in the prior fiscal year.
COVID-19 has also contributed to the supply chain disruptions which have not yet had a material effect for the Company. The Company will continue to monitor the supply chain shortages affecting its business.
The extent to which COVID-19 may impact the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent and related costs. We had received funding under the PPP, and a majority of that has been forgiven.
NOTE 2:4. DISCONTINUED OPERATIONS
On June 17, 2022, the Company sold Trend Discovery to an entity formed by the investment manager of Trend Discovery LP and Trend Discovery SPV for a three-year $4,250,000 secured note (seeAs discussed in Note 4). Each of the Trend Discovery subsidiaries including Barrier Crest guaranteed the note and provided Agora with a first lien on its assets. The Company accounted for this sale as a disposal of the business under ASC 205-20-50-1(a). The Company had reclassified the operations of Barrier Crest and Trend Discovery Capital Management (the other entities were inactive) as discontinued operations as the disposal represents a strategic shift that will have a major effect on the Company’s operations and financial results. The Company made this determination for these segments to be held for sale as the criteria established under ASC 205-20-45-1E had been satisfied as of June 8, 2022. Under ASC 855-10-55, the Company has reflected the reclassification of assets and liabilities of these entities as held for sale1 and the operations as discontinued operations as of and for2023 Annual Report, during the year ended March 31, 2022 as well as2023, the Company sold all of its subsidiaries, other than Agora and Zest Labs. On August 25, 2023, the Company sold 100% of the issued and outstanding stock of Zest Labs to the Purchaser (see Note 1). The Company’s loss from discontinued operations includes Banner Midstream , Trend Discovery, and Zest Labs for the period April 1,three and six months ended September 30, 2022, through June 17, 2022. The Company accounted for this sale as a disposal of the business under ASC 205-20-50-1(a)which were sold in three separate transactions on July 25, 2022, September 7, 2022 and August 25, 2023, respectively. In addition on June 17, 2022, at which time the gain was recognized. As a resultAgora sold all of this reclassification, the Company identified the following assets and liabilities that were reclassified from continuingits non-Bitcoin operations to discontinued operations as they are discontinued.
On July 25, 2022, the Company sold its oil and gas production business (White River) which is part of the Commodities segment.a third party. The Company has reflected the reclassification of assets and liabilities of these entities discontinued operations as of and for the period April 1, 2022 through July 31, 2022. The Company used July 31, 2022 as a cut-off as a majority of its revenue and expenses are billed on a monthly basis and it is more convenient to do so.
On September 7, 2022, the Company sold its transportation business (Pinnacle Frac and Capstone) which is part of the Commodities segment. The Company has reflected the reclassification of assets and liabilities of these entities discontinued operations as of and for the period April 1, 2022 through August 31, 2022. The Company used August 31, 2022 as a cut-off as a majority of its revenue and expenses are billed on a monthly basis and it is more convenient to do so. The shares the Company were issued by Wolf Energy represent approximately 70% of the total voting shares of Wolf Energy. As a result, the Company will consolidate Wolf Energy in the condensed consolidated financial statements. It is the intent of the Company to distribute these shares in Wolf Energy to the stockholders of the Company upon the effectiveness of a registration statement filed by Wolf Energy. Therefore, the Company has classifiedreflects the assets and liabilities of Wolf Energy as discontinued operations, as the Company has a 66% voting interest in Wolf Energy that will be part of the Company’s dividend to its shareholders upon the effective S-1 registration Wolf Energy has filed with the SEC.
Current assets as of September 30, 2023 and the results of operations of Wolf Energy in discontinued operations.March 31, 2023 – Discontinued Operations:
September 30, 2023 | March 31, 2023 | |||||||
Wolf Energy | $ | 60,860 | $ | 1,297,801 | ||||
Prepaid expenses | - | 4,908 | ||||||
$ | 60,860 | $ | 1,302,709 |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
CurrentNon-current assets as of December 31, 2022September 30, 2023 and March 31, 20222023 – Discontinued Operations:
September 30, 2023 | March 31, 2023 | |||||||
Wolf Energy | $ | 259,790 | $ | 984,071 | ||||
$ | 259,790 | $ | 984,071 |
Current liabilities as of September 30, 2023 and March 31, 2023 – Discontinued Operations:
December 31, 2022 | March 31, 2022 | |||||||
Cash | $ | - | $ | 391,125 | ||||
Accounts receivable | - | 1,075,960 | ||||||
Inventory | - | 107,026 | ||||||
Prepaid expenses | - | 838,731 | ||||||
Wolf Energy Services, Inc. | 1,509,292 | - | ||||||
$ | 1,509,292 | $ | 2,412,842 |
September 30, 2023 | March 31, 2023 | |||||||
Wolf Energy | $ | 1,750,910 | $ | 2,952,257 | ||||
Zest Accounts payable | - | 532,279 | ||||||
Zest Accrued expenses | - | 85,136 | ||||||
$ | 1,750,910 | $ | 3,569,672 |
Non-current assetsliabilities as of December 31, 2022September 30, 2023 and March 31, 2022 – Discontinued Operations:
December 31, 2022 | March 31, 2022 | |||||||
Goodwill | $ | - | $ | 10,224,046 | ||||
Property and equipment, net | - | 3,117,962 | ||||||
Intangible assets, net | - | 1,716,331 | ||||||
Oil and gas properties, full cost-method | - | 6,626,793 | ||||||
Capitalized drilling costs, net of depletion | - | 604,574 | ||||||
Right of use asset – operating and financing leases | - | 608,714 | ||||||
Wolf Energy Services, Inc. | 7,829,596 | - | ||||||
$ | 7,829,596 | $ | 22,898,420 |
Current liabilities as of December 31, 2022 and March 31, 20222023 – Discontinued Operations:
December 31, 2022 | March 31, 2022 | |||||||
Accounts payable and accrued expenses | $ | - | $ | 2,419,909 | ||||
Current portion of long-term debt | - | 572,644 | ||||||
Current portion of lease liability – operating and financing leases | - | 345,441 | ||||||
Wolf Energy Services, Inc. | 3,047,164 | - | ||||||
$ | 3,047,164 | $ | 3,337,994 |
September 30, 2023 | March 31, 2023 | |||||||
Wolf Energy | $ | 1,108,955 | $ | 377,786 | ||||
$ | 1,108,955 | $ | 377,786 |
Non-current liabilities as of December 31, 2022 and March 31, 2022 – Discontinued Operations:
December 31, 2022 | March 31, 2022 | |||||||
Lease liabilities – operating and financing leases, net of current portion | $ | - | $ | 282,638 | ||||
Long-term debt | - | 67,512 | ||||||
Asset retirement obligations | - | 1,303,751 | ||||||
Wolf Energy Services, Inc. | 394,852 | - | ||||||
$ | 3,94,852 | $ | 1,653,901 |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
The Company reclassified the following operations to discontinued operations for the nine months ended December 31, 2022 and 2021, respectively.
2022 | 2021 | |||||||
Revenue | $ | 10,955,153 | $ | 19,107,195 | ||||
Operating expenses | 17,110,005 | 22,654,861 | ||||||
Wolf Energy Services, Inc. – net loss | (4,305,129 | ) | - | |||||
Other (income) loss | 560,831 | (639,047 | ) | |||||
Net loss from discontinued operations | $ | (11,020,812 | ) | $ | (2,908,619 | ) |
The Company reclassified the following operations to discontinued operations for the three monthsand six month periods ended December 31, 2022September 30, 2023 and 2021, respectively.2022.
2022 | 2021 | |||||||
Revenue | $ | - | $ | 6,117,622 | ||||
Operating expenses | - | 8,032,666 | ||||||
Wolf Energy Services Inc. – net loss | (468,210 | ) | - | |||||
Other (income) loss | - | 22,056 | ||||||
Net loss from discontinued operations | $ | (468,210 | ) | $ | (1,937,100 | ) |
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenue | $ | - | $ | 3,795,607 | $ | - | $ | 10,955,153 | ||||||||
Operating expenses | - | 7,259,381 | 576,343 | 18,256,453 | ||||||||||||
Wolf Energy – net loss | (385,242 | ) | (3,826,919 | ) | (1,528,545 | ) | (3,836,919 | ) | ||||||||
Other loss | - | (338,755 | ) | - | (560,831 | ) | ||||||||||
Net loss from discontinued operations | $ | (385,242 | ) | $ | (7,629,448 | ) | $ | (2,104,888 | ) | $ | (11,699,050 | ) |
The following represents the calculation of the gain on disposal of Trend Discovery at June 17, 2022:
2022 | 2021 | |||||||
Secured Note Receivable | $ | 4,250,000 | $ | - | ||||
Cash | (27,657 | ) | - | |||||
Accounts receivable | (222,400 | ) | - | |||||
Prepaid expenses | (99,566 | ) | - | |||||
Goodwill | (3,222,799 | ) | - | |||||
Other assets | (284 | ) | - | |||||
Accounts payable and accrued expenses | 34,211 | - | ||||||
Gain on disposal of discontinued operations | $ | 711,505 | $ | - |
The following represents the calculation of the loss on disposal of Banner Midstream Corp in two separate transactions – July 25, 2022 and September 7, 2022:
2022 | 2021 | |||||||
Investment – White River Energy Corp./Wolf Energy Services, Inc.. | $ | 35,328,753 | $ | - | ||||
Cash | (3,000,000 | ) | - | |||||
Forgiveness of amounts due from subsidiaries | (39,997,461 | ) | - | |||||
Reversal of investment booked on March 27, 2020 when acquired | (4,866,192 | ) | - | |||||
Loss on disposal of discontinued operations | $ | (12,534,900 | ) | $ | - |
Secured note receivable | $ | 4,250,000 | ||
Cash | (27,657 | ) | ||
Accounts receivable | (222,400 | ) | ||
Prepaid expenses | (99,566 | ) | ||
Goodwill | (3,222,799 | ) | ||
Other assets | (284 | ) | ||
Accounts payable and accrued expenses | 34,211 | |||
Gain on disposal of discontinued operations | $ | 711,505 |
5. BUSINESS COMBINATIONS/DIVESTITURES
ECOARK HOLDINGS, INC. AND SUBSIDIARIESBNC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
On March 7, 2023, the Company acquired BNC from AAI. The Company accounted for this acquisition as an asset purchase as BNC did not meet the definition of a business as discussed in ASC 805 and Accounting Standards Update (“ASU”) 2017-01.
The Company acquired the assets and liabilities of BNC noted below at fair value.
Prepaid expenses | $ | 620,616 | ||
Property and equipment | 330,190 | |||
Intangible assets | 6,239,000 | |||
Accounts payable and accrued expenses | (3,186,513 | ) | ||
Due to BNC former parent | (4,404,350 | ) | ||
Notes payable | (170,222 | ) | ||
Total assets and liabilities | $ | (571,279 | ) |
The consideration paid for the acquisition of BNC was as follows (see Note 17):
Series B and Series C Preferred Stock | $ | 53,913,000 | ||
Total consideration | $ | 53,913,000 |
The acquisition has been accounted for as a purchase of assets. The Company recognized a loss on the acquisition as of March 7, 2023 of $54,484,279 in the condensed consolidated statements of operations.
Zest Labs
On August 25, 2023, the Company sold 100% of the issued and outstanding stock of Zest Labs to the Purchaser (see Note 1) in consideration for the Purchaser agreeing to distribute any net proceeds from any new or ongoing intellectual property litigation or the sale or licensing of any intellectual property of Zest Labs to the Company’s shareholders of record as of November 15, 2022.
The Company sold the assets and liabilities of Zest Labs noted below at fair value.
Prepaid expenses | $ | 2,454 | ||
Accounts payable and accrued expenses | (685,606 | ) | ||
Total assets and liabilities | $ | (683,152 | ) |
The Company recorded a gain on disposal of Zest Labs of $683,152 for the six and three months ended September 30, 2023.
NOTE 3:6. REVENUE
The Company recognizes revenue when it transfers promised services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those services. InAs part of each of the nineCompany’s social functions or events, the Company offers the option to request catering services for an additional charge. For the three and six months ended December 31, 2022September 30, 2023 the Company recognized no$19,200 and $64,350, respectively, of revenue from hospitality and VIP experience services and gaming and $0 in 2022.
The Company had related party hospitality service sales of $17,700 and $62,850 for the nine monthsthree and six month period ended December 31, 2021, the Company recognized revenue from continuing operations related to their Bitcoin mining operations in the amount of $17,455.
Bitcoin Mining
Prior to March 3, 2022, the Company recognized revenue for Bitcoin mining as follows:
Providing computing power to solve complex cryptographic algorithms in support of Bitcoin blockchains, in a process known as “solving a block”, is an output of the Company’s ordinary activities. The provision of computing power is the only performance obligation in the Company’s contracts with mining pool operators, its customers. When the Company engaged in mining, satisfied its performance obligation over time as it provides computing power.
The contract term is short, limited to the period of time the Company’s miners were contributing to the mining pool computational operations in support of the blockchain, measured in “hash rate” or “hashes per second”. The contract term was the payout period under the Company’s mining pool contracts, which is a twenty-four-hour period. After each contract period, the Company had the right to renew the contract for subsequent, successive payout periods.
Bitcoin received in exchange for providing computing power represents noncash consideration. The fair value of the noncash consideration determined at contract inception was recognized in revenue as the Company performed over the contract term using an output method based on hash rate contributed. Changes in the fair value of the noncash consideration post-contract consideration due to reasons other than form of consideration (that is, other than the price of bitcoin or ether) were estimated under the expected value method but constrained from inclusion in the transaction price (and hence revenue) until end of the contract term when the uncertainty has been resolvedSeptember 30, 2023, respectively, and amount was known.
The Company received payment for its provision of hash rate under the Pay-Per-Shares-Plus (“PPS+”) payment method. The payment method contains two components, (1) the block rewards issued by the blockchain network and paid by the mining pool operator, and (2) transaction fees generated from (paid by) blockchain users and distributed (paid out) to individual miners by the mining pool operator. The pool, as a collective entity, develops its own technology that, on one end, gathers individual miner’s hash rate, and on the other end contributes hash rate to the network to compete for block rewards from the network.
For PPS+, as long as individual miners contribute hash rate to the pool, the Company (as an individual miner) is entitled to receive its corresponding amount of block rewards based on the mining pool’s calculation methodology, which is standard across pool operators.
Block rewards are the new coins awarded to Bitcoin miners by the network (bitcoin$0 for the bitcoin network)three and is a theoretical number calculated by the mining pool operator based on inputs including difficulty level, network hash rate, and block rewards (for example, 6.25 for Bitcoin). Transaction fees refers to the total fees paid by users of the network to execute transactions.
Digital asset transaction fees are payable to the mining pool operator to cover the costs of maintaining the pool and are deducted from the block reward payout. This fee was deducted from the block reward the Company received and recorded as a reduction of revenue because it does not represent payment for a distinct good or service.
Effectivesix month period ended September 16, 2022, Agora commenced efforts to become a power-centric hosting company and if it becomes operational it will recognize revenue in accordance with the provisions of ASC 606. 30, 2022.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
NOTE 4:7. SENIOR SECURED PROMISSORY NOTE RECEIVABLE
Agora was issued a Senior Secured Promissory Note by Trend Ventures, LP (“Trend Ventures Note”) on June 16, 2022. The Trend Ventures Note was the consideration paid to Agora for the acquisition of Trend Discovery Holdings.Discovery. The Trend Ventures Note is in the principal amount of $4,250,000, bears interest at the rate of 5% per annum, and matureswas to mature June 16, 2025. Under the Trend Ventures Note, Trend Ventures, LP has agreed to make interest-only payments, in arrears on a monthly basis commencing on June 30, 2022 and continuing thereafter until June 16, 2023. Beginning on June 30, 2023, Trend Ventures, LP agreed to make 24 consecutive equal monthly payments of principal each in an amount which would fully amortize the principal, plus accrued interest. All principal and any unpaid accrued interest will be due and payable on or before the maturity date. The Trend Ventures Note will be granted a first lien senior secured interest as set forth in the Security Agreementa security agreement executed on the same date as the Trend Ventures Note, by and among Trend Ventures, LP, its future subsidiaries (each a Guarantor)guarantor) and Agora dated as of June 16, 2022. Trend has not made any interest payments on the Trend Ventures Note.
On May 15, 2023, Agora and Trend Ventures, LP entered into a First Amendment of Senior Secured Promissory Note (“First Amendment”), to amend the Trend Ventures Note. The First Amendment amended the following clauses of the Trend Ventures Note: (a) the principal amount was amended from $4,250,000 to $4,443,870, which includes all of the accrued interest through May 15, 2023; (b) the maturity date was amended from June 16, 2025 to May 15, 2025; and (c) the interest rate shall remain at 5%, and any additional accrued interest under the default rate shall be mutually waived by both parties. No payments on either principal or interest shall be due until the new maturity date.
As of December 31, 2022,September 30, 2023, the Company has recognized $115,104 in interest incomeestablished a full reserve for the principal and accrued interest receivable. The Company has waived Trend Ventures, LP’s failure to pay the interest. The Company has included $1,177,604 in current assets, and the remaining $3,187,500 in non-current assets.
NOTE 5:8. INVESTMENT – SERIES A CONVERTIBLE PREFERRED STOCK – WHITE RIVER ENERGY CORPWTRV
On July 25, 2022, the Company entered into a Share Exchange Agreement pursuant to which that day it sold to WTRV its oil and gas production business, (White River) which iswas part of the Commoditiescommodities segment. The Company received 1,200 shares of WTRV’s Series A Convertible Preferred Stock, which becomes convertible into 42,253,521 shares of WTRV common stock upon such time as (A) WTRV has filed a Form S-1 with the SEC and such Form S-1 has been declared effective, or is no longer subject to comments from the Staff of the SEC, and (B) Ecoarkthe Company elects to distribute shares of itsWTRV’s common stock to its stockholders. Basedshareholders. The S-1 was declared effective by the SEC on September 29, 2023, file number 333-268707, but the Company has not yet elected to convert the Series A preferred stock as it is still determining next steps on the lowerpreviously proposed distribution of cost or market, the value of the investment was determined to be $30,000,000. As of December 31, 2022, WTRV has not filed a registration statement. The Company has determined that as of December 31, 2022, there is no impairment of this investment. The Company has treated the investment as a Level 3 asset and that the fair value of the investment exceeds the cost basis which thereby implies no impairment as of December 31, 2022.shares.
As of December 31, 2022,September 30, 2023, the Company has determined that Ecoarkit is not the primary beneficiary, and this transaction has not resulted in Ecoarkthe Company controlling WTRV as the preferred shares are unable to behave not yet been converted untilinto common stock, and the effectiveness of the registration statement being filed for WTRV,Company does not have the power to direct activities of WTRV, control the Boardboard of Directorsdirectors of WTRV and WTRV is not reliant upon funding by Ecoarkthe Company moving forward.forward; therefore the Company concluded that WTRV is not a variable interest entity as of September 30, 2023.
NOTE 6:9. INVESTMENT – COMMON STOCK – WOLF ENERGY SERVICES, INC.
On August 23, 2022, the Company entered into a Share Exchange Agreement (the “Agreement”) with Wolf Energy and Banner Midstream. Pursuant to the Agreement, upon the terms and subject to the conditions set forth therein, the Company acquired 51,987,832 shares of the Wolf Energy common stock in exchange for all of the capital stock of Banner Midstream owned by the Company, which represents 100% of the issued and outstanding shares (the “Exchange”).shares. Following the closing of the Agreement, which occurred on September 7, 2022, Banner Midstream continues as a wholly-ownedwholly owned subsidiary of Wolf Energy. Based on the lower of cost or market, the value of the investment was determined to be $5,328,753. On September 7, 2022, the Exchange was completed, and Banner Midstream became a wholly-owned subsidiary of Wolf Energy. The Company has determined that as of December 31, 2022,September 30, 2023, there is no impairment ofloss on this investment.
The Company has determined that this transaction has resulted in Ecoarkthe Company having a controlling interest in Wolf Energy as the common stock issued representrepresents approximately 65%66% of the voting common stock of Wolf Energy common stock outstanding at DecemberSeptember 30, 2023 and March 31, 2022.2023. Since Ecoarkthe Company will be distributing to the Ecoark stockholdersits shareholders a stock dividend to all common and preferred stockholdersshareholders with a stock dividend date of December 31,September 30, 2022, the Company has reflected Wolf Energy,, in discontinued operations as the Company intends to hold no shares and thus no voting interest upon the effectiveness of a registration statement for Wolf Energy,, and the investment has been eliminated in the consolidation.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES10. INVESTMENT – EARNITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
As part of the acquisition of BNC, the Company acquired BNC’s 19.9% ownership in Earnity, a company that aimed to democratize access to the broadest array of cryptocurrency assets in a secure, educational, and community-oriented platform to global customers. In the purchase of BNC, the Company allocated no value to this investment. Subsequent to the Company’s acquisition of BNC, Earnity permanently ceased operations.
NOTE 7: BITCOIN
Agora commenced its Bitcoin mining operations in November 2021. Through March 31, 2022, Agora mined 0.57 Bitcoins. Agora ceased Bitcoin mining on March 3, 2022. The value of the Bitcoin mined was $26,495 of which $16,351 has been impaired through September 12, 2022. On September 12, 2022, the Company liquidated its Bitcoin holdings into fiat currency (USD), of $12,485. This transaction resulted in a gain on sale of Bitcoin of $2,340. During the nine months ended December 31, 2022, the Company recognized Bitcoin impairment losses of $9,122.
The following table presents additional information about Agora’s Bitcoin holdings during the nine months ended December 31, 2022:
Beginning balance – April 1, 2022 | $ | 19,267 | ||
Gain on sale of Bitcoin | 2,340 | |||
Bitcoin converted into fiat currency | (12,485 | ) | ||
Bitcoin impairment losses | (9,122 | ) | ||
Ending balance – December 31, 2022 | $ | - |
NOTE 8:11. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2022September 30, 2023 and March 31, 2022:2023:
December 31, 2022 | March 31, 2022 | September 30, 2023 | March 31, 2023 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Zest Labs freshness hardware, equipment and computer costs | $ | 2,915,333 | $ | 2,915,333 | $ | - | $ | 2,915,333 | ||||||||
Land | 125,000 | 125,000 | 125,000 | 125,000 | ||||||||||||
Furniture | 40,074 | - | - | 40,074 | ||||||||||||
Auto – BNC | 232,406 | 220,786 | ||||||||||||||
Equipment – BNC | 174,404 | 109,404 | ||||||||||||||
Mining technology equipment– Bitcoin | 5,639,868 | 7,065,630 | - | 5,639,868 | ||||||||||||
Machinery and equipment – Bitcoin | 91,132 | 91,132 | ||||||||||||||
Auto – Bitcoin | 91,132 | 91,132 | ||||||||||||||
Total property and equipment | 8,811,407 | 10,197,095 | 622,942 | 9,141,597 | ||||||||||||
Accumulated depreciation and impairment | (4,689,042 | ) | (2,970,725 | ) | (151,613 | ) | (4,709,194 | ) | ||||||||
Property and equipment, net | $ | 4,122,365 | $ | 7,226,370 | $ | 471,329 | $ | 4,432,403 |
As of December 31, 2022, the Company performed an evaluation of the recoverability of these long-lived assets. As a result of the evaluation, there was impairment of fixed assets necessary in the amount of $1,655,969 in September 2022 as the Agora’s focus changed to a power-centric power company from a Bitcoin Mining company. As a result, the Company determined the value of the miners purchased have nominal value.
In September 2022, Agora renegotiated a settlement with one of its vendors, and provided them transformers (in mining technology equipment) valued at $1,425,772 in exchange for a credit against amounts owed to them of $855,000. This resulted in a loss on settlement of $570,772.
Depreciation expense for the ninethree and six months ended December 31,September 30, 2023 was $32,420 and $65,319, respectively. Depreciation expense for the three and six months ended September 30, 2022 was $15,661 and 2021$48,560, respectively. On August 25, 2023, the Company sold 100% of the issued and outstanding common stock of Zest Labs, and all the assets and liabilities of Zest Labs were assumed by the Purchaser as discussed in Note 1. The net amount of property and equipment recorded in the sale was $62,338$0.
Effective September 30, 2023, the Company impaired $5,679,942 of gross fixed assets related to Agora and $143,321,Bitstream Mining LLC (“Bitstream”) that had $1,784,189 in accumulated depreciation. The $3,895,753 of net property and equipment remaining was impaired as the Company deemed the assets without value as they have been unable to commence mining operations, either for themselves or from others through hosting arrangements, and is not expected to.
On November 1, 2023, both Agora and Bitstream filed petitions for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Western District of Texas, cases 23-51490 and 23-51491, respectively.
12. INTANGIBLE ASSETS
Intangible assets consisted of the following as of September 30, 2023 and March 31, 2023:
September 30, 2023 | March 31, 2023 | |||||||
Trademarks | $ | 5,097,000 | $ | 5,097,000 | ||||
Developed technology | 1,142,000 | 1,142,000 | ||||||
Accumulated amortization - trademarks | (198,217 | ) | (28,317 | ) | ||||
Accumulated amortization - developed technology | (44,411 | ) | (6,344 | ) | ||||
Intangible assets, net | $ | 5,996,372 | $ | 6,204,339 |
On March 7, 2023, the Company acquired trademarks and developed technology in the acquisition of BNC. These intangible assets were valued by an independent valuation consultant utilizing various methods including the discounted cash flow and option-pricing methods, and the estimated remaining useful life of these assets was estimated to be fifteen years.
Amortization expense for the three and six months ended September 30, 2023 was $103,983 and $207,967, respectively, and $0 for the three and six months ended September 30, 2022.
ECOARK HOLDINGS, INC. AND SUBSIDIARIESOn August 25, 2023, the Company sold 100% of the issued and outstanding common stock of Zest Labs, and all the assets and liabilities of Zest Labs were assumed by the Purchaser as discussed in Note 1. The net amount of property and equipment recorded in the sale was $0.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Amortization expense for the next five years and in the aggregate is as follows:
Remaining fiscal year 2024 | $ | 207,967 | ||
2025 | 415,933 | |||
2026 | 415,933 | |||
2027 | 415,933 | |||
2028 | 415,933 | |||
Thereafter | 4,124,673 | |||
$ | 5,996,372 |
NOTE 9: POWER DEVELOPMENT COST13. ACCRUED EXPENSES
Agora has paid $1,000,000 each under two separate agreements for two different land sites to a non-related third party for a totalAccrued expenses consisted of $2,000,000 in connection with the commencementfollowing as of Bitstream’s Bitcoin mining operations. The payments represent the fee for securing 48 MWSeptember 30, 2023 and 30 MW, respectively of utility capacity as defined and agreed by ERCOT West Load Zone in the Oncor Electric Delivery Company LLC (“Utility”) at the “one-span” tariff rate classification of “6.1.1.1.5 Primary greater than 10kw”. If the Utility is unable to deliver these terms as defined in the facilities extension agreement, the non-related third party is obligated to secure a new location for Bitstream with at least the stated capacity and same rate tariff. The non-related third party secured the 48 MW and 30 MW of available capacity by signing a distribution facilities extension agreement with the Utility and posting the required collateral.March 31, 2023:
The $2,000,000 was used to purchase this right to the distribution facilities extension agreement which gives Bitstream immediate access to the 78 MW electric capacity from the Utility.
Bitstream also reimbursed the utility deposits paid by the non-related third party in connection with these agreements in the amount of $96,000 and $326,500, respectively. The power development fees are deemed non-refundable unless the non-related third party cannot find a suitable location within 6 months. Bitstream and the non-related third party are still negotiating a definitive power agreement.
On August 10, 2022, the Company had $844,708 returned from one of the distribution facilities extension agreements, which is net of $155,292 of fees related to development costs paid to our power broker. As a result, $1,000,000 remains as an asset as of December 31, 2022.
The Company has classified these payments as “Power Development Costs” as a noncurrent asset on the Consolidated Balance Sheets.
September 30, 2023 | March 31, 2023 | |||||||
Professional fees and consulting costs | $ | 354,488 | $ | 790,214 | ||||
Platform hosting fees | 1,000,000 | - | ||||||
Compensation vacation and paid time off | 353,633 | 138,262 | ||||||
Sponsorship | 200,000 | 500,000 | ||||||
Interest | 79,232 | 61,722 | ||||||
Accrued legal contingencies | 414,027 | - | ||||||
Other | 461,738 | 68,160 | ||||||
Total | $ | 2,863,118 | $ | 1,558,358 |
NOTE 10:14. WARRANT DERIVATIVE LIABILITIES
The Company issued common stock and warrants in several private placements and two public offerings (“Derivative Warrant Instruments”) and some of these warrants have been classified as liabilities. The Derivative Warrant Instruments have been accounted for utilizing ASC 815 “Derivatives and Hedging.” The Company has incurred a liability for the estimated fair value of Derivative Warrant Instruments. The estimated fair value of the Derivative Warrant Instruments has been calculated using the Black-Scholes fair value option-pricing model with key input variables provided by management, as of the date of issuance, with changes in fair value recorded as gains or losses on revaluation in other income (expense).
The Company identified embedded features in some of the warrant agreements which were classified as a liability. These embedded features included (a) the implicit right for the holders to request that the Company settle the warrants in registered shares. Since maintaining an effective registration of shares is potentially outside the control of the Company, these warrants were classified as liabilities as opposed to equity; (b) included the right for the holders to request that the Company cash settle the warrant instruments from the holder by paying to the holder an amount of cash equal to the Black-Scholes value of the remaining unexercised portion of the Derivative Warrant Instrumentsderivative warrant instruments on the date of the consummation of a fundamental transaction; and (c) certain price protections in the agreements. The accounting treatment of derivative financial instruments requires that the Company treat the whole instrument as a liability and record the fair value of the instrument as derivatives as of the inception date of the instrument and to adjust the fair value of the instrument as of each subsequent balance sheet date.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
On November 14, 2020, theThe Company granted 60,000 two-yearhas only included descriptions of warrants exercisable at $7.75 per share in exchange for the early conversion of a portion of the September 24, 2020 warrants. The fair value of the November 14, 2020 warrants was estimated to be $251,497 at inception, and these warrants have expiredthat are still outstanding as of November 14, 2022.September 30, 2023.
On December 30, 2020, the Company granted 888,889 two-year warrants, with a strike price of $10.00, in the registered direct offering. The fair value of those warrants was estimated to be $4,655,299 at inception. During the three months ended March 31, 2021, 176,000 warrants were exercised for $1,760,000, and no shares were exercised during the year ended March 31, 2022 and nine months ended December 31, 2022. The remaining 712,889 warrants have expired as of December 30, 2022.
On December 30, 2020, the Company granted 62,222 two-year warrants to the placement agent as additional compensation in connection with the registered direct offering closed December 31, 2020, exercisable at a strike price of $11.25 per share. The fair value of those warrants was estimated to be $308,205 at inception and these warrants have expired as of December 30, 2022.
The fair value of the 200,000 warrants that remain outstanding from the 250,000 warrants granted on September 24, 2020 have expired on September 24, 2022.
On June 30, 2021, the Company granted 200,000 two-year warrants with a strike price of $10.00 per share, pursuant to a purchase agreement entered into the same day with the warrant holder. The fair value of those warrants was estimated to be $545,125 at inception, on June 30, 2021 and $0 as of December 31, 2022.
On August 6, 2021, the Company closed a $20,000,000 registered direct offering. The Company sold 3,478,261115,942 shares of common stock and 3,478,261115,942 warrants at $5.75$172.50 per share. The warrants are exercisable through April 8, 2025. The Company also issued the placement agent 243,4788,116 warrants exercisable at $7.1875$215.625 per share. Further information on the offering and compensation to the placement agent is contained in the prospectus supplement dated August 4, 2021. The fair value of the investor warrants was estimated to be $11,201,869 at inception and $42,208$11 as of December 31, 2022.September 30, 2023. The fair value of the placement agent warrants was estimated to be $744,530 at inception and $2,239$0 as of December 31, 2022.September 30, 2023.
On April 27, 2023, the Company closed a $6,875,000 senior secured convertible promissory note and granted the noteholders 2,100,905 warrants that expire five years from the issuance date and have a strike price of $3.28. The warrants contain a rachet provision which the Company has determined meets the criteria for accounting treatment as a derivative liability. The Company recorded a discount on the convertible note of $4,329,755, which represents the derivative liability at inception of the warrants. The fair value of the warrants was estimated to be $1,109,372 as of September 30, 2023.
The Company determined ourits derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of DecemberSeptember 30, 2023 and March 31, 2022 and 2021.2023. The Black-Scholes model requires six basic data inputs: the exercise or strike price,price; time to expiration,expiration; the risk-free interest rate,rate; the current stock price,price; the estimated volatility of the stock price in the future,future; and the dividend rate.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each warrant is estimated using the Black-Scholes valuation model. The following assumptions were used on December 31, 2022,September 30, 2023 and March 31, 20222023 and at inception:
Year Ended March 31, | Inception | |||||||||||||||
Expected term | 5.00 years | |||||||||||||||
Expected volatility | 110 – | 107 – 110% | 91% – | |||||||||||||
Expected dividend yield | - | - | - | |||||||||||||
Risk-free interest rate | ||||||||||||||||
1.50% – | ||||||||||||||||
Market price | $ | $ |
The Company’s remaining derivative liabilities as of December 31, 2022September 30, 2023 and March 31, 20222023 associated with warrant offerings arewere as follows. All fully extinguished warrants liabilities are not included in the chart below.
December 31, 2022 (unaudited) | March 31, 2022 | Inception | ||||||||||
Fair value of 200,000 (originally 250,000) September 24, 2020 warrants | $ | - | $ | 8,354 | $ | 1,265,271 | ||||||
Fair value of 60,000 November 14, 2020 warrants | - | 7,695 | 251,497 | |||||||||
Fair value of 888,889 December 31, 2020 warrants | - | 82,436 | 4,655,299 | |||||||||
Fair value of 62,222 December 31, 2020 warrants | - | 5,741 | 308,205 | |||||||||
Fair value of 200,000 June 30, 2021 warrants | - | 60,866 | 545,125 | |||||||||
Fair value of 3,478,261 August 6, 2021 warrants | 42,208 | 3,904,575 | 11,201,869 | |||||||||
Fair value of 243,478 August 6, 2021 warrants | 2,239 | 248,963 | 744,530 | |||||||||
$ | 44,447 | $ | 4,318,630 |
September 30, 2023 | March 31, 2023 | |||||||
Fair value of 115,942 August 6, 2021 warrants | $ | 11 | $ | 5,974 | ||||
Fair value of 8,116 August 6, 2021 warrants | - | 290 | ||||||
Fair value of 2,100,905 April 27, 2023 warrants | 1,109,372 | - | ||||||
$ | 1,109,383 | $ | 6,264 |
During the ninesix months ended December 31,September 30, 2023 and 2022, and 2021 the Company recognized changes in the fair value of the derivative liabilities of $(4,274,183)$2,231,127 and $(15,294,814),$2,892,472, respectively. In addition, the Company recognized $0 and $1,289,655 in expenses related to the warrants granted for the nine months ended December 31, 2022 and 2021.
Activity related to the warrant derivative liabilities for the nine months ended December 31, 2022 is as follows:
Beginning balance as of March 31, 2022 | $ | 4,318,630 | ||
Issuances of warrants – derivative liabilities | - | |||
Warrants exchanged for common stock | - | |||
Change in fair value of warrant derivative liabilities | (4,274,183 | ) | ||
Ending balance as of December 31, 2022 | $ | 44,447 |
Activity related to the warrant derivative liabilities for the nine months ended December 31, 2021 is as follows:
Beginning balance as of March 31, 2021 | $ | 7,213,407 | ||
Issuances of warrants – derivative liabilities | 12,491,524 | |||
Warrants exchanged for common stock | - | |||
Change in fair value of warrant derivative liabilities | (15,294,814 | ) | ||
Ending balance as of December 31, 2021 | $ | 4,410,117 |
ECOARK HOLDINGS, INC. AND SUBSIDIARIESActivity related to the warrant derivative liabilities for the six months ended September 30, 2023 was as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31,
Beginning balance as of March 31, 2023 | $ | 6,264 | ||
Issuances of warrants – derivative liabilities | 3,334,246 | |||
Warrants exchanged for common stock | - | |||
Change in fair value of warrant derivative liabilities | (2,231,127 | ) | ||
Ending balance as of September 30, 2023 | $ | 1,109,383 |
Activity related to the warrant derivative liabilities for the six months ended September 30, 2022 was as follows:
Beginning balance as of March 31, 2022 | $ | 4,318,630 | ||
Issuances of warrants – derivative liabilities | - | |||
Warrants exchanged for common stock | - | |||
Change in fair value of warrant derivative liabilities | (2,892,472 | ) | ||
Ending balance as of September 30, 2022 | $ | 1,426,158 |
NOTE 11:15. LONG-TERM DEBT
Long-term debt included in continuing operations consisted of the following as of December 31, 2022September 30, 2023 and March 31, 2022. All debt instruments repaid during the year ended March 31, 2022 are not included in the below chart and the chart only reflects those instruments that had a balance owed as of these dates. 2023:
December 31, 2022 | March 31, 2022 | September 30, 2023 | March 31, 2023 | |||||||||||||
(unaudited) | ||||||||||||||||
Credit facility -Trend Discovery SPV 1, LLC (a) | $ | 291,036 | $ | 595,855 | $ | 291,036 | $ | 291,036 | ||||||||
Auto loan – Ford (b) | 70,762 | 80,324 | 62,064 | 68,114 | ||||||||||||
Auto loan – Cadillac (c) | 160,381 | 170,222 | ||||||||||||||
Total long-term debt | 361,798 | 676,179 | 513,481 | 529,372 | ||||||||||||
Less: current portion | (303,136 | ) | (608,377 | ) | (325,699 | ) | (323,818 | ) | ||||||||
Long-term debt, net of current portion | $ | 58,662 | $ | 67,802 | $ | 187,782 | $ | 205,554 |
(a) | On December 28, 2018, the Company entered into a $10,000,000 credit facility that includes a loan and security agreement |
(b) | On February 16, 2022, the Company entered into a long-term secured note payable for $80,324 for a service truck maturing February 13, 2028. The note is secured by the collateral purchased and |
(c) | On March 6, 2023, in the acquisition of BNC, the Company assumed an auto loan for a Cadillac in the amount of $170,222. The loan bears interest at 14.18% and matures December |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
The following is a list of maturities by fiscal year as of December 31:September 30, 2023:
2023 | $ | 303,136 | ||||||
2024 | 12,819 | |||||||
Remaining 2024 | $ | 325,699 | ||||||
2025 | 13,582 | 38,804 | ||||||
2026 | 14,389 | 43,512 | ||||||
2027 | 15,245 | 48,869 | ||||||
2028 | 45,884 | |||||||
Thereafter | 2,627 | 10,713 | ||||||
$ | 361,798 | $ | 513,481 |
During the nine months ended December 31, 2022, the Company received proceeds of $487,500, repaid $810,000, and incurred $17,681 in commitment fees added to the credit facility with Trend Discovery SPV 1, LLC for its long-term debt from continuing operations. All discontinued operation totals are not reflected in these figures.
During the nine months ended December 31, 2021, the Company repaid $23,966.
Interest expense on long-term debt during the ninethree and six months ended December 31,September 30, 2023 was $9,735 and $25,528, respectively. Interest expense on long-term debt during the three and six months ended September 30, 2022 was $32,379 and 2021 are $66,635 and $276,$44,133, respectively.
NOTE 12:16. NOTES PAYABLE - RELATED PARTIES
A Board memberRelated Parties
AAI advanced $577,500the Company $781,897 and $7,510,520 during the three and six months ended September 30, 2023, respectively. The advances were used for working capital purposes, were unsecured, interest-free and had no fixed terms of repayment as of September 30, 2023.
Convertible Notes
On April 27, 2023, the Company sold $6.875 million of principal face amount senior secured convertible notes with an original issue discount to sophisticated investors for gross proceeds to the Company through August 8, 2021, underof $5.5 million. The notes mature on April 27, 2024 and are secured by all of the terms of notes payable that bears interest at rates ranging between 10% and 15% interest per annum. On August 9, 2021, the Company repaid the entire $577,500 to the Board member with accrued interest of $42,535. Interest expense on the notes for the nine months ended December 31, 2021 was $17,514.
An officerassets of the Company advanced $116,000 and certain of its subsidiaries, including BNC. There is no interest on the convertible notes unless there is an event of default. The notes are convertible into shares of common stock at $3.28, however there is a rachet provision in the convertible note that enables the holders of the notes to receive a lower conversion rate upon future issuances by the Company that fall below the $3.28 price. The conversion option meets the criteria of a derivative instrument, and the convertible note has been discounted $4,686,817 for the day one derivative liability. In addition, the Company has recorded $1,375,000 in original issue discount, which is being amortized using the interest method over the term of the note. Amortization of the original issue discount related to the convertible note was repaid this amount during$345,628 and $586,724 for the year ended March 31, 2022,three and $25,000 was advanced and repaid during the year ended March 31, 2022 from an officer of Agora. In the ninesix months ended December 31, 2022,September 30, 2023. Amortization of the Company’s Chief Executive Officerconversion option and Chief Financial Officer advanced a total of $716,000 of which $591,000warrant derivative instruments related to the convertible note was repaid in$1,997,660 for the same period leaving a balance due insix months ended September 30, 2023.
Beginning balance as of March 31, 2023 | $ | - | ||
Issuance of convertible notes | 6,875,000 | |||
Less: original issue discount - inception | (1,375,000 | ) | ||
Amortization of discounts | 2,584,384 | |||
Less: debt discount – reclassification to derivative liability (*) | (4,686,817 | ) | ||
Ending balance as of September 30, 2023 | $ | 3,397,567 |
(*) | This amount also includes discount related to the warrants issued with the convertible note (see Note 14). |
Activity related to the amount of $125,000; and an officer of Agora advanced $25,000 whichconvertible note derivative liabilities for the six months ended September 30, 2023 was fully repaid in the same period. These were short-term advances and no interest was charged as the amounts were outstanding for just a few weeks.follows:
Beginning balance as of March 31, 2023 | $ | - | ||
Issuances of convertible note – derivative liabilities | 1,352,322 | |||
Change in fair value of convertible note derivative liabilities | (1,278,650 | ) | ||
Ending balance as of September 30, 2023 | $ | 73,672 |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
NOTE 13: SERIES A CONVERTIBLE REDEEMABLE17. PREFERRED STOCK
RiskOn International Series A
On June 8, 2022, the Company entered into a Securities Purchase Agreement (the “Agreement”“Series A Agreement”) with Ault Lending, LLC (formerly Digital Power Lending, LLC), a California limited liability company (the “Purchaser”), pursuant to which the Company sold the PurchaserAult Lending 1,200 shares of Series A Convertible Redeemable Preferred Stock (the “Ecoark“RiskOn International Series A”), 102,8813,429 shares of common stock (the “Commitment Shares”) and a warrant to purchase shares of common stock (the “Warrant,” and together with the EcoarkRiskOn International Series A and the Commitment Shares, the “Securities”) for a total original purchase price of $12,000,000. The PurchaserAult Lending is a subsidiary of Ault Alliance, Inc. [NYSE American: AULT].AAI. The Company determined that the classification of the EcoarkRiskOn International Series A was Mezzanine Equitymezzanine equity as the option to convert the shares belongsbelong to the Purchaser.Ault Lending. A description of the material transaction components are as follows:
Ecoark Series AConversion Rights
Conversion Rights
Prior to the November 2022 amendment described below, each share of EcoarkRiskOn International Series A had a stated value of $10,000 and werewas convertible into shares of common stock at a conversion price of $2.10$63.00 per share, subject to customary adjustment provisions. The holder’s conversion of the EcoarkRiskOn International Series A was subject to a beneficial ownership limitation of 19.9% of the issued and outstanding common stock as of any conversion date of the EcoarkRiskOn International Series A, unless and until the Company obtains stockholdershareholder and The Nasdaq Stock Market (“Nasdaq”) approval for the conversion of more than that amount, in order to comply with Nasdaq Rules. StockholderShareholder approval was obtained on September 9, 2022. In addition, the conversion rights in general did not become effective until July 23, 2022, which is one day after the record date for the stockholdersshareholders meeting seeking such stockholdershareholder approval at the September 9, 2022 meeting. The shares of EcoarkRiskOn International Series A as amended are also subject to a 4.99% beneficial ownership limitation, which may be increased to up to 9.9% by the holder by giving 61 days’ notice to the Company.
On November 28, 2022, the Company, following an agreement with the Purchaser, the CompanyAult Lending, amended the Certificate of Designations of Rights, Preferences and Limitations (the “Certificate”) of the EcoarkRiskOn International Series A previously issued to the PurchaserAult Lending to: (i) increase the stated value of the EcoarkRiskOn International Series A from $10,000 to $10,833.33; (ii) provide for the dividends payable under the EcoarkRiskOn International Series A to be payable in common stock rather than cash effective November 1, 2022,2022; and (iii) reduce the conversion price of the EcoarkRiskOn International Series A from $2.10$63.00 to the lesser of (a) $1.00$30.00 or (b) the higher of (1) 80% of the 10-day daily volume weighted average price, or (2) $0.25.$7.50. The amendment on November 28, 2022 constituted a modification to the classification of the RiskOn International Series A from mezzanine equity to liability. The Company determined, in accordance with ASC 470-50-40, that the amendment would be accounted for as a debt modification as opposed to a debt extinguishment as the amendment did not meet the 10% threshold when comparing the present value of the remaining cash flows to the value to the original terms of the RiskOn International Series A. As a result of this modification, the Company recognized a debt modification expense of $879,368. Upon reclassification to preferred stock liability, the Company analyzed the terms and determined that the preferred stock liability was considered a derivative liability and measured the derivative liability at inception (November 28, 2022). This measurement resulted in a gain of $2,878,345.
As described in Note 15. “Commitments and Contingencies”, Nasdaq is alleging that the November 2022 amendment to the Series A violated its voting and stockholder approval requirements, and we expect it may do so with regard to the recent BitNile.com transaction, although the Company plans to seek stockholder approval for both transactions and make any modifications Nasdaq requires. See “Risk Factors” contained in this Report.
Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of the preferred stock liability is estimated using the Black-Scholes valuation model. The following assumptions were used on DecemberSeptember 30, 2023 and March 31, 2022, and at inception: 2023:
September 30, 2023 | March 31, 2023 | |||||||
Expected term | 1.66 – 2.00 years | 1.66 – 2.00 years | ||||||
Expected volatility | 108 – 110% | 108 – 110% | ||||||
Expected dividend yield | - | - | ||||||
Risk-free interest rate | 3.48 – 3.88% | 3.48 – 3.88% | ||||||
Market price | $1.15 – $22.80 | $3.60 – $22.80 |
December 31, 2022 | Inception | |||||||
Expected term | 1.91 – 2.00 years | 2.00 years | ||||||
Expected volatility | 108 - 109 | % | 108 | % | ||||
Expected dividend yield | - | - | ||||||
Risk-free interest rate | 3.57 – 3.88 | % | 3.69 | % | ||||
Market price | $0.18 – $0.76 | $ | 0.76 |
As described in Note 19 ECOARK HOLDINGS, INC. AND SUBSIDIARIES“Commitments and Contingencies”, on November 2, 2023, the Company received a notice in the form of a letter (“Deficiency Letter”) from the Staff of the Nasdaq stating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common stock had closed below $1.00 per share for the previous 31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER2022consecutive business days. See Note 22, “Subsequent Events”, for more information.
Negative Covenants and Approval Rights
The Ecoark Series A Certificate of Designation (the “Certificate”) subjects the Company to negative covenants restricting its ability to take certain actions without prior approval from the holder(s) of a majority of the outstanding shares of EcoarkRiskOn International Series A for as long as the holder(s) continue to hold at least 25% (or such higher percentage as set forth in the Certificate (as defined below))Certificate) of the EcoarkRiskOn International Series A shares issued on the closing date under the Series A Agreement. These restrictive covenants include the following actions by the Company, subject to certain exceptions and limitations:
(i) | payment or declaration of any dividend (other than pursuant to the |
(ii) | investment in, purchase or acquisition of any assets or capital stock of any entity for an amount that exceeds $100,000 in any one transaction or $250,000, in the aggregate; |
(iii) | issuance of any shares of common stock or other securities convertible into or exercisable or exchangeable for shares of common stock; |
(iv) | incurrence of indebtedness, liens, or guaranty obligations, in an aggregate amount in excess of $50,000 in any individual transaction or $100,000 in the aggregate with customary |
(v) | sale, lease, transfer or disposal of any of its properties having a value calculated in accordance with GAAP of more than $50,000; |
(vi) | increase in any manner the compensation or fringe benefits of any of its directors, officers, employees; and |
(vii) | merger or consolidation with, or purchase a substantial portion of the assets of, or by any other manner the acquisition or combination with any business or entity. |
The above and other negative covenants in the Series A Certificate do not apply to a reverse merger with an entity with securities quoted on a market operated by OTC Markets or listed on a national securities exchange.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Warrant
Prior to its cancellation, the Warrant, as amended, provided the PurchaserAult Lending or its assignees (the “Holder”) with the right to purchase a number of shares of common stock as would enable the holderHolder, together with its affiliates, to beneficially own 49% of the Company’s common stock, calculated on a fully diluted basis, at an exercise price of $0.001$0.03 per share, including the Commitment Shares and Conversion Sharesconversion shares unless sold. Subject to stockholdershareholder approval, the Warrant was to vest and become exercisable into shares of the Company’s stock if, as of June 8, 2024: (i) the Company had failed to complete the distributions to the Company’s security holders or to any other subsidiary of the Company’s equity ownership of its three principal subsidiaries: Agora, Banner Midstream and Zest Labs (or their principal subsidiaries) (the “Distributions”), and/or (ii) the Holder together with its affiliates does not beneficially own at least 50% of the Company’s outstanding common stock. Provided,stock, provided however, that the Company must retain 20% of its common stock of Agora. The Warrant was to be exercised on a cashless basis and expire on June 8, 2027.
On November 14, 2022, the Company and the warrant holderHolder canceled the warrant which was originally issued to the holder on June 8, 2022, as subsequently amended and restated,Warrant in exchange for $100 as$100. As the Company hashad substantially met the conditions under Section 1(a) of the warrant, therefore,Warrant, the Company did not compute any derivative liability on the warrants.Warrant.
Registration Rights
Pursuant to the Agreement, the Company has agreed to register the sale by the PurchaserAult Lending of up to 5,246,456174,882 shares of common stock, representing the Commitment Shares issued at the closing plus 5,143,575171,453 of the shares of common stock issuable upon conversion of the EcoarkRiskOn International Series A. This amount equals 19.9% of the Company’s outstanding common stock immediately prior to the closing. The Company registered the sale by filing a prospectus supplement pursuant to the Company’s registration statement on Form S-3 (File No. 333-249532), originally filed with the SEC on October 16, 2020, as amended, which became effective on December 29, 2020, and the base prospectus included therein.therein. On January 23, 2023, the PurchaserAult Lending agreed to reduce its secondary offering of shares of ourthe Company’s common stock issuable upon conversion of the RiskOn International Series A by $3,500,000. See Note 20. “Subsequent Events.18 “Shareholders’ Deficit.”
The value of the Commitment Shares of $193,416 were considered issuance costs and have been reflected in the total for Mezzanine Equity of $11,806,584. During the nine months ended December 31, 2022, a total of 318 shares of the Series A have been converted into 2,416,637 shares of common stock. As of December 31, 2022, a total of 882 shares of Series A are issued and outstanding. In addition, the Company amortized $34,609 in discount on the preferred stock, prior to the reclassification to the preferred stock liability on November 22, 2022. Upon this reclassification, the balance of unamortized discount of $166,350, was expensed as part of the debt modification expense.
The description above is not a substitute for reviewing the full text of the referenced documents, which were attached as exhibits to the Company’s Current ReportReports on Form 8-K as filed with the SEC on June 9, 2022, and the Company’s Current Report on Form 8-K as filed with the SEC on July 15, 2022 when we filed the amended and restated warrant, and the aforementioned amendment filed on November 29, 2022.
Preferred Stock Derivative Liability
RiskOn International Series A
As discussed herein, the Company determined that the RiskOn International Series A upon the amendment on November 28, 2022, constituted a derivative liability under ASC 815.815, Derivatives and Hedging (“ASC 815”). As a result of this classification, the Company determinedetermined that on November 28, 2022 (inception), the value of the derivative liability was $7,218,319.
On December 9, 2022, the RiskOn International Series A holder converted 50 shares of RiskOn International Series A into 1,140,44738,015 common shares that resulted in a loss on conversion of $3,923.
The derivative liability for the preferred stockRiskOn International Series A was remeasured at December 31, 2022September 30, 2023 and iswas valued at $4,811,875,$55,415, resulting in a gain of $1,864,777$1,604,787 in the change in fair value.value for the six month period ended September 30, 2023.
DuringIn addition, the nineCompany advanced $1,205,000 during the six months ended December 31,September 30, 2023 to a third-party related to an obligation by the RiskOn International Series A shareholder and this amount will be reflected as a redemption upon the dividend that will be paid to the Company’s shareholders of record as of September 30, 2022 for the Company recognized changesWTRV and Wolf Energy divestitures. In addition, $635,000 was advanced in the fair valueyear ended March 31, 2023. The $1,840,000 has been reclassified to advances to former owners of the derivative liabilities related to the Series A of $(1,864,777).BitNile.com.
Activity related to the preferred stock derivative liabilities for the ninesix months ended December 31, 2022 isSeptember 30, 2023 was as follows:
Beginning balance as of March 31, 2022 | $ | - | ||
Reclassification of mezzanine equity to preferred stock liability | 10,096,664 | |||
Gain on fair value at inception | (2,878,345 | ) | ||
Conversion of preferred stock for common stock | (541,667 | ) | ||
Change in fair value of preferred stock derivative liabilities | (1,864,777 | ) | ||
Ending balance as of December 31, 2022 | $ | 4,811,875 |
Beginning balance as of March 31, 2023 | $ | 1,025,202 | ||
Reclassification – advances former owners of BitNile.com | 1,840,000 | |||
Advances to third-party that will be considered redemption of Series A | (1,205,000 | ) | ||
Change in fair value of preferred stock derivative liabilities | (1,604,787 | ) | ||
Ending balance as of September 30, 2023 | $ | 55,415 |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
NOTE 14: STOCKHOLDERS’ EQUITY (DEFICIT)RiskOn International Series B and C
On July 26, 2022, the Company filed a Definitive Proxy Statement with respect to its 2022 Annual Meeting of the Stockholders, being held virtually at 1:00 p.m., Eastern Time, on September 9, 2022, at which the stockholders of the Company approved the following proposals:
Ecoark Holdings Preferred Stock
On March 18, 2016, the Company created 5,000,000 shares of “blank check” preferred stock, par value $0.001.
As of March 31, 2022, there were no shares of any series of preferred stock issued and outstanding. On June 8, 2022, as noted in Note 13, “Series A Convertible Redeemable Preferred Stock”, the Company issued 1,200 shares of Series A , and as of December 31, 2022, there are 882 shares of preferred stock issued and outstanding, and 318 shares were converted into common stock in the period ended December 31, 2022.
Ecoark Holdings Common Stock
The Company is authorized to issue 100,000,000 shares of common stock, par value $0.001 which followed stockholder approval on September 9, 2022. Effective with the opening of trading on December 17, 2020, the Company implemented a one-for-five reverse split of its issued and outstanding common stock and a simultaneous proportionate reduction of its authorized common stock. All share and per share figures are reflected on a post-split basis herein.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
In the three months ended June 30, 2021, the Company issued 114,796 shares of common stock which had been accrued for at March 31, 2021 in consulting fees under a contract entered into February 2, 2021. In addition, the Company issued 20,265 shares of common stock for the exercise of stock options.
In the three months ended September 30, 2021, the Company issued 45,000 shares of common stock for services, and 3,478,261 shares issued in a registered direct offering.
In the three months ended December 31, 2021, the Company did not issue any shares of common stock.
In the three months ended June 30, 2022, the Company issued 102,881 shares of common stock which were the commitment shares in the BitNile transaction as discussed in Note 13.
In the three months ended September 30, 2022, the Company issued 1,276,190 shares of common stock in conversion of 268 shares of Series A. In addition, the Company issued 550,000 shares (including the 117,115 shares held as treasury stock, for a net 432,885 common shares) as settlement with a Trend Ventures investor. The Company has expensed the value of $1,045,000 ($1.90 per share) as a settlement expense.
In the three months ended December 31, 2022, the Company issued 1,140,447 shares of common stock in conversion of 50 shares of Series A and 139,840 shares of common stock in payment of the Series A dividend for November 2022. The Company accrued the December 2022 dividend of 411,854 shares with a value of $103,934, which were issued January 5, 2023.
As of December 31, 2022, 29,456,342 shares of common stock were issued and outstanding.
Agora Common Stock
Agora is authorized to issue 250,000,000 shares of common stock, par value $0.001. On September 22, 2021, the Company purchased 100 shares of Agora for $10.
On October 1, 2021, the Company purchased 41,671,121 shares of Agora common stock for $4,167,112 which Agora used to purchase equipment to commence the Bitstream operations.
In addition, between October 1 and December 7, 2021, Agora issued 4,600,000 restricted common shares to its management, non-employee directors, employees and advisors. After issuance of these shares, Ecoark controls approximately 90% of Agora. The future stock-based compensation related to these shares that will be measured consists of $12,166,680 over a three-year period in service-based grants ($9,611,145 in year one, $1,861,096 in year two, and $694,436 in year 3) and $10,833,320 in performance-based grants ($5,416,660 for the deployment of 20 MW in the State of Texas, and $5,416,660 for the deployment of 40 MW in the State of Texas) for a total of $23,000,000. These restricted common shares were measured pursuant to ASC 718-10-50 at an estimated value per share of $5.00 and consist of both service-based and performance-based criteria.
On August 7, 2022, Agora issued 400,000 shares of common stock to its management, non-employee directors, employees and advisors. After issuance of these shares, Ecoark controls approximately 89% of Agora. The future stock-based compensation related to these shares that will be measured consists of $2,000,000 ranging from immediate vesting through the three-year anniversary in service-based grants. These restricted common shares were measured pursuant to ASC 718-10-50 at an estimated value per share of $5.00 and consist of service-based criteria only.
Of the 5,000,000 restricted shares of common stock — 2,833,336 shares of restricted stock are considered service grants and 2,166,664 are considered performance grants.
The performance grants vest as follows: 1,083,332 restricted common shares upon Agora deploying a 20 MW power contract in Texas; and 1,083,332 restricted common shares upon the Company deploying a 40 MW power contract in Texas. As of December 31, 2022, none of the performance criteria are probable as no contracts have been signed as the proper funding has not been secured, therefore no compensation expense is recognized in accordance with ASC 718-10-25-20 related to the performance grants. On April 12, 2022, Agora upon board of director approval accelerated the vesting of 250,000 restricted shares for deploying a 20 MW power contract in Texas; and 250,000 restricted shares for deploying a 40 MW power contract in Texas with Agora’s former Chief Financial Officer. All remaining performance grants remain unvested.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
The Company recognized $8,963,700 in stock-based compensation for the nine months ended December 31, 2022, which represented $5,838,700 in service grants, and $3,125,000 in the accelerated vesting of the former CFO’s grants ($625,000 in service-based grants and $2,500,000 in performance grants). The unrecognized stock-based compensation expense as of December 31, 2022 is $8,333,320 in performance based grants and $3,019,224 in service based grants for a total of $11,352,544.
The Company accounts for stock-based payments in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). During the year ended March 31, 2022, in addition to the value measured by the 4,600,000 restricted stock grants, stock-based compensation consists primarily of RSUs granted to a Company employee while employed by Ecoark Holdings. The Company measures compensation expense for RSUs based on the fair value of the award on the date of grant. The grant date fair value is based on the closing market price of Ecoark Holdings’ common stock on the date of grant.
Share-based Compensation Expense
Share-based compensation for employees is included in salaries and salary related costs and directors and services are included in professional fees and consulting in the consolidated statement of operations for the nine months ended December 31, 2022 and 2021.
Share-based compensation for the nine months ended December 31, 2022 and 2021 for stock options and RSUs granted under the 2013 Incentive Stock Plan and 2017 Omnibus Incentive Stock Plan and non-qualified stock options were $470,687 and $1,711,466, respectively.
There is $252,120 in share-based compensation accrued as of December 31, 2022 for Ecoark Holdings and $237,499 accrued in Agora for a total of $489,619.
In order to have sufficient authorized capital to raise the $20,000,000, on August 4, 2021, a then officer and director of the Company agreed to cancel stock options in exchange for a lesser number of restricted stock units, subject to future vesting. In accordance with the restricted stock agreement, the director was granted 272,252 RSUs that vest over 12 quarterly increments, in exchange for cancelling 672,499 stock options. In addition, on October 6, 2021, this officer and director received 63,998 additional RSUs. The expense related to the modification of these grants is included in the share-based compensation expense in the year ended March 31, 2022.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
NOTE 15: COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are presently involved in the following legal proceedings. To the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties or businesses are subject, which would reasonably be likely to have a material adverse effect on the Company.
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In the opinion of management, there are no legal matters involving us that would have a material adverse effect upon the Company’s financial condition, results of operations or cash flows.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Nasdaq Compliance
On December 27, 2022, the Company received a letter from Nasdaq notifying the Company of its noncompliance with stockholder approval requirements set forth in Listing Rule 5635(d), which requires stockholder approval for transactions, other than public offerings, involving the issuance of 20% or more of the pre-transaction shares outstanding at less than the Minimum Price (as defined therein). Additionally, the letter indicates that the Company violated Nasdaq’s voting rights rule set forth in Listing Rule 5640. The matters described in the letter relate to an amendment to the Certificate of Designation of Rights, Preferences and Limitations (the “Certificate”) of the Series A, shares of which were issued by the Company on June 8, 2022 in a private placement transaction which was previously disclosed on a Current Report on Form 8-K filed on June 9, 2022. Specifically, the Company amended the Certificate on November 28, 2022 to: (i) increase the stated value of the Series A from $10,000 to $10,833.33; (ii) provide for the dividends payable under the Series A to be payable in Common Stock rather than cash effective beginning November 1, 2022, and (iii) reduce the conversion price of the Series A from $2.10 to the lesser of (1) $1.00 and (2) the higher of (A) 80% of the 10-day daily volume weighted average price and (B) $0.25 (the “Amendment”). According to the letter, the Company was required to obtain stockholder approval to effect the Amendment because the Series A as amended provides for the potential issuance of 51,999,984 shares of Common Stock at less than the Minimum Price under Listing Rule 5635(d), and the Amendment also violates Listing Rule 5640 by providing the holder of the Series A with voting rights on an as-converted basis with the Series A convertible into Common Stock at a discount, thereby violating Listing Rule 5640.
In the letter, the Company was provided 45 calendar days from the date of the letter, or until February 10, 2023, to submit a plan to regain compliance with the referenced Listing Rules, and if such plan is accepted by Nasdaq, the Company can receive an extension of up to 180 calendar days from the date of the letter to evidence compliance. However, if the Company’s plan is not accepted by Nasdaq, or is not sufficiently executed to regain compliance and remedy the matters set forth in the letter, the Company’s Common Stock will be subject to delisting. In connection with the letter the Company was also requested certain documents and information related to its sale of White River.
In connection with the December 27th letter, the Company was also requested to provide certain documents and information related to its sale of White River, including as it pertains to the $30,000,000 in preferred stock value being carried on the Company’s balance sheet as consideration for the sale of the entity. According to the correspondence, the request was made under Listing Rule 5250 which provides that a listed company will provide Nasdaq with requested information deemed necessary to make a determination regarding such company’s continued listing.
Further, on December 30, 2022, the Company received another letter from the Nasdaq notifying the Company of its noncompliance with Listing Rule 5550(a)(2) by failing to maintain a minimum bid price for its Common Stock of at least $1.00 per share for 30 consecutive business days and providing the Company with a 180 calendar day grace period to regain compliance with the Listing Rule 5550(a)(2), subject to a potential 180 calendar day extension, as described below. To regain compliance, the Company’s Common Stock must have a minimum closing bid price of at least $1.00 per share for at least 10 consecutive business days within the grace period which ends on June 28, 2023. To qualify for the additional grace period, the Company will be required to meet the continued listing requirement for the market value of its publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second grace period, by effecting a reverse stock split if necessary, which would also require stockholder approval unless completed with a proportionate reduction in our authorized Common Stock under our Articles of Incorporation.
On January 26, 2023, Nasdaq sent an email to the Company raising 13 questions concerning the White River transaction, White River’s business, seeking verification that the Company had in fact transferred $3 million to White River last July and questioning the time allocations of the two senior executive officers of the Company and White River, among other things. The Company responded on February 15, 2023.
The Company provided responses to Nasdaq on January 11, 2023, February 10, 2023 and February 15, 2023. As of the date of this Report, the Company has not heard back from Nasdaq.
If our Common Stock is delisted from Nasdaq, we could face significant material adverse consequences, including:
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
If we are unable to rectify any of the above-described Nasdaq issues, for failure to timely obtain stockholder approval, a delisting will subject us and our stockholders to the above and other adverse consequences, and could also delay us from effecting the announced spin-offs of common stock of White River and Wolf Energy certain entities as described elsewhere in this Report. See “Risk Factors” contained elsewhere in this Report.
NOTE 16: CONCENTRATIONS
The Company occasionally maintains cash balances in excess of the FDIC insured limit. The Company does not consider this risk to be material.
NOTE 17: FAIR VALUE MEASUREMENTS
The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by U.S. generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:
Level 1 – quoted prices for identical instruments in active markets;
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Financial instruments consist principally of cash, prepaid expenses, other receivables, accounts payable and accrued liabilities, notes payable, and amounts due to related parties. The fair value of cash is determined based on Level 1 inputs. There were no transfers into or out of “Level 3” during the nine months ended December 31, 2022 and 2021. The recorded values of all other financial instruments approximate its current fair values because of its nature and respective relatively short maturity dates or durations.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The Company records the fair value of the of the warrant derivative liabilities disclosed in accordance with ASC 815, Derivatives and Hedging. The fair values of the derivatives were calculated using the Black-Scholes Model. The fair value of the derivative liabilities is revalued on each balance sheet date with corresponding gains and losses recorded in other income (expense) in the consolidated statement of operations. The following table presents assets and liabilities that are measured and recognized at fair value on a recurring basis as of:
Level 1 | Level 2 | Level 3 | Total Gains and (Losses) | |||||||||||||
December 31, 2022 | ||||||||||||||||
Warrant derivative liabilities | $ | - | $ | - | $ | 44,447 | $ | 4,274,183 | ||||||||
Preferred stock derivative liabilities | - | - | 4,811,875 | 1,864,777 | ||||||||||||
Bitcoin | - | - | - | (9,122 | ) | |||||||||||
Investment – White River Energy Corp | - | - | 30,000,000 | - | ||||||||||||
March 31, 2022 | ||||||||||||||||
Warrant derivative liabilities | $ | - | $ | - | $ | 4,318,630 | $ | 15,386,301 | ||||||||
Bitcoin | 19,267 | - | - | (7,228 | ) |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
The table below shows a reconciliation of the beginning and ending liabilities measured at fair value using significant unobservable inputs (Level 3) for the nine months ended December 31, 2022:
December 31, 2022 | ||||
(unaudited) | ||||
Beginning balance | $ | (4,318,630 | ) | |
Net change in unrealized (depreciation) appreciation included in earnings | 6,138,960 | |||
Reclassification from mezzanine equity | (10,096,664 | ) | ||
Gain on derivative at inception of amendment | 2,878,345 | |||
Purchases | 30,000,000 | |||
Sales/conversions to equity | 541,667 | |||
Transfers in and out | - | |||
Ending balance | $ | 25,143,678 |
NOTE 18: LEASES
The Company has adopted ASU No. 2016-02, Leases (Topic 842), as of April 1, 2019 and will account for its leases in terms of the right of use assets and offsetting lease liability obligations under this pronouncement. The Company had had only short-term leases up through the acquisition of Banner Midstream. The Company acquired a right of use asset and lease liability on March 27, 2020. The Company recorded these amounts at present value, in accordance with the standard, using a discount rate of 5%. The right of use asset is composed of the sum of all lease payments, at present value, and is amortized straight line over the life of the expected lease term. For the expected term of the lease the Company used the initial terms ranging between 24 and 60 months. Upon the election by the Company to extend the lease for additional years, that election will be treated as a lease modification and the lease will be reviewed for re-measurement.
The Company has chosen to implement this standard using the modified retrospective model approach with a cumulative-effect adjustment, which does not require the Company to adjust the comparative periods presented when transitioning to the new guidance. The Company has also elected to utilize the transition related practical expedients permitted by the new standard. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a modified retrospective approach. Adoption of the new standard did not result in an adjustment to retained earnings for the Company.
As of December 31, 2022, the value of the unamortized lease right of use asset is $370,315 (through maturity at October 31, 2026). As of December 31, 2022, the Company’s lease liability was $376,280.
Maturity of lease liability for the operating leases for the period ended December 31, | |||||
2023 | $ | 135,983 | |||
2024 | $ | 94,743 | |||
2025 | $ | 97,585 | |||
2026 | $ | 83,344 | |||
Imputed interest | $ | (35,375 | ) | ||
Total lease liability | $ | 376,280 |
Disclosed as: | ||||
Current portion | $ | 119,975 | ||
Non-current portion | $ | 256,305 |
Amortization of the right of use asset for the period ended December 31, | |||||
2023 | $ | 122,346 | |||
2024 | $ | 83,433 | |||
2025 | $ | 87,787 | |||
2026 | $ | 76,749 | |||
Total | $ | 370,315 |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
Total Lease Cost
Individual components of the total lease cost incurred by the Company is as follows:
Operating lease expense – nine months ended December 31, 2022 and 2021 | $ | 106,765 | $ | 19,726 | ||||
Operating lease expense – three months ended December 31, 2022 and 2021 | $ | 35,588 | $ | 19,726 |
NOTE 19: RELATED PARTY TRANSACTIONS
Trend Capital Management was founded in 2011 and through June 30, 2021, was Trend Holding’s primary asset. Trend Capital Management is not the investment manager of these entities, nor the beneficial owner of Ecoark securities held by Trend Discovery LP (“Trend LP”) nor Trend Discovery SPV I, LLC (“Trend SPV”) since it assigned the power to vote and dispose of securities to a third party not affiliated with Ecoark. The investment capital in Trend LP and Trend SPV is from individual limited partners and members, and not from the Company. Trend Capital Management does not have the obligation to absorb losses or the right to receive benefits that could be significant as a result of the entities’ performance. Trend Capital Management does not have any ownership of or a controlling financial interest in Trend LP nor Trend SPV and therefore management has concluded consolidation of these entities with Trend Capital Management is not required. Trend Capital Management provides services and collects fees from entities which include Trend LP and Trend SPV.
Trend Discovery which held Barrier Crest and Trend Capital Management was sold on June 17, 2022.
Jay Puchir, the Company’s Chief Financial Officer, Secretary and Treasurer, served as a consultant to the Company from May 2019 to March 2020 and was paid solely in stock options totaling 40,000 stock options at an exercise price of $3.15 per share. In addition, any outstanding notes with Mr. Puchir have been repaid along with all accrued interest.
Gary Metzger, a director, advanced $577,500 to the Company through March 31, 2020, under the terms of notes payable that bears interest at rates ranging between 10% and 15% interest per annum. These notes along with all accrued interest were repaid in August 2021.
In the Banner Midstream acquisition, Randy S. May, Chief Executive Officer and Chairman, was the holder of approximately $1,242,000 in notes payable by Banner Midstream and its subsidiaries, which were assumed by the Company in the transaction. Additionally, Mr. May held a note payable by Banner Energy in the amount of $2,000,000 in principal and accrued interest, which was converted into 2,740,000 shares of common stock (on a pre-reverse stock split basis) as a result of the transaction. Neither of these amounts remain outstanding.
On August 31, 2021, William B. Hoagland, the then Chief Financial Officer of the Company, transferred 550,000 shares of Ecoark Holdings common stock to Trend LP, of which Mr. Hoagland owns an approximately 25% of Trend LP. Additionally, Trend SPV holds 344,000 shares of Ecoark Holdings common stock and 460,000 warrants to purchase Ecoark Holdings common stock.
Ecoark Holdings has made periodic loans to Agora to permit it to begin its Bitcoin mining business. On November 13, 2021, Agora issued Ecoark Holdings a $7.5 million term note which accrues 10% per annum interest and is due March 31, 2023. As of December 31, 2022, Agora owed principal of $5,515,174 and interest of $547,621 to Ecoark Holdings. These amounts have been eliminated in consolidation.
On February 2, 2022, Peter Mehring, a director and executive officer, gave notice of his intent to resign as an executive officer and director effective on February 11, 2022. Mr. Mehring resigned as a result of his entering into an Employment Agreement with a leading Internet service company. He also entered into a Consulting Agreement with the Company.
Under the Consulting Agreement, Mr. Mehring will advise the Company (including Zest Labs) on its current intellectual property litigation and matters relating to Zest Lab’s intellectual property as well as provide transition services. The Consulting Agreement is for a one-year term. The Company agreed to pay Mr. Mehring $16,667 per month. His unvested stock awards will continue to vest during the term and the expiration date on any stock awards will be extended for one year following the termination. The Company and Mr. Mehring agreed to not renew this agreement and have parted amicably.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
NOTE 20: SUBSEQUENT EVENTS
Subsequent to December 31, 2022, the Company had the following transactions:
On January 24, 2023, the Company entered into an At-The-Market (“ATM”) Issuance Sales Agreement (the “Agreement”) with Ascendiant Capital Markets, LLC (“Ascendiant”), pursuant to which the Company may issue and sell from time to time, through Ascendiant, shares of the Company’s common stock, par value $0.001 per share (the “Shares”), with offering proceeds of up to $3,500,000.
Sales of the Shares, if any, may be made by any method permitted by law deemed to be an “at-the-market” offering as defined in Rule 415 of the Securities Act of 1933 (the “Securities Act”), including without limitation sales made directly on or through The Nasdaq Capital Market, the trading market for the Company’s common stock, on any other existing trading market in the United States for the Company’s common stock, to or through a market maker, directly to Ascendiant as principal for its account in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices, in privately negotiated transactions, in block trades, or through a combination of any such methods of sale. Ascendiant will use commercially reasonable efforts to sell on the Company’s behalf all of the Shares requested to be sold by the Company, consistent with its normal trading and sales practices, subject to the terms of the Agreement. Under the Agreement, Ascendiant will be entitled to compensation of 3% of the gross proceeds from the sales of the Shares sold under the Agreement. The Company also agreed to reimburse Ascendiant for certain specified expenses, including the fees and disbursements of its legal counsel, in an amount not to exceed $30,000 as well as up to $2,500 for each quarterly and annual bring-down while the Agreement is ongoing.
The Shares are being offered and sold pursuant to a prospectus supplement filed with the Securities and Exchange Commission (the “SEC”) on January 24, 2023 and the accompanying base prospectus which is part of the Company’s effective Registration Statement on Form S-3 (File No. 333-249532) (the “Registration Statement”). As of February 17, 2023, the Company had sold 1,425,928 shares and received $475,623 in net proceeds.
The Agreement contains representations, warranties and covenants customary for the transactions of this kind.
The Company has allocated 7,500,000 shares of common stock to be sold as of February 10, 2023 under the Ascendiant ATM.
On January 23, 2023, the Series A holder agreed to reduce its secondary offering of shares of our common stock issuable upon conversion of the Series A by $3,500,000 in connection with the ATM offering.
The Company issued 710,430 shares of common stock for the December 2022 and January 2023 preferred stock dividend payments to Ault.
On February 8, 2023, the Company entered into a Share Exchange Agreement (the “SEA”)the SEA by and among Ault Alliance, Inc. (“Ault”),AAI, a significant shareholder and the owner of approximately 86% of BitNile.com, Inc. (“BitNile.com”),BNC, and the minority stockholders of BitNile.com (the “Minority Shareholders”).Minority Shareholders. The SEA providesprovided that, subject to the terms and conditions set forth therein, the Company willwas to acquire allthe assets and assume the liabilities of the outstanding shares of capital stock of BitNile.comBNC as well as the common stocksecurities of Earnity Inc. beneficially owned by BitNile.comBNC (which represents approximately 19.9% of the outstanding common stock of Earnity Inc. as of the date of the SEA), which has no value, in exchange for the following: (i) 8,637.5 shares of newly designated Series B, Convertible Preferred Stock of the Company to be issued to Ault (the “Series B”), and (ii) 1,362.5 shares of newly designated Series C ConvertibleC. The Preferred Stock, of the Company to be issued to the to the Minority Shareholders (the “Series C,” and together with the Series B, the “Preferred Stock”). The Series B and the Series C, the terms of which are summarized in more detail below, each have a stated value of $10,000 per share (the “Stated Value”), for a combined stated valueStated Value of $100,000,000, and subject to adjustment, areand subject to Nasdaq and shareholder approval, convertible into a total of up to 400,000,00013,333,333 shares of the Company’s common stock, which represent approximately 92.4%stock. The Company has independently valued the Preferred Stock as of the Company outstanding common stock ondate of acquisition. The combined value of the Preferred Stock issued to AAI was $53,913,000 using a fully-diluted basis.blended fair value of the discounted cash flow method and option pricing method.
The terms of the Series B and Series C as set forth in the Certificates of Designations of the Rights, Preferences and Limitations of each such series of Preferred Stock (each, a “Certificate,” and together the “Certificates”) are essentially identical except the Series B is super voting and must approve any modification of various negative covenants and certain other corporate actions as more particularly described below.
Pursuant to the Series B Certificate, each share of Series B is convertible into a number of shares of the Company’s common stock determined by dividing the Stated Value by $0.25,$7.50, or 40,0001,333 shares of common stock. The conversion price is subject to certain adjustments, including potential downward adjustment if the Company closes a qualified financing resulting in at least $25,000,000 in gross proceeds at a price per share that is lower than the conversion price. The Series B holders are entitled to receive dividends at a rate of 5% of the Stated Value per annum from issuance until February 7, 2033 (the “Dividend Term”). During the first two years of the Dividend Term, dividends will be payable in additional shares of Series B rather than cash, and thereafter dividends will be payable in either additional shares of Series B or cash as each holder may elect. If the Company fails to make a dividend payment as required by the Series B Certificate, the dividend rate will be increased to 12% for as long as such default remains ongoing and uncured. Each share of Series B also has an $11,000 liquidation preference in the event of a liquidation, change of control event, dissolution or winding up of the Company, and ranks senior to all other capital stock of the Company with respect thereto other than the Series C with which the Series B shares equal ranking. Each share of Series B is entitled to vote with the Company’s common stock at a rate of 10 votes per share of common stock into which the Series B is convertible.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
In addition, for as long as at least 25% of the shares of Series B remain outstanding, AultAAI (and any transferees) musthas consent rights with respect to certain corporate events, including reclassifications, fundamental transactions, stock redemptions or repurchases, increases in the number of directors, and declarations or payment of dividends, and further the Company is subject to certain other negative covenants, including covenants against issuing additional shares of capital stock or derivative securities, incurring indebtedness, engaging in related party transactions, selling of properties having a value of over $50,000, altering the number of directors, and discontinuing the business of any subsidiary, subject to certain exceptions and limitations.
The terms, rights, preferences and limitations of the Series C are substantially the same as those of the Series B, except that the Series B holds certain additionalC does not hold negative covenant and consent rights, and Series C holders vote with the Company’s common stock on an as-converted basis.rights. The Company is required to maintain a reserve of authorized and unissued shares of common stock equal to 200% of the shares of common stock issuable upon conversion of the Preferred Stock, which is initially 800,000,00026,666,667 shares.
Pending stockholdershareholder approval of the transaction, the Series B and the Series CPreferred Stock combined are subject to a 19.9% beneficial ownership limitation. That limitation includes shares of Series A issued to Ault Lending, a wholly owned subsidiary of AAI, on June 8, 2022 and any common stock held by Ault.AAI. Certain other rights are subject to stockholdershareholder approval as described below. The SEA provides that the Company will seek stockholdershareholder approval following the closing. The entire transaction is subject to compliance with Nasdaq Rules and the Series B and Series voting rights provision of the B/C Certificates each containcontains a savings clause that nothing shall violate such Rules. Nasdaq may nonetheless disregard the savings clause.
Under the SEA, effective at the closing Ault is entitled to appoint three of the Company’s directors, and following receipt of approval from the Company’s stockholders, a majority of the Company’s directors. The SEA also provides the holders of Preferred Stock with most favored nations rights in the event the Company offers securities with more favorable terms than the Preferred Stock for as long as the Preferred Stock remains outstanding. Under the SEA, while any Preferred Stock is outstanding, the Company is prohibited from redeeming or declaring or paying dividends on outstanding securities other than the Preferred Stock. Further, the SEA prohibits the Company from issuing or amending securities at a price per share below the conversion price of the Preferred Stock, or to engage in variable rate transactions, for a period of 12 months following the closing.
The SEA further providesprovided that following the closing the Company will prepare and distribute a proxy statement and hold a meeting of its stockholdersshareholders to approve each of the following: (i) the SEA and the transactions contemplated thereby, (ii) a ratification of the Third Certificate Designations of Rights, Preferences, and Limitations of the Series A, (iii) a reverse stock split with a range of between 1-for 21-for-2 and 1-for-20, (iv) a change in the Company’s name to BitNile.com,BitNile Metaverse, Inc., (v) an increase of the Company’s authorized common stock to 1,000,000,000 shares of common stock; and (vi) any other proposals to which the Partiesparties shall mutually agree. In addition, pursuant to the SEA the Company agreed to use its reasonable best efforts to effect its previously announceannounced spin-offs of the common stock of Wolf Energy and White RiverWTRV held by or issuable to the Company, use its best efforts to complete one or more financings resulting in total gross proceeds of $100,000,000 on terms acceptable to Ault,AAI, and (financiallyfinancially support the ongoing Zest Labs litigation. The holders of the Preferred Stock will not participate in the aforementioned spin-offs and distribution. In connection with the SEA, the Company and AultAAI also agreed that the net litigation proceeds from the Zest Labs litigation that was ongoing as of November 15, 2022 would be held in a trust for the benefit of the Company’s stockholdersshareholders of record as of such date.
In connection with the SEA, the Company also entered into a Registration Rights Agreement with AultAAI and the Minority Shareholders pursuant to which the Company agreed to file a registration statement on Form S-3 or Form S-1 with the Securities and Exchange Commission (the “SEC”)SEC registering the resale by the holders of the Preferred Stock and/or the shares of common stock issuable upon conversion of the Preferred Stock, to be initially filed within 15 days of the closing, and to use its best efforts to cause such registration statement to be declared effective by the SEC within 45 days thereafter, subject to certain exceptions and limitations.
The SEA contains certain representations and warranties made by each of the Company, AultAAI and the Minority Shareholders. Upon the closing, which is subject to the closing conditions set forth in the SEA, including among other conditions the parties obtaining a fairness opinion from a national independent valuation firm and satisfactory completion of due diligence by each of the Company and Ault, BitNile.com will continue as a wholly-owned subsidiary of the Company. BitNile.com’sBNC’s principal business entails the development and operation of a metaverse platform, the beta for which is scheduled to launch inlaunched on March 1, 2023. However, no assurances can be givenThis transaction closed on March 7, 2023.
The Company determined that the Preferred Stock constituted a derivative liability under ASC 815 on the date of inception March 7, 2023. As a result of this classification, the Company determined that on March 7, 2023 (inception), the value of the derivative liability was $42,426,069.
The derivative liability for the Preferred Stock was remeasured at September 30, 2023 and is valued at $962,481, resulting in a gain of $17,868,279 in the change in fair value for the six months ended September 30, 2023. The Company has accrued $2,847,222 in dividends on the Preferred Stock as of September 30, 2023.
Activity related to the preferred stock derivative liabilities for the Preferred Stock for the six months ended September 30, 2023 was as follows:
Beginning balance as of March 31, 2023 | $ | 18,830,760 | ||
Change in fair value of preferred stock derivative liabilities | (17,868,279 | ) | ||
Ending balance as of September 30, 2023 | $ | 962,481 |
On April 4, 2023, the Company entered into an agreement with Ault Lending and WTRV pursuant to which the Company agreed to advance to WTRV payments of up to $3.25 million (the “Amounts”), and WTRV agreed to accept the Amounts as payment of Ault Lending’s $3.25 million payable to WTRV from Ault Lending’s exercise of participation rights in oil and gas exploration and drilling ventures which WTRV granted Ault Lending in connection with its acquisition of White River Holdings Corp. in July 2022. The parties agreed that the Amounts will be treated as a credit to the sums owed to WTRV, and the Company and Ault Lending agreed that in lieu of repayment of the Amounts advanced to WTRV, Ault Lending will permit the Company to redeem shares of the RiskOn International Series A held by Ault by dividing the Amounts by the stated value of such shares, or one share of RiskOn International Series A for each $10,833 advanced to WTRV. The redemption cannot occur until the previously announced spin-offs by the Company of shares of common stock of WTRV and Wolf Energy occurs, which would permit Ault Lending to receive its full dividends thereunder.
18. SHAREHOLDERS’ DEFICIT
RiskOn International Series A
As of March 31, 2022, there were no shares of any series of preferred stock issued and outstanding. On June 8, 2022, as noted in Note 17, the Company issued 1,200 shares of RiskOn International Series A, and as of September 30, 2023 and March 31, 2023, there were 882 shares of RiskOn International Series A issued and outstanding.
As of September 30, 2023 and March 31, 2023, the Company had issued Series B and Series C, as noted in Note 17, and has 8,637.5 and 1,362.5 shares of Series B and Series C, respectively, outstanding, which were issued March 7, 2023.
Common Stock
The Company is authorized to issue 500,000,000 shares of common stock, par value $0.001, which followed shareholder approval on October 16, 2023. On May 4, 2023, the Company amended its Articles of Incorporation to reflect a 1-for-30 reverse stock split. The Company also reduced its authorized shares on a 1-for-30 basis going from 100,000,000 authorized shares down to 3,333,333 authorized shares. All share and per share figures are reflected on a post-split basis herein.
In the six months ended September 30, 2022, the Company issued 3,429 shares of common stock, which were the commitment shares in the AAI transaction as discussed in Note 17.
On January 24, 2023, the Company entered into an ATM Issuance Sales Agreement (the “ATM Agreement”) with Ascendiant Capital Markets, LLC (“Ascendiant”), pursuant to which the Company could issue and sell from time to time, through Ascendiant, shares of the Company’s common stock, par value $0.001 per share (the “Shares”), with offering proceeds of up to $3,500,000. The ATM was terminated on June 16, 2023 after having raised approximately $3,500,000.
Under the ATM Agreement, Ascendiant was entitled to compensation of 3% of the gross proceeds from the sales of the Shares sold under the ATM Agreement. The Company also reimbursed Ascendiant for certain specified expenses, including the fees and disbursements of its legal counsel, in an amount not to exceed $30,000 as well as up to $2,500 for each quarterly and annual bring-down while the ATM Agreement was ongoing.
As of September 30, 2023, there were 163,393 unsold shares of the Company’s common stock being held by a custodian in an account owned by the Company which had not been sold during the ATM offering. It is the Company’s policy not to consider or classify these shares as issued or outstanding as it continues to own and control these shares.
The Shares were being offered and sold pursuant to a prospectus supplement filed with the Securities and Exchange Commission (the “SEC”) on January 24, 2023 and the accompanying base prospectus which is part of the Company’s effective Registration Statement on Form S-3 (File No. 333-249532) (the “Registration Statement”).
In the six months ended September 30, 2023, the Company issued 40,022 shares for payment of a preferred stock dividend of $300,158, and 935,452 shares in the ATM, for which it received $1,780,440. There was no common stock activity for the three months ended September 30, 2023.
As of September 30, 2023 and March 31, 2023, 2,359,306 and 1,383,832 shares of common stock were issued and outstanding, respectively.
Agora Common Stock
Agora is authorized to issue 250,000,000 shares of common stock, par value $0.001. On September 22, 2021, the Company purchased 100 shares of Agora for $10.
On October 1, 2021, the Company purchased 41,671,121 shares of Agora common stock for $4,167,112 which Agora used to purchase equipment to commence the Bitstream operations.
In addition, between October 1 and December 7, 2021, Agora issued 4,600,000 restricted common shares to its management, non-employee directors, employees and advisors. After issuance of these shares, the Company controls approximately 90% of Agora. The future share-based compensation related to these shares that will be measured consists of $12,166,680 over a three-year period in service-based grants ($9,611,145 in year one, $1,861,096 in year two, and $694,436 in year 3) and $10,833,320 in performance-based grants ($5,416,660 for the deployment of 20 MW in the State of Texas, and $5,416,660 for the deployment of 40 MW in the State of Texas) for a total of $23,000,000. These restricted common shares were measured pursuant to ASC 718-10-50 at an estimated value per share of $5.00 and consist of both service-based and performance-based criteria.
On August 7, 2022, Agora issued 400,000 shares of common stock to its management, non-employee directors, employees and advisors. After issuance of these shares, the Company controlled approximately 89% of Agora. The future share-based compensation related to these shares that will be measured consists of $2,000,000 ranging from immediate vesting through the three-year anniversary in service-based grants. These restricted common shares were measured pursuant to ASC 718-10-50 at an estimated value per share of $5.00 and consist of service-based criteria only.
Of the 5,000,000 restricted shares of common stock — 2,833,336 shares of restricted stock are considered service grants and 2,166,664 are considered performance grants.
The performance grants vest as follows: 1,083,332 restricted common shares upon Agora deploying a 20 MW power contract in Texas; and 1,083,332 restricted common shares upon the Company deploying a 40 MW power contract in Texas. As of December 31, 2022, none of the performance criteria are probable as no contracts have been signed as the proper funding has not been secured, therefore no compensation expense is recognized in accordance with ASC 718-10-25-20 related to the performance grants. On April 12, 2022, Agora upon board of director approval accelerated the vesting of 250,000 restricted shares for deploying a 20 MW power contract in Texas; and 250,000 restricted shares for deploying a 40 MW power contract in Texas with Agora’s former Chief Financial Officer. All remaining performance grants remain unvested.
The Company recognized $1,721,310 and $2,351,518 in share-based compensation for the three and six months ended September 30, 2023, respectively. The Company recognized $2,956,922 and $8,172,209 in share-based compensation for the three and six months ended September 30, 2022, respectively. The unrecognized share-based compensation expense as of September 30, 2023 is $8,333,320 in performance based grants and $0 in service based grants for a total of $8,333,320. It is very unlikely that the criteria established for the recognition of the performance grants will ever be satisfied.
The Company accounts for share-based payments in accordance with ASC 718, Compensation — Stock Compensation. The Company measures compensation expense for restricted stock units based on the fair value of the award on the date of grant. The grant date fair value is based on the closing market price of the Company’s common stock on the date of grant.
Share-based Compensation Expense
Share-based compensation for employees is included in salaries and salary related costs and directors and services are included in professional fees and consulting in the condensed consolidated statement of operations for the three and six months ended September 30, 2023 and 2022.
Share-based compensation for the three and six months ended September 30, 2023 for stock options and restricted stock units granted under the 2013 Incentive Stock Plan and 2017 Omnibus Incentive Stock Plan and non-qualified stock options were $0 and $258,655, respectively. Share-based compensation for the three and six months ended September 30, 2022 for stock options and restricted stock units granted under the 2013 Incentive Stock Plan and 2017 Omnibus Incentive Stock Plan and non-qualified stock options were $160,040 and $342,601, respectively.
There was $535,731 in share-based compensation accrued as of September 30, 2023 for the Company.
19. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is presently involved in the following legal proceedings. To the best of the Company’s knowledge, no governmental authority is contemplating any proceeding to which the Company is a party or to which any of its properties or businesses are subject, which would reasonably be likely to have a material adverse effect on the Company.
● | On August 1, 2018, ROI and Zest Labs filed a complaint against Walmart, Inc. (“Walmart”) in the United States District Court for the Eastern District of Arkansas, Western Division. The complaint includes claims for violation of the Arkansas Trade Secrets Act, violation of the Federal Defend Trade Secrets Act, breach of contract, unfair competition, unjust enrichment, breach of the covenant of good faith and fair dealing, conversion and fraud. On April 9, 2021, a Little Rock, Arkansas jury awarded ROI and Zest Labs a total of $115 million in damages (subsequently reduced to $110 million) which includes $65 million in compensatory damages (subsequently reduced to $60 million) and $50 million in punitive damages and found Walmart liable on three claims. The federal jury found that Walmart misappropriated Zest Labs’ trade secrets, failed to comply with a written contract, and acted willfully and maliciously in misappropriating Zest Labs’ trade secrets. The Company expects Walmart to continue to vigorously defend the litigation and to oppose the verdict in post-trial motions and an appeal. ROI filed post-trial motions to add an award for its attorneys’ fees as the prevailing party in the litigation. In addition to other post-trial motions, Walmart filed a renewed motion for judgment as a matter of law or, in the alternative, for remittitur or a new trial. As of the date of this Report, the court has allowed post-trial discovery but has not ruled on the motion for new trial. The ongoing litigation involving Walmart was assumed by the Purchaser as discussed in Note 1. Any net proceeds received in this litigation will be distributed to the Company’s shareholders of record as of November 15, 2022. |
● | On April 22, 2022, BitStream and ROI were sued in Travis County, Texas District Court (Docket #79176-0002) by Print Crypto Inc. in the amount of $256,733 for failure to pay for equipment purchased to operate BitStream’s Bitcoin mining operation. The defendants intend to vigorously defend themselves and have filed counterclaims in the 353rd Judicial District in Travis County, Texas on May 6, 2022 for fraudulent inducement, breach of contract, and for payment of attorney’s fees and costs. ROI provided additional documents to its attorneys on October 7, 2022, and there is no update since then. The Company has accrued the full amount of the claim in its condensed consolidated financial statements as of September 30, 2023. |
● | On July 15, 2022, Bitstream and two of their management were parties to a petition filed in Ward County District Court by 1155 Distributor Partners-Austin, LLC d/b/a Lonestar Electric Supply in the amount of $414,027 for failure to pay for equipment purchased to operate Bitstream’s Bitcoin mining operation. The Company filed a petition to remove one of its management from the claim in December 2022, and there is no update since then. The Company has accrued the full amount of the claim in its condensed consolidated financial statements as of September 30, 2023. |
● | On October 17, 2022, Bitstream was a party to a petition filed in Ward County District Court by VA Electrical Contractors, LLC in the amount of $1,666,187 for failure to pay for equipment purchased to operate Bitstream’s Bitcoin mining operation. The Company’s registered agent was served with this lawsuit on January 3, 2023, the Company answered the claim in January 2023, and is in process of supplying documents for discovery. The Company has accrued the full amount of the claim in its condensed consolidated financial statements as of September 30, 2023. |
In the opinion of management, there are no additional legal matters involving us that would have a material adverse effect upon the Company’s financial condition, results of operations or cash flows.
Nasdaq Compliance
On July 18, 2023, the Company received a letter (the “Letter”) from the Listing Qualifications staff (the “Staff”) of the Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company’s shareholders’ equity as reported in the 2023 Annual Report did not satisfy the continued listing requirement under Nasdaq Listing Rule 5550(b)(1) for the Nasdaq Capital Market, which requires that a listed company’s shareholders’ equity be at least $2.5 million. As reported in the 2023 Annual Report, the Company’s shareholders’ equity as of March 31, 2023 was approximately $(13.9) million.
According to the Letter, the Company had 45 calendar days from the date of the Letter, or until September 1, 2023, to submit a plan to regain compliance with Nasdaq Listing Rule 5550(b)(1). If the Company’s compliance plan is accepted by Nasdaq, then Nasdaq may, in its discretion, grant the Company up to 180 calendar days from the date of the Letter, or until January 14, 2024, to evidence compliance. If Nasdaq does not accept the Company’s plan, then Nasdaq may issue a staff delisting determination letter whereby the Company’s common stock will be subject to delisting. The Company would have the opportunity to appeal that decision to a Nasdaq hearings panel. The Company submitted a compliance plan, which was subsequently amended and restated, to the Staff, but as of the date of this filing, Nasdaq has not determined whether or not to accept the Company’s plan.
If the Company’s Common Stock is delisted from Nasdaq, the Company could face significant material adverse consequences, including:
● | it may adversely affect its ability to raise capital which is needed to stay operational; |
● | a limited availability of market quotations for the Company common stock; |
● | reduced liquidity with respect to the Company’s common stock; |
● | a determination that the Company’s common stock is a “penny stock” which will require broker-dealers trading in the common stock to adhere to more stringent rules, resulting in a reduced level of trading activity in the secondary trading market for the common stock; and |
● | being in default under the transaction documents entered into with the investors in the April 27, 2023 financing. |
If the Company is unable to rectify any of the above-described Nasdaq issues, a delisting would subject the Company and its shareholders to the above.
ELOC
On August 24, 2023, the Company entered into a purchase agreement (the “ELOC Purchase Agreement”) with Arena Business Solutions Global SPC II Ltd on behalf of and for the account of Segregated Portfolio #3 – SPC #3 (“Arena”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company has the right to direct Arena to purchase up to an aggregate of $100,000,000 of shares of common stock over the 36-month term of the ELOC Purchase Agreement. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, including, without limitation, the effectiveness of the Registration Statement (as defined in the ELOC Purchase Agreement), the Company has the right to present Arena with an advance notice (each, an “Advance Notice”) directing Arena to purchase any amount up to the Maximum Advance Amount (as defined in the ELOC Purchase Agreement). On October 30, 2023, the Registration Statement related to the ELOC Purchase Agreement was declared effective by the SEC.
Non-cancelable Obligations
In the course of BNC’s gaming business in association with its Platform, the Company has entered into non-cancelable obligations with certain parties to purchase services, such as technology and the hosting of the Platform. As of September 30, 2023, the Company had outstanding non-cancelable purchase obligations with terms of one year or longer aggregating $3,000,000 and obligations with terms less than one year of $2,000,000.
20. FAIR VALUE MEASUREMENTS
The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by U.S. generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:
Level 1 – quoted prices for identical instruments in active markets;
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Financial instruments consist principally of cash, prepaid expenses, other receivables, accounts payable and accrued liabilities, notes payable, and amounts due to related parties. The fair value of cash is determined based on Level 1 inputs. There were no transfers into or out of “Level 3” during the three or six months ended September 30, 2023 and 2022. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The Company records the fair value of the of the warrant derivative liabilities disclosed in accordance with ASC 815. The fair values of the derivatives were calculated using the Black-Scholes Model. The fair value of the derivative liabilities is revalued on each balance sheet date with corresponding gains and losses recorded in other income (expense) in the condensed consolidated statement of operations. The following table presents assets and liabilities that were measured and recognized at fair value on a recurring basis as of:
Level 1 | Level 2 | Level 3 | Total Gains and (Losses) | |||||||||||||
September 30, 2023 | ||||||||||||||||
Derivative liabilities | $ | - | $ | - | $ | 2,200,951 | $ | 22,982,843 | ||||||||
Investment – WTRV | - | - | 9,224,785 | - | ||||||||||||
March 31, 2023 | ||||||||||||||||
Derivative liabilities | - | $ | - | $ | 19,862,226 | $ | 32,924,126 | |||||||||
Bitcoin | - | - | - | (9,122 | ) | |||||||||||
Investment – WTRV | - | - | 9,224,785 | (20,775,215 | ) |
The table below shows a reconciliation of the beginning and ending liabilities measured at fair value using significant unobservable inputs (Level 3) for the six months ended September 30, 2023:
Beginning balance as of March 31, 2023 | $ | (10,637,441 | ) | |
Issuance – convertible notes with warrants | (4,686,817 | ) | ||
Net change in unrealized (depreciation) appreciation included in earnings | 22,982,843 | |||
Ending balance as of September 30, 2023 | $ | 7,658,585 |
21. RELATED PARTY TRANSACTIONS
In connection with the hospitality services the Company offers, the Company and certain customers enter into separate arrangements with respect to sponsorships it provides in addition to a number of ongoing commercial relationships, including license agreements.
As of September 30, 2023 and March 31, 2023, the Company had related party receivables of $62,200 and $0, respectively. All receivables at September 30, 2023 were attributable to a single customer.
See Note 8 for the investment in WTRV and Note 17 for the preferred stock issued in the year ended March 31, 2023 with a significant shareholder. The Company’s Chief Executive Officer and Chief Financial Officer hold similar positions in WTRV.
In the six month period ended September 30, 2023, the Company was advanced an additional $7,510,520 from AAI.
The Company’s former subsidiary Zest Labs, along with the Company and Zest Labs Holdings, LLC (owned by Gary Metzger, a current board member of the Company and therefore a related party) (the “Purchaser”), entered into a stock purchase agreement dated August 25, 2023, whereby the Purchaser purchased 100% of the issued and outstanding common stock of Zest Labs from the Company in exchange for the Purchaser agreeing to distribute any net proceeds from any new or ongoing intellectual property litigation or the sale or licensing of any intellectual property of Zest Labs to the Company’s shareholders of record as of November 15, 2022. The Company recorded a gain on disposal of Zest Labs of $683,152 in this transaction. Zest Labs is no longer a subsidiary of the Company, and all of the assets and liabilities of have been assumed by the Purchaser.
Revenues and Accounts Receivable
The Company had related party hospitality service sales of $17,700 and $41,150 for the three and six months ended September 30, 2023, respectively, and $0 in the three and six months ended September 30, 2022.
Allocation of General Corporate Expenses
AAI provides use of certain assets, human resources and other executive services to the Company. The accompanying financial statements include allocations of these expenses. The allocation method calculates the appropriate share of costs to the Company by using the percentage of time spent working on and building the Company’s business. The Company believes the allocation methodology used is reasonable and has been consistently applied, and results in an appropriate allocation of costs incurred. However, these allocations may not be indicative of the cost had the Company been a stand-alone entity or of future services. AAI allocated $507,576 and $1,395,842 of costs for the three and six months ended September 30, 2023, respectively, and $0 for the three and six months ended September 30, 2022.
22. SUBSEQUENT EVENTS
Chapter 7 Bankruptcy Filing of Agora and Bitstream
On November 1, 2023, both Agora and Bitstream, filed voluntary petitions for relief under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Texas. The bankruptcy cases are being administered under case numbers 23-51490 and 23-51491, respectively. The cases are still pending before the court.
S-1 Registration Statement
On October 30, 2023, the Registration Statement related to the ELOC Purchase Agreement was declared effective by the SEC. In conjunction with the ELOC Purchase Agreement, there were an indeterminable number of shares of the Company’s common stock to be issued to the Buyer equal to $4,000,000 to be issued as consideration for the Buyer’s irrevocable commitment to purchase shares of common stock (“Commitment Fee Shares”). $1 million of Commitment Fee Shares were due to be issued on each of (i) one business day after the effectiveness of the Registration Statement, and (ii) the three, six and nine months after the date of effectiveness. As of November 16, 2023, the Company received requests from the Buyer and subsequently issued 455,418 shares of common stock registered under this S-1 towards the Commitment Fee Shares.
S-3 Registration Statement and Subsequent Conversions
On October 19, 2023, the registration statement registering the shares of common stock issuable upon conversion of the senior secured convertible notes issued in April 2023 was declared effective by the SEC. As of November 16, 2023, the Company received conversion notices converting an aggregate of $264,650 of the senior secured convertible notes and subsequently issued an aggregate of 503,652 shares of common stock.
Name and Ticker Symbol Change
Effective November 1, 2023, the Company changed its name from BitNile Metaverse, Inc., to RiskOn International, Inc. and changed its ticker symbol from BNMV to ROI. The change in both name and ticker are underscored by the Company’s commitment to developing a vertically integrated community while creating a seamless and enriched user experience.
Changes in Board of Directors Composition
On October 13, 2023, the Company appointed Robert O. Smith to its Board of Directors. Mr. Smith will serve as lead independent director and as Chairman of the Audit Committee. Mr. Smith replaces Steve Nelson who departed the Board of Directors on September 30, 2023; Mr. Nelson’s resignation was not the result of any disagreement with the Company, or its management on any matter relating to the Company’s operations, policies or practices.
Changes in Authorized Shares
On October 16, 2023, the Company, upon obtaining shareholder approval, filed a certificate of amendment to its Articles of Incorporation increasing its authorized shares of common stock from 3,333,333 to 500,000,000.
Nasdaq Compliance
On November 2, 2023, the Company received a notice in the form of a letter (“Deficiency Letter”) from the Staff of the Nasdaq stating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common stock had closed below $1.00 per share for the previous 31 consecutive business days.
In accordance with Nasdaq listing rule 5810(c)(3)(A), the Company has 180 calendar days, or until April 30, 2024, to regain compliance. The Deficiency Letter states that to regain compliance, the bid price for the Company’s common stock must close at $1.00 per share or more (the “Minimum Bid Price”) for a minimum of 10 consecutive business days during the compliance period ending April 30, 2024. In the event that the Company does not regain compliance within this 180-day period, the Company may be eligible to seek an additional compliance period of 180 calendar days if it meets the transaction closescontinued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the Minimum Bid Price, and provides written notice to Nasdaq of its intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq Staff that the Company will realizenot be able to cure the anticipateddeficiency, or expected benefitsif the Company is otherwise not eligible, Nasdaq will provide notice to the Company that its common stock will be subject to delisting. At that time, the Company may appeal any such delisting determination to a Nasdaq hearings panel.
Term Note Agreement
On November 8, 2023, the Company entered into a term note (“Term Note”) agreement for a principal amount of $660,000 with an institutional investor. After accounting for an original issue discount of $60,000, the Company received proceeds of $600,000. The Term Note has a maturity date of January 7, 2024 and shall accrue interest at a rate of 10% per annum.
Series D Preferred Purchase Agreement, Related Party
On November 14, 2023, the Company entered into a securities purchase agreement (the “SPA”) with AAI, pursuant to which the Company agreed to sell to AAI 603.44 shares of newly designated Series D Convertible Preferred Stock (“Series D shares”) for a total purchase price of $15,085,931. This transaction closed on November 15, 2023. The purchase price was paid by the cancellation of $15,085,931 of cash advances made by the Purchaser to the Company between January 1, 2023 and November 9, 2023. The Series D shares each have a stated value of $25,000 per share. Each Series D share is convertible into a number of shares of the transaction.Company’s common stock determined by dividing the Stated Value by $0.51 (the “Conversion Price”), or an aggregate of 29,580,392 shares of Common Stock. The Conversion Price is subject to adjustment in the event of an issuance of Common Stock at a price per share lower than the Conversion Price then in effect, as well as upon customary stock splits, stock dividends, combinations or similar events. As the Conversion Price represents a premium to the closing price of the Common Stock on the date of execution of the Agreement, the conversion of the Preferred Shares is not subject to limitations on conversion.
Common Stock Issuance
On November 17, 2023, the Company issued 73,361 shares of common stock for Series A Preferred dividends.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto presented in this Report as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2022.2023, filed with the Securities and Exchange Commission (“SEC”) on July 14, 2023.
Overview
On March 15, 2023, Ecoark Holdings, Inc. (“Ecoark Holdings,” “Ecoark” or thechanged its name to BitNile Metaverse, Inc.; subsequently, on November 1, 2023 it changed its name to RiskOn International, Inc. (the “Company”) and is a holding company incorporated in the State of Nevada on November 19, 2007. On February 8, 2023, the Company entered into a Share Exchange Agreement (the “SEA”) by and among Ault Alliance, Inc. (“AAI”), the owner of approximately 86% of BitNile.com, Inc. (“BNC”), a significant shareholder of the Company, and the minority shareholders of BNC (the “Minority Shareholders”). The SEA provides that, subject to the terms and conditions set forth therein, the Company will acquire all of the outstanding shares of capital stock of BNC as well as the securities of Earnity, Inc. beneficially owned by BNC (which represents approximately 19.9% of the outstanding securities of Earnity, Inc. as of the date of the SEA), in exchange for the following: (i) 8,637.5 shares of newly designated Series B Convertible Preferred Stock of the Company to be issued to Ault (the “Series B”), and (ii) 1,362.5 shares of newly designated Series C Convertible Preferred Stock of the Company to be issued to the Minority Shareholders (the “Series C,” and together with the Series B, the “Preferred Stock”). The Series B and the Series C, the terms of which are summarized in more detail below, each have a stated value of $10,000 per share (the “Stated Value”), for a combined stated value of $100,000,000, and subject to adjustment are convertible into a total of up to 13,333,333 shares of the Company’s common stock. The Company has independently valued the Series B and Series C as of the date of acquisition. The combined value of the shares issued to Ault was $53,913,000 using a blended fair value of the discounted cash flow method and option pricing method. See Note 5 for the details on the asset purchase as BNC did not meet the accounting definition of a business and Note 17 for details on the Series B and C Preferred Stock.
Through September 30, 2022, Ecoark Holdings’the Company’s former wholly owned subsidiaries with the exception of Agora Digital Holdings, Inc., a Nevada corporation (“Agora”) and Zest Labs, Inc. (“Zest Labs”) hashave been treated as divested for accounting purposes. See Notes 1purposes as divested. Please refer to our Annual Report for the year ended March 31, 2023 (“2023 Annual Report”) filed with the Securities and 2Exchange Commission (“SEC”) on July 14, 2023 for details on all of our prior subsidiaries that were divested in the year ended March 31, 2023 and an overview of the business conducted in those subsidiaries. On August 28, 2023, we executed a spin-off of Zest Labs, which owns intellectual property relating to agriculture shelf life and freshness management, pursuant to a stock purchase agreement whereby we sold all of the outstanding shares of Zest Labs, Inc. to Zest Labs Holding, LLC. The comparative financial statements includedfor the three and six months ended September 30, 2022 reflect the operations of those subsidiaries that were sold during the year ended March 31, 2022 as discontinued operations in this Report. As a resultthe condensed consolidated statements of the divestitures, alloperations and as assets and liabilities of the former subsidiaries have been reclassified to discontinued operations on the condensed consolidated balance sheet for March 31, 2022 and all operations of these companies have been reclassified to discontinued operations and gain on disposal on the condensed consolidated statements of operations for the nine and three months ended December 31, 2022.sheets.
PriorThrough BNC, we are primarily engaged in the development and operation of an online metaverse platform (the “Metaverse”). The Metaverse represents a significant development in the online metaverse landscape, offering immersive, interconnected digital experiences that are inclusive, engaging, and dynamic. By integrating various elements such as virtual markets, real world goods marketplaces and VIP experiences, gaming, social activities, sweepstakes, gambling, and more, the Company aims to revolutionize the recent divestitures,way people interact online. Our virtual world, located at BitNile.com, is accessible via any device using any web browser, without requiring permissions, downloads, or apps, and the Company’s principal subsidiaries consistedplatform can be enjoyed without the need for bulky and costly virtual reality headsets.
Our games operate on a free-to-play model, whereby game players may collect coins free of Ecoark, Inc.,charge through the passage of time and, if a Delaware corporation which wasgame player wishes to obtain coins above and beyond the parentlevel of Zest Labs, Banner Midstream Corp., a Delaware corporationfree coins available to that player, the player may purchase additional coin packages (“Banner Midstream”)Freemium” gaming model). Once obtained, Nile Tokens and Agora which was assignedNile Coins (either free or purchased) cannot be redeemed for cash or exchanged for anything outside of the membershipmetaverse. When coins are used and played in the games, the game player could “win” and would be awarded additional coins or could “lose” and lose the future use of those coins.
Our current and planned products and experiences are:
● | Virtual markets. The platform facilitates sales of digital assets the Company as well as third party vendors like virtual real estate, digital art, user customizations, and unique collectibles. |
● | Real world goods marketplaces. The platform allows users to shop for a diverse range of real world products and VIP experiences. |
● | Gaming. The platform provides an extensive selection of gaming options, including participation in games, sweepstakes and social gaming experiences, such as Blackjack. |
● | Sweepstakes gaming. The platform features a dedicated gaming zone for users to engage in sweepstakes gaming, offering opportunities to win virtual and real money. |
● | Contests of skill. The platform organizes competitions for users to showcase their talents and compete against others for prizes and recognition in various disciplines. |
● | Building private spaces. The platform allows users to construct and customize their dream homes or private spaces. |
● | Socialization and connectivity. The platform’s ongoing mission will be to foster global connections by enabling users to interact with individuals from around the world, forming new friendships, collaborating on projects or engaging in conversations within various social hubs. |
● | Real and virtual concerts. We expect the platform to host live and virtual concerts within the metaverse, featuring performances from both real world and virtual artists, allowing users to attend and enjoy shows in an immersive environment. |
Our Business Strategy
The metaverse industry is experiencing rapid growth and expansion, driven by advancements in technology, increased interest in Trend Discovery Holdings LLC,virtual experiences and the rise of digital economies. Our business strategy revolves around creating a Delaware limited liability corporation (all referencesseamless, all-encompassing platform that caters to “Trend Holdings”various user needs and interests.
The strategic pillars for the growth of our BitNile.com metaverse platform include (i) leveraging cutting-edge technology to offer a user-friendly, browser-based platform compatible with virtual reality headsets and other modern devices for an enhanced experience, (ii) providing a diverse range of products and experiences that caters to users with different interests and preferences, (iii) fostering global connections and a sense of community among users, encouraging socialization and collaboration, and (iv) focusing on continuous innovation to stay ahead of industry trends and customer expectations.
We expect to generate revenue in fiscal 2024 through the sale of tokens or “Trend” are now synonymouscoins that provide our end users with Agora)interactive entertainment (game play) and durable goods principally for the personal computer and mobile platforms.
Competition
The Company faces competition from theexisting metaverse platforms and new entrants. Key competitors include:
● | Established metaverse platforms, such as Decentraland, The Sandbox, and Second Life, as well as companies that develop metaverse tools and platforms such as META; |
● | Gaming-focused platforms, like Fortnite and Roblox; and |
● | Social media platforms that integrate metaverse elements, such as Facebook’s Horizon Workrooms. |
Regulatory Environment
The Company on September 17, 2021 upon its formation, which includes Bitstream Mining, LLC, the Company’s Bitcoin mining subsidiary.operates within a complex and evolving regulatory landscape, with key considerations including:
● | Data privacy and protection regulations, such as GDPR and CCPA; |
● | Compliance with gaming and gambling regulations in various jurisdictions; and |
● | Intellectual property rights and digital asset ownership. |
Recent Developments
During the current fiscal year ending March 31, 2023,2024, the Company engaged in the following transactions:
● |
|
● | On |
● | On May 4, 2023, the Company amended its |
● | On May 8, 2023, the Company received a letter from the Listing Qualifications staff (the “Staff”) of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that the Staff has determined to delist the Company’s common stock, par value $0.001 per share (the “Common Stock”) from The Nasdaq Capital Market, effective May 17, 2023, pursuant to Listing Rule 5810(c)(3)(A)(iii), as the Company’s common stock traded below $0.10 per share for 10 consecutive trading days. On May 12, 2023, the Company issued a press release announcing a 1-for-30 reverse stock split of its outstanding common stock which was effective for trading purposes as of the commencement of trading on May 15, 2023. On May 26, 2023, the Company received a letter from Nasdaq stating that the Company’s bid price deficiency had been cured. |
● | On May 15, 2023, Agora and |
● | On June 21, 2023, the Company received a letter from the Listing Qualifications staff of |
● | On July 18, 2023, the Company received a letter from the Listing Qualifications staff of Nasdaq indicating that the Company’s shareholders’ equity as reported in the 2023 Annual Report did not satisfy the continued listing requirement under Nasdaq Listing Rule 5550(b)(1) for the Nasdaq Capital Market, which requires that a listed company’s shareholders’ equity be at least $2.5 million. As reported in the 2023 Annual Report, the Company’s shareholders’ equity as of March 31, 2023 was approximately $(13.9) million. According to the letter, the Company had 45 calendar days from the date of the letter to submit a plan to regain compliance with Nasdaq Listing Rule 5550(b)(1). If the Company’s compliance plan is accepted by Nasdaq, then Nasdaq may, in its discretion, grant the Company up to 180 calendar days from the date of the Letter, or until January 14, 2024, to evidence compliance. If Nasdaq does not accept the Company’s plan, then Nasdaq may issue a staff delisting determination letter whereby the Company’s common stock will be subject to delisting. The Company would have the opportunity to appeal that decision to a Nasdaq hearings panel. The Company submitted a compliance plan, which was subsequently amended and restated, to the staff, but as of the date of this filing, Nasdaq has not determined whether or not to accept the Company’s plan. |
● | On August | |
● | On August 25, 203, we, Zest Labs and Zest Labs Holdings, LLC (owned by Gary Metzger, a current board member of our company) (the “Purchaser”), entered into a stock purchase agreement, whereby the Purchaser purchased 100% of the issued and outstanding common stock of Zest Labs from us in exchange for the Purchaser agreeing to distribute any net proceeds from any new or ongoing intellectual property litigation or the sale or licensing of any intellectual property of Zest Labs to our shareholders of record as of November 15, 2022. |
● | On September 28, 2023, the Company amended the Certificate of Designations for each of the Series | |
● | On In accordance with Nasdaq listing rule 5810(c)(3)(A), the Company has 180 calendar days, or until April 30, 2024, to regain compliance. The Deficiency Letter states that to regain compliance, the bid price for the Company’s common stock must close at $1.00 per share or more (the “Minimum Bid Price”) for a |
● | On November 14, 2023, we entered into a Securities Purchase Agreement (the “Agreement”) with AAI, pursuant to which we sold to AAI 603.44 shares of newly designated Series D Convertible Preferred Stock (the “Preferred Shares”) for a total purchase price of $15,085,930.69 (the “Transaction”). The Transaction closed on November 15, 2023 (the “Closing Date”). |
In addition
The purchase price was paid by the cancellation of $15,085,930.69 of cash advances made by AAI to us between January 1, 2023 and November 9, 2023.
The terms of the Preferred Shares as set forth in the Certificates of Designations of the Rights, Preferences and Limitations of the Series D Convertible Preferred Stock (the “Certificate”). The Preferred Shares each have a stated value of $25,000 per share (the “Stated Value”). Pursuant to the potential acquisitionCertificate, each Preferred Share is convertible into a number of BitNile.comshares of our common stock determined by dividing the Stated Value by $0.51 (the “Conversion Price”). The Conversion Price is subject to adjustment in the event of an issuance of common stock at a price per share lower than the Conversion Price then in effect, as contemplatedwell as upon customary stock splits, stock dividends, combinations or similar events.
The Preferred Shares holders are entitled to receive dividends at a rate of 10% of the Stated Value per annum from issuance until November 14, 2033 (the “Dividend Term”). During the first two years of the Dividend Term, dividends will be payable, in our option, in additional Preferred Shares rather than cash, and thereafter dividends will be payable in either additional Preferred Shares or cash as the majority holder may elect. If the Company fails to make a dividend payment as required by the SEA,Certificate, the Company’s goal isdividend rate will be increased to spin-off all15% for as long as such default remains ongoing and uncured. Each Preferred Share also has a $25,000 liquidation preference in the event of the Wolf Energy common stock and WTRV common stock to the Company’s stockholders in calendar year 2023, although because of regulatory delays or other reasons we may not meet that deadline. At the same time, we expect to acquire either BitNile.com under the SEA described above or another business so we do not become a shell corporation. This will result in aliquidation, change of control event, dissolution or winding up of our company, and may or may not be subjectranks senior to stockholder approval.all our other capital stock with respect thereto other than the existing Series B Preferred Stock and Series C Preferred Stock, with which the Preferred Shares shall have equal ranking. Each Preferred Share is entitled to vote, on an as-converted basis, with the common stock at a rate of 0.9 votes per share of common stock into which the Preferred Share is convertible.
Future Spin-Offs
In addition, for as long as at least 25% of the Preferred Shares remain outstanding, AAI must consent with respect to certain corporate events, including reclassifications, fundamental transactions, stock redemptions or repurchases, increases in the number of directors, and declarations or payment of dividends, and further we are subject to certain negative covenants, including covenants against issuing additional shares of capital stock or derivative securities, incurring indebtedness, engaging in related party transactions, selling of properties having a value of over $50,000, altering the number of directors, and discontinuing the business of any subsidiary, subject to certain exceptions and limitations.
As describedThe Agreement provides the holders of Preferred Shares with most favored nations rights in this Report, Ecoark’s goal is to spin-off its common stock of White River and Wolf Energy. While the Company previously planned on spinning off Zest Labs common stock in a similar fashion,event we offer securities with more favorable terms than the Company decided not to proceed with that spin-off. Due to market conditions,Preferred Shares for as long as the Company decided it was inadvisable to seek to raise capital for Zest Labs which it needed to operate as a stand-alone public company. To protect the Company’s stockholders, it granted its stockholders of record as of September 30, 2022 the right to receive 95% of the net proceeds of the Zest Labs litigation with Walmart and Deloitte, which is describe under Note 15 to the financial statements contained in this Report. That right is part of the Zest Labs certificate of incorporation.Preferred Shares remain outstanding. Under the SEA,Agreement, while any Preferred Shares are outstanding, we are prohibited from redeeming or declaring or paying dividends on outstanding securities other than the BitNile.com stockholders agreedPreferred Shares. Further, the Agreement prohibits us from issuing or amending securities at a price per share below the Conversion Price, or to engage in variable rate transactions, for a period ending on the earlier of (i) four (4) years from the Closing Date and (ii) the date that they will not participate in any of these distributions if the transaction closes.AAI holds less than 250 Preferred Shares.
Following the above transactions, the Company’s only remaining subsidiaries are Agora, which ceased mining Bitcoin but is now exploring operating as a hosting company for Bitcoin mining ventures, and Zest Labs which holds technology and related intellectual property rights for fresh food solutions, and is not operating due to ongoing litigation involving its technology an intellectual property.
Segment Reporting for the NineThree and ThreeSix Months Ended December 31, 2022:September 30, 2023 and 2022
As a result of the sales of White RiverWTRV and Banner Midstream, and the immaterial nature of the operations of Zest Labs the Companyand Agora, we no longer segregates its operations as most of the continuing operations are related to Agora.
Key Trends
Impact of Inflation
In 2022, there has been a sharp rise in inflation in the U.S. and globally. Givensegregate our limited operations, the most significant future impact will be on employee salaries and benefits and electricity costs.
Impact of COVID-19
COVID-19 may continue to affect the economy and our business, depending on the vaccine rollouts and the emergence of virus mutations as well as the impact of supply chain disruptions.
COVID-19 did not have a material effect on the Consolidated Statements of Operations or the Consolidated Balance Sheets for the fiscal quarter ended December 31, 2022 included in this Report.
COVID-19 has been a contributing factor in supply and labor shortages which have been pervasive in many industries. The extent to which a future COVID-19 outbreak and other adverse developments may impact the Company’s results will depend on future developments that are highly uncertain and cannot be predicted.operations.
Results of Operations For Continuing Operations For the Three Months Ended December 31, 2022 and 2021 Revenues
The discussion of our results of operations should be evaluated considering that our primary subsidiaries were sold in the three monthsyear ended DecemberMarch 31, 20222023 and their results of operations are now treated as discontinued operations. Accordingly, period to period comparisons may not be meaningful.
The Company had no revenue inContinuing Operations For the three months ended December 31,Three Months Ended September 30, 2023 and 2022 (“Q3 2023”)
Three Months Ended September 30, | Change | Change | ||||||||||||||
2023 | 2022 | ($) | (%) | |||||||||||||
Hospitality and VIP experience revenue | $ | 17,700 | $ | - | $ | 17,700 | 100 | % | ||||||||
Gaming revenue | 1,500 | - | 1,500 | 100 | % | |||||||||||
Cost of revenue | 28,422 | 88,212 | (59,790 | ) | -68 | % | ||||||||||
Gross loss | (9,222 | ) | (88,212 | ) | 78,990 | 90 | % | |||||||||
Operating expenses: | ||||||||||||||||
Depreciation, amortization and impairment | 4,032,157 | 1,668,555 | 2,363,602 | 142 | % | |||||||||||
Bad debt | 55,548 | - | 55,548 | 100 | % | |||||||||||
Selling, general and administration | 7,030,891 | 1,621,728 | 5,409,163 | 334 | % | |||||||||||
Salaries and professional consulting fees | 2,619,762 | 3,625,044 | (1,005,282 | ) | -28 | % | ||||||||||
Total operating expenses | 13,738,358 | 6,915,327 | 6,823,031 | 99 | % | |||||||||||
Operating loss | (13,747,580 | ) | (7,003,539 | ) | (6,744,041 | ) | -96 | % | ||||||||
Other (expense) income | ||||||||||||||||
Change in fair value of warrant derivative liabilities | 1,862,290 | 3,286,004 | (1,423,714 | ) | -43 | % | ||||||||||
Dividend expense | (1,553,458 | ) | - | 1,553,458 | 100 | % | ||||||||||
Amortization of discounts | (2,161,211 | ) | - | 2,161,211 | 100 | % | ||||||||||
Loss on disposal of fixed assets | - | (570,772 | ) | (570,772 | ) | -100 | % | |||||||||
Interest expense, net of interest income | 41,499 | (281,900 | ) | 323,399 | -115 | % | ||||||||||
Total other (expense) income | (1,810,880 | ) | 2,433,332 | (4,244,212 | ) | -174 | % | |||||||||
Loss from continuing operations before discontinued operations | (15,558,460 | ) | (4,570,207 | ) | (10,988,253 | ) | -240 | % | ||||||||
Discontinued operations | ||||||||||||||||
Loss from discontinued operations | (385,242 | ) | (7,629,448 | ) | ||||||||||||
Gain (loss) on disposal of discontinued operations | 683,152 | (12,534,900 | ) | |||||||||||||
Total gain (loss) discontinued operations | 297,910 | (20,164,348 | ) | |||||||||||||
Net loss | $ | (15,260,550 | ) | $ | (24,734,555 | ) |
Revenue and had $17,455 in 2021 (“Q3 2022”) as it had just recently commenced Bitcoin mining operations. Agora has recently focused on becoming a hosting company as reflected below. To that end, Agora entered into the MSA with Ault described above, whereby Agora agreed to host Ault’s cryptocurrency mining equipment at Agora’s West Texas location and supply the electricity for the cryptocurrency mining.Gross Loss
The Company’s Bitcoin operationsDuring the three-month period ended September 30, 2023, we had increased revenues of $19,200 and decreased gross loss of $78,990 compared to the three-month period ended September 30, 2022, primarily due to prior year salary and wage expenses coupled with the hospitality sales, which began in the fiscal yearthree-month period ended March 31, 2022 and ceased on March 3, 2022 due to the low price of Bitcoin and the inability of Agora to timely complete its initial public offering which created a working capital issue. The Company intends to refocus Agora to operating as a hosting company providing infrastructure and energy to cryptocurrency mining enterprises assuming the Company can raise the necessary capital. Unless and until we are successful in generating revenue for Agora or acquire another operatingSeptember 30, 2023.
CostOperating Loss and Operating Expenses
During the three months ended September 30, 2023, our operating loss increased by $7 million, from $7 million for the three-month period ended September 30, 2022, to $14 million for the three-month period ended September 30, 2023, primarily due to increased advertising expenses and platform hosting fees coupled with increased travel, legal and management expenses of Revenuesapproximately $5 million and Gross Profit$2 million, respectively.
CostLoss from Continuing Operations
We had increased loss from continuing operations for the period of revenuesapproximately $11 million, from $5 million for Q3the three-month period ended September 30, 2022, to $16 million for the three-month period ended September 30, 2023, was $47,460 as compared due to $92,823 for Q3 2022. We expect costthe increase of revenues to increase once we have commenced Agora’s hosting operations.our operating loss of approximately $7 million, the amortization of derivative discounts expense of $2 million and dividend expenses of approximately $2 million.
Operating Expenses
Total operating expenses were $3,005,922 for Q3 2023 compared to $4,692,895 for Q3 2022. The decrease between periods were primarily related to a decrease in salaries and salaries related costs to $1,280,078 in Q3 2023 from $3,159,979 in Q3 2022 primarily due to higher stock-based compensation in Q3 2022 compared to Q3 2023.
Other Income (Expense)
Total other income was $5,948,563 in Q3 2023, compared to total other income of $10,982,731 in Q3 2022, almost all of which was non-cash. Change in fair value of derivative liabilities for Q3 2023 was a non-cash gain of $1,381,711 related to the changes in our stock price, a change in the fair value of the preferred stock derivative liability for Q3 2023 of $1,864,777, a gain of $2,878,345 related to the preferred stock derivative liability at inception, and interest expense, net of ($172,347). Change in fair value of derivative liabilities for Q3 2022 was a non-cash gain of $10,979,137 related to the changes in our stock price.
Net Income from Continuing Operations
Net income from continuing operations for Q3 2023 was $2,895,181 as compared to net income from continuing operations of $6,214,468 for Q3 2022. The decrease was primarily due to the decrease in operating expenses as noted above offset by the change in the fair value of the derivative liability and the change in the preferred stock derivative liability arising from the decrease in the Company’s Common Stock price.
Results of Operations For Continuing Operations For the NineSix Months Ended December 31,September 30, 2023 and 2022 and 2021 Revenues
The Company had no revenue in the nine months ended December 31, 2022 (“9M 2023”) and $17,455 in the nine months ended December 31, 2021 related to the Bitcoin mining operation (“9M 2022”). To that end, on December 7, 2022, Agora entered into the MSA with Ault described above.
Six Months Ended September 30, | Change | Change | ||||||||||||||
2023 | 2022 | ($) | (%) | |||||||||||||
Hospitality and VIP experience revenue | $ | 62,850 | $ | - | $ | 62,850 | 100 | % | ||||||||
Gaming revenue | 1,500 | - | 1,500 | 100 | % | |||||||||||
Cost of revenue | 114,722 | 182,074 | (67,352 | ) | -37 | % | ||||||||||
Gross loss | (50,372 | ) | (182,074 | ) | 131,702 | 72 | % | |||||||||
Operating expenses: | ||||||||||||||||
Depreciation, amortization and impairment | 4,169,039 | 1,713,651 | 2,455,388 | 143 | % | |||||||||||
Bad debt | 108,963 | - | 108,963 | 100 | % | |||||||||||
Selling, general and administration | 16,864,801 | 2,460,929 | 14,403,872 | 585 | % | |||||||||||
Salaries and professional consulting fees | 4,211,660 | 9,582,893 | (5,371,233 | ) | -56 | % | ||||||||||
Total operating expenses | 25,354,463 | 13,757,473 | 11,596,990 | 84 | % | |||||||||||
Operating loss | (25,404,835 | ) | (13,939,547 | ) | (11,465,288 | ) | -82 | % | ||||||||
Other income (expense) | ||||||||||||||||
Change in fair value of derivative liabilities | 22,982,843 | 2,892,472 | 20,090,371 | 695 | % | |||||||||||
Dividend expense | (3,150,680 | ) | - | 3,150,680 | 100 | % | ||||||||||
Amortization of discounts | (2,584,384 | ) | - | 2,584,834 | 100 | % | ||||||||||
Loss on disposal of fixed assets | - | (570,772 | ) | (570,772 | ) | -100 | % | |||||||||
Interest expense, net of interest income | (221,036 | ) | (318,728 | ) | (97,692 | ) | -31 | % | ||||||||
Total other income | 17,026,743 | 2,002,972 | 15,023,771 | 750 | % | |||||||||||
Loss from continuing operations before discontinued operations | (8,378,092 | ) | (11,936,575 | ) | (3,558,483 | ) | -30 | % | ||||||||
Discontinued operations | ||||||||||||||||
Loss from discontinued operations | (2,104,888 | ) | (11,699,050 | ) | ||||||||||||
Gain (loss) on disposal of discontinued operations | 683,152 | (11,823,395 | ) | |||||||||||||
Total loss from discontinued operations | (1,421,736 | ) | (23,522,445 | ) | ||||||||||||
Net loss | $ | (9,799,828 | ) | $ | (35,459,020 | ) |
Cost of Revenues and Gross Profit
Cost of revenues for 9M 2023 was $229,534 as compared to $92,823 for 9M 2022. We expect cost of revenues to increase once we have commenced Agora’s hosting operations.
Operating Expenses
Total operating expenses were $17,909,843 for 9M 2023 compared to $10,775,053 for 9M 2022. The increase between periods were primarily related to an increase in salaries and salaries related costs to $10,998,108 in 9M 2023 from $5,504,833 in 9M 2022 arising from the stock-based compensation of $9,370,769 in 9M 2023 versus $3,786,342 in 9M 2022, and to a lesser extent an $1,655,969 increase related to the impairment of the miners that Agora had purchased as it has moved to a hosting model from a mining model for Bitcoin.
Other Income (Expense)
Total other income was $7,951,535 in 9M 2023, compared to total other income of $14,741,253 in 9M 2022. Change in fair value of derivative liabilities for 9M 2023 was a non-cash gain of $4,274,183, and the change in the fair value of the preferred stock derivative liability of $1,864,777, a gain of $2,878,345 related to the preferred stock derivative liability at inception, partially offset by a loss on disposal of fixed assets of $(570,772) related to Agora’s settlement wherein mining equipment valued at $1,425,772 were exchanged with a vendor for a credit of $855,000; and interest expense, net of interest income of $(491,075). Change in fair value of derivative liabilities for 9M 2022 was a non-cash gain of $15,294,814, partially offset by interest expense, net of interest income of $(553,561).
Net Income (Loss)Revenue and Gross Loss
During the six-month period ended September 30, 2023, we had increased revenues of $64,350 and decreased gross loss of $131,702 compared to the six-month period ended September 30, 2022, primarily due to prior year salary and wage expenses coupled with hospitality and VIP experience sales, which began in the six-month period ended September 30, 2023.
Operating Loss and Operating Expenses
During the six months ended September 30, 2023, our operating loss increased by $11 million, from $14 million for the six-month period ended September 30, 2022, to $25 million for the six-month period ended September 30, 2023, primarily due to advertising and hospitality expenses, platform hosting fees and travel expenses of approximately $11 million, $2 million and $2 million, respectively. These expenses were partially offset by a decrease in salaries and professional fees of approximately $4 million.
Loss from Continuing Operations
NetWe had decreased loss from continuing operations for 9Mthe period of approximately $4 million, from $12 million for the six-month period ended September 30, 2022, to $8 million for the six-month period ended September 30, 2023, was ($10,187,842) as compareddue to netthe gain of $18 million of other income from continuing operations of $3,890,832 for 9M 2022. The decrease was primarily attributabledue to increases in salaries and salaries related costs and our 9M 2023 impairment charge, partially offset by thea change in the fair value of the derivative liabilities and the changea gain on disposal of the preferred stock liability.discontinued operations in 2023, partially offset by increased dividend expenses coupled with our increased operating loss of approximately $3 million and $11 million, respectively.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are revenue generated from operations, levels of accounts receivable, and accounts payable and capital expenditures.
Net cash used in operating activities forof continuing operations was $(12,385,949)approximately $16 million for 9Mthe six month period ended September 30, 2023, as compared to $(8,414,833) for 9M 2022. Cash usedapproximately $14 million in operating activities for 9M 2023the prior year period. The $2 million increase in the current period was primarily caused bydue to the net losschange in the fair value of derivative liabilities of approximately $23 million, partially offset by increases in common shares issued for services, and lossesno loss on disposal of former subsidiaries without similar amounts in 9M 2022 as well as changes in accountsWTRV and Banner Midstream of $12 million, depreciation amortization and impairment of approximately $4 million and dividends payable, gain on disposal of discontinued operations and accruedlegal expenses from 9M 2022 to 9M 2023.of $5 million.
Net cash provided by investing activities was $517,221 for 9M 2023 compareddecreased due to netno cash usedbeing provided in investing activities of $(9,392,671) for 9M 2022. Net cash providedthe current year period by investing activities in 9M 2023 were comprised of proceeds received from the refund of the power development costs partially offset by purchases of fixed assets and discontinued operations, and the amounts used in 9M 2022 related to the purchase of fixed assets and power development costs as we commenced operations in Agora.operations.
Net cash provided by financing activities for 9M 2023 was $11,816,297 which comprisedincreased by approximately $2 million primarily, ofdue to the proceeds from our June 2022 saleparent of $7 million and the Ecoark Series A, Commitment Shares described elsewhere in this Report. This compared with 9M 2022 net cash provided by financing activities of $17,431,074 comprised primarily ofproceeds from the sale of our common stock and convertible notes of $7 million in a registered direct offering.the current year period offset by proceeds from the proceeds related to the sale of preferred stock of $12 million in the prior year period.
As of February 14,September 30, 2023, the Company has $31,294we had $1,554 in cash and cash equivalents. The Company believesWe believe that the current cash on hand is not sufficient to conduct planned operations for one year from the issuance of the condensed consolidated financial statements, and needs to raise capital to support their operations.
To date we have financed our operations through sales of common stock, convertible preferred stock and other derivative securities and the issuance of debt. We may also issue common stock, preferred stock or other securities in connection with any business acquisition we undertake in the future following our planned spin-offs. Presently we may not raise capital without the consent of the Purchaser.
On January 24, 2023, the Company entered an ATM Agreement with Ascendiant as sales agent, which contemplates sales of shares of our common stock in a registered “at-the-market” offering for offering proceeds of up to $3,500,000. As of the date of this Report, the Company has sold 1,425,928 shares for total gross proceeds of $475,623, at an average price of $0.333 per share.
The Company’s financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company sold its interests in Banner Midstream in two separate transactions on July 25, 2022 and September 7, 2022. In addition, it sold the non-core business of Trend Discovery on June 17, 2022. The Company expects to distribute the common stock it received (or issuable upon conversion of preferred stock) in the sales to its stockholders upon the effective registration statements for the two entities the companies were sold to. See Note 13, “Series A Convertible Redeemable Preferred Stock” for information on the Company’s recent $12 million convertible preferred stock financing. That financing has restrictive covenants that require approval of the investor for the Company to engage in any equity or debt financing. The Company believes that the current cash on hand is not sufficient to conduct planned operations for 12 months from the issuance of the consolidated financial statements and may need to raise capital to support their operations. While the Company entered into the MSA with Ault which if the hosting arrangement is established would provideour operations, raising substantial doubt about our ability to continue as a source ofgoing concern. We recently acquired BNC and have generated nominal revenue as of the date of this Report the Company has not yet met its obligations under the MSA, including raising at least $5,000,000 to establish the initial infrastructure and power for the hosting arrangement. Further, if we acquire BitNile.com as contemplated by the SEA, we expect to require substantial additional capital to further develop its metaverse platform and launch revenue-generating operations therefrom, and no assurance can be given that we will be able to close that acquisition or that if we are we will be able to leverage the BitNile.com business as needed to generate material revenue or raise the necessary capital. See “Risk Factors” included in this Report.
September 30, 2023. The accompanying financial statements for the periodthree and six month periods ended December 31, 2022September 30, 2023 have been prepared assuming the Companywe will continue as a going concern, but theour ability of the Company to continue as a going concern is dependent on the Companyour obtaining adequate capital to fund operating losses until it establisheswe establish continued revenue streams and becomesbecome profitable. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing. However, management cannot provide any assurances that the Companywe will be successful in accomplishing any of itsour plans. If the Company is not ablewe are unable to obtain the necessary additional financing on a timely basis, the Companywe will be required to delay, reduce or perhaps even cease the operation of itsour business. TheOur ability of the Company to continue as a going concern is dependent upon itsour ability to successfully secure other sources of financing and attain profitable operations. In our fourth fiscal quarter ended March 31, 2023, we raised $1,715,439 from the sales of our common stock related to an “At-the-Market” (“ATM”) offering, with an additional approximate $1,800,000 raised in the first fiscal quarter of 2024. In addition, on April 27, 2023, we sold $6.875 million of principal face amount senior secured convertible notes with an original issue discount to sophisticated investors for gross proceeds to the company of $5.5 million. The notes mature on April 27, 2024 and are secured by all of our assets and certain of our subsidiaries, including BNC. The proceeds received have gone towards working capital until we can generate the necessary funds from our operations. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company iswe are unable to continue as a going concern. See “Risk Factors” included in our 2023 Annual Report filed with the Securities and Exchange Commission SEC on July 14, 2023.
Agora Line of Credit
As of February 14, 2023, the Company has advanced a total of $5,692,463 to Agora under a $7.5 million term line of credit note issued to the Company by Agora which bears interest at a rate of 10% per annum. Agora will be required to repay any sums we lend it on March 31, 2023 with accrued interest.
2018 Line of Credit
On December 28, 2018, the Company entered into a $10,000,000 credit facility that includes a loan and security agreement (the “Agreement”) where the lender agreed to make one or more loans to the Company, and the Company may make a request for a loan or loans from the lender, subject to the terms and conditions. In the nine months ended December 31, 2022, the Company borrowed $505,181, which includes $17,681 in commitment fees, with the balance of $487,500 being deposited directly into the Company, and repaid $810,000 in the nine months ended December 31, 2022. Interest incurred for the nine months ended December 31, 2022 was $50,888, and accrued as of December 31, 2022 was $53,111. There were no advances in the nine months ended December 31, 2021. With the sale of Trend Holdings, we no longer can access this line of credit.
Cautionary Note Regarding Forward Looking Statements
This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding closing the SEA with Ault, the potential terms, timing and success of the planned spin-offs by us to our security holders of White River’s and Wolf Energy’s common stock, our ability to raise capital, our plans to maintain our Nasdaq listing, the expected changes to Agora’s business, our expectations with respect to future developments in our ongoing litigation, and our liquidity. All statements other than statements of historical fact are “forward-looking statements” including: any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include possibility that the acquisition of BitNile.com contemplated by the SEA does not close including possibly due to closing conditions that are beyond either party’s control, the failure to obtain a favorable fairness opinion, the risks and uncertainties surrounding the anticipated launch of the BitNile.com platform, the acceptance of such platform by consumers, advertisers and others, the ability to complete and timelines of our planned spin-offs and any regulatory, registration or other delays or obstacles including the potential for the Depository Trust Company to require a change in the record date, risks and uncertainties relating to undisclosed liabilities or the integration if the acquisition of BitNile.com closes, risks and uncertainties due to factors beyond our control, our ability to refocus Agora into a hosting company, challenges in securing our maintaining relationships with customers operating cryptocurrency mining businesses and vendors, the future price of Bitcoin and other cryptocurrencies if we host any mining for them, our failure to meet Nasdaq continued listing requirements, the inability to obtain stockholder approval of (i) the acquisition ofBitNile.com and the issuance of more than 19.9% of our common stock to Ault, and (ii) the November 2022 amendments to our Series A, the impact of future strains of COVID-19, the Russian invasion of the Ukraine, inflation and Federal Reserve interest rate increases in response thereto on the economy including the potential for a recession which may result, supply chain shortages, any issues which could result in unfavorable outcomes of one or both of our ongoing Zest Labs lawsuits, the outcome of the lawsuits against Agora, and the availability of capital on acceptable terms when needed or at all including all risks relating to the capital markets in general and small public companies in particular. Further information on the risks and uncertainties affecting our business is contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022 under Part I. Item 1A. – Risk Factors. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.
Critical Accounting Estimates
Critical Accounting Policies, Estimates and Assumptions
The critical accounting policies listed below are those the Company deems most important to its operations.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, management’s estimate of provisions required for uncollectible accounts receivable, fair value of assets held for sale and assets and liabilities acquired, impaired value of equipment and intangible assets, including goodwill, asset retirement obligations, estimates of discount rates in lease, liabilities to accrue, fair value of derivative liabilities associated with warrants, cost incurred in the satisfaction of performance obligations, permanent and temporary differences related to income taxes and determination of the fair value of stock awards.
Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The standalone selling price is the price at which the Company would sell a promised service separately to a customer. The relative selling price for each performance obligation is estimated using observable objective evidence if it is available. If observable objective evidence is not available, the Company uses its best estimate of the selling price for the promised service. In instances where the Company does not sell a service separately, establishing standalone selling price requires significant judgment. The Company estimates the standalone selling price by considering available information, prioritizing observable inputs such as historical sales, internally approved pricing guidelines and objectives, and the underlying cost of delivering the performance obligation. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
Management judgment is required when determining the following: when variable consideration is no longer probable of significant reversal (and hence can be included in revenue); whether certain revenue should be presented gross or net of certain related costs; when a promised service transfers to the customer; and the applicable method of measuring progress for services transferred to the customer over time. Although, Agora since March 3, 2022, has not recognized revenue from its mining operations, prior to this time, it recognized revenue upon satisfaction of its performance obligation over time in accordance with ASC 606-10-25-27 for its contracts with mining pool operators.
The Company accounts for incremental costs of obtaining a contract with a customer and contract fulfillment costs in accordance with ASC 340-40, Other Assets and Deferred Costs. These costs should be capitalized and amortized as the performance obligation is satisfied if certain criteria are met. The Company elected the practical expedient, to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would otherwise have been recognized is one year or less, and expenses certain costs to obtain contracts when applicable. The Company recognizes an asset from the costs to fulfill a contract only if the costs relate directly to a contract, the costs generate or enhance resources that will be used in satisfying a performance obligation in the future and the costs are expected to be recovered. The Company recognizes the cost of sales of a contract as expense when incurred or when a performance obligation is satisfied. The incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained, are not considered recoverable, or the practical expedient applies.
Hosting Revenues
Agora effective in September 2022 began efforts to generate revenue via hosting agreements. Agora entered into a MSA on December 7, 2022 with Ault, whereby Ault agreed to provide mining equipment which Agora would host at its West Texas location and supply the electricity for the cryptocurrency mining.
When Agora generates hosting revenues, it will follow ASC 606 as outlined above and recognize revenue upon the completion of the performance obligations as stipulated under the MSA.
Fair Value Measurements
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosure about fair value measurements. ASC 820 classifies these inputs into the following hierarchy:
Level 1 inputs: Quoted prices for identical instruments in active markets.markets;
Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.observable; and
Level 3 inputs: Instruments with primarily unobservable value drivers.
The carrying values of the Company’sour financial instruments such as cash, accounts payable, and accrued expenses approximate their respective fair values because of the short-term nature of those financial instruments.
Derivative Financial Instruments
The Company doesWe do not currently use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks but may explore hedging oil pricesand do not expect to in the current fiscal year. Management evaluates all of the Company’sour financial instruments, including warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The CompanyWe generally uses a Black-Scholes model, as applicable, to value the derivative instruments at inception and subsequent valuation dates when needed. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, isare remeasured at the end of each reporting period. The Black-Scholes model is used to estimate the fair value of the derivative liabilities.
Recently Issued Accounting Standards
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contract’s in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU simplifies the diluted net income per share calculation in certain areas.
The ASU is effective for annual and interim periods beginning after December 31, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not believe this new guidance will have a material impact on its consolidated financial statements.
In MayOctober 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-04 “Earnings Per Shareaccounting standards update 2021-08, “Business Combinations (Topic 260)805), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) Issuer’s Accounting for Certain ModificationsContract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. The guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. The guidance should be applied prospectively to acquisitions occurring on or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as follows: i) for a modification or an exchange thateffective date. The guidance is a part of or directly related to a modification or an exchange of an existing debt instrument or line-of-credit or revolving-debt arrangements (hereinafter, referred to as a “debt” or “debt instrument”), as the difference between the fair value of the modified or exchanged written call option and the fair value of that written call option immediately before it is modified or exchanged; ii) for all other modifications or exchanges, as the excess, if any, of the fair value of the modified or exchanged written call option over the fair value of that written call option immediately before it is modified or exchanged. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021,2022, including interim periods within those fiscal years. An entity should apply the amendments prospectivelyEarly adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. We do not expect this guidance to modifications or exchanges occurring on or after the effective date of the amendments. The Company does not believe this new guidance will have a material impact on itsour condensed consolidated financial statements.
The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The guidance is effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), which pushes back the effective date for public business entities that are smaller reporting companies, as defined by the SEC, to fiscal years beginning after December 15, 2022. Early adoption is permitted. The adoption of ASU 2016-13 which began April 1, 2023, did not have a material impact on our condensed consolidated financial statements.
Our management has considered all recent accounting pronouncements issued since the last audit of our financial statements. Our management believes that these recent pronouncements will not have a significant effect on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officers, has evaluated the effectiveness of ourWe have established disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, our principal executive and financial officers have concluded that as of the end of the period covered by this report the Company’s disclosure controls and procedures were effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company reports filedthat we file or submittedsubmit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’sSEC rules and forms. Disclosure controlsforms and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officerprincipal executive officer and Principal Financial Officer (Principal Financial and Accounting Officer), as appropriate,principal financial officer, to allow timely decisions regarding required disclosure.
Our principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon our evaluation, each of our principal executive officer and principal financial officer has concluded that the Company’s internal control over financial reporting was not effective as of the end of the period covered by this Quarterly Report on Form 10-Q because the Company has not yet completed its remediation of the material weaknesses previously identified and disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2023, the end of its most recent fiscal year.
Management has identified the following material weaknesses:
1. | The Company does not have sufficient segregation of duties within accounting functions; |
2. | Lack of formal review procedures including multiple level of review over accounting financial reporting process due to the small size of its accounting staff; |
3. | The Company does not have sufficient written documentation of our internal control policies and procedures; and |
4. | The Company’s financial reporting is carried out with the assistance of an outside financial consultant. |
Planned Remediation
Management continues to work to improve its controls related to our material weaknesses. Management will continue to implement measures to remediate material weaknesses, such that these controls are designed, implemented, and operating effectively. We plan to rectify these weaknesses by implementing written policies and procedures for our internal control of financial reporting, and hiring additional accounting personnel at such time as we have sufficient financial and human capital resources to do so. In order to achieve the timely implementation of the above, management has commenced the following actions and will continue to assess additional opportunities for remediation on an ongoing basis:
Revenue Recognition. We intend on enhancing the design of existing controls and implementing new controls over the review of the application and recording of revenue for customer contracts under the guidance outlined in ASC 606. We also intend on implementing more thorough reviews of contracts by evaluating contractual terms and determining whether certain contracts should be consolidated, involve related parties and the proper timing of revenue recognition. These reviews will include more comprehensive contractual analysis from our legal team while ensuring qualified resources are involved and adequate oversight is performed during the internal technical accounting review process.
Accounts Receivable. We intend on enhancing the design of existing controls and implementing new controls over the processing and review of accounts receivable billings. We plan to supplement our accounting staff with more experienced personnel. We will also evaluate information system capabilities in order to reduce the manual calculations within this business process.
Complex Financial Instruments. We will design and implement controls to properly identify and implement the proper accounting treatment and classifications of our complex financial instruments to ensure our equity accounting and treatment is in accordance with U.S. generally accepted accounting principles. We intend to accomplish this by implementing more thorough reviews of certain details regarding all rights, penalties, record holders and negative covenants of the financial instruments in order to apply the correct accounting guidance (liabilities vs. equity vs. temporary equity).
Fair value estimates. We will design and implement additional control activities to ensure controls related to fair value estimates (including controls that validate the reasonableness, completeness and accuracy of information, data and assumptions), are properly designed, implemented and documented.
These material weaknesses will not be considered to be remediated until the applicable remediated controls are operating for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Despite the existence of these material weaknesses, we believe that the condensed consolidated financial statements included in the period covered by this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.
Changes in Internal ControlControls Over Financial Reporting
ThereExcept as detailed above, during the fiscal quarter ended September 30, 2023, there were no materialsignificant changes in our internal control over financial reporting that occurred during(as such term is defined in Rules 13a-15(f) and 15d-15(f) of the fiscal quarter ended December 31, 2022Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than discussed below, duringDuring the period covered by this report, there were no material developments in the legal proceedings disclosed in our Annual Report on Form 10-K for the year ended March 31, 2022.2023.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. Investors should reviewThere are no updates or changes to the risk factors describedset forth in our Annual Report on Form 10-K for the year ended March 31, 2022. In addition, investors should consider2023, as supplemented by the risk factors described below.set forth in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023.
Although we reported net income for the three months ended December 31, 2022, such results are unrelated to our actual performance.
During the third quarter ended December 31, 2022, we reported net operating income from continuing operations of $2,895,181. Investors should consider that the income arose from GAAP which provides that our derivative liabilities operate inversely to our stock price. If our stock price in a given quarter goes down, we recognize non-cash income. Conversely if our stock price goes up, we report a non-cash loss.
There is substantial doubt about our ability to continue as a going concern, and if we are unable to close the acquisition of BitNile.com or raise sufficient capital to launch cryptocurrency mining hosting operations through Agora, we may be forced to cease operations.
As disclosed under “Liquidity and Capital Resources,” we do not have sufficient capital to fund our operations for the next 12 months, and there is substantial doubt as to our ability to continue as a going concern. As disclosed elsewhere, on February 8, 2023 we entered into the SEA contemplating our acquisition of BitNile.com, the result of which would be BitNile.com becoming our wholly-owned subsidiary and us operating a development stage metaverse platform through BitNile.com. However, the acquisition may not close due to reasons beyond our control, including a closing condition that we acquire a fairness opinion, and that each party complete satisfactory due diligence. Further, if we are delisted from Nasdaq, which may result from inquiries which are currently pending as more particularly described in this Report, the stockholders of BitNile.com, particularly Ault, may determine not to proceed with the transaction, as one of the principal benefits envisioned by the SEA for BitNile.com is for the BitNile.com business to operate autonomously under the corporate umbrella of a Nasdaq-issuer, and be able to have access to capital thereby.
If we acquire BitNile.com, we anticipate requiring substantial additional capital to fund its operations, particularly given its metaverse platform is still under development, with its beta test scheduled to launch in March 2023. Further, if the acquisition of BitNile.com contemplated by the SEA does not close and in any event, we will need to raise at least $5,000,000 in order to fully launch our planned cryptocurrency mining hosting business through Agora under the MSA with an affiliate Ault and may require additional capital beyond the initial $5,000,000 to expand that business. In order to raise the capital required, we may need to issue common stock or common stock equivalents which will dilute our current stockholders, and/or debt securities which could subject us to negative covenants that hinder our ability to manage our business and take certain corporate actions as intended or at all. If we fail to proceed with the above-described transactions and/or raise sufficient capital to fund our planned operations as and when needed, we could be forced to cease operations, in which case you could lose some or all of your investment in us.
Nasdaq has recently provided us with correspondence containing violation notices and questions arising from certain of our prior transactions, the result of which could be our common stock being delisted from Nasdaq.
As disclosed elsewhere in this Report under “Note 15: Commitments And Contingencies – Nasdaq Compliance,” in December 2022 the Company was notified by Nasdaq of alleged violations of the Nasdaq Listing Rules in connection with an amendment to the Series A that was effected in November 2022. Specifically, the notice alleges that by reducing the conversion price of the Series A and entitling the holder to vote with the common stock on an as-converted basis, the Company violated Nasdaq Listing Rule 5635(d) by issuing over 20% of the outstanding common stock without first obtaining stockholder approval, and Nasdaq Listing Rule 5640 by providing the holder of the Series A with disproportionate voting rights relative to the holders of common stock. While the Company submitted its initial response to Nasdaq including a plan of remediation, we cannot predict how Nasdaq will respond, including whether it will deem our responses and plan of remediation to be acceptable to remain compliant with the Nasdaq Listing Rules and maintain compliance therewith and listing on Nasdaq. Additionally, Nasdaq also sent two separate rounds of correspondence in December 2022 and January 2023 containing inquiries regarding the Company’s July 25, 2022 divestment of White River Holdings to White River Energy Corp, including questions focused on whether the transaction was appropriately valued and whether any conflicts of interest or other issues are present given that Jay Puchir and Randy May are on the management teams of both the Company and White River Energy Corp. Finally, in December 2022 the Company also received a notice of deficiency with Nasdaq Rules because the closing price of our common stock was below $1.00 for 30 consecutive trading days, and unless our stock price goes above the $1.00 minimum bid price requirement for 10 consecutive trading days on its own, we will need to effect a reverse stock split or take other action to remediate this deficiency. In addition to all of these matters, Nasdaq may take the position that the acquisition of BitNile.com not only requires stockholder approval to issue more than 19.9% of our common stock to Ault and the minority stockholders of BitNile.com but also that the super voting rights violate Nasdaq Rules. We cannot assure you that Nasdaq will permit us to have our common stock to remain listed.
Any of the foregoing matters could result in our common stock being delisted from Nasdaq. If our common stock is delisted from Nasdaq, we could face significant material adverse consequences, including:
If we are unable to rectify any of the above-described Nasdaq issues, including potentially for failure to timely obtain stockholder approval, delisting will subject us and our stockholders to the above and other adverse consequences, and could also delay or prevent us from acquiring BitNile.com or effecting the announced spin-offs of common stock of certain entities as described elsewhere in this Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Not applicable.None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
* | Certain schedules and other attachments have been omitted. The Company undertakes to furnish the omitted schedules and attachments to the Securities and Exchange Commission upon request. |
** | This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K. |
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our stockholders who make a written request to our Corporate Secretary at Ecoark Holdings, Inc., 303 Pearl Parkway Suite #200, San Antonio, Texas 78215.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | By: | /s/ Randy May |
Randy May | ||
Chief Executive Officer | ||
Date: | By: | /s/ Jay Puchir |
Jay Puchir | ||
Chief Financial Officer |
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