| PREFERRED STOCK | 17. PREFERRED STOCK BitNile Metaverse Series A On June 8, 2022, the Company entered into a Securities Purchase Agreement
(the “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 Purchaser 1,200 shares of Series A Convertible Redeemable Preferred
Stock (the “BitNile Metaverse Series A”), 3,429 shares of common stock (the “Commitment Shares”) and a warrant
to purchase shares of common stock (the “Warrant,” and together with the BitNile Metaverse Series A and the Commitment Shares,
the “Securities”) for a total original purchase price of $12,000,000. The Purchaser is a subsidiary of AAI. The Company determined
that the classification of the BitNile Metaverse Series A was mezzanine equity as the option to convert the shares belongs to the Purchaser.
A description of the material transaction components are as follows: Conversion Rights Prior to the November 2022 amendment described
below, each share of BitNile Metaverse Series A had a stated value of $10,000 and was convertible into shares of common stock at a conversion
price of $63.00 per share, subject to customary adjustment provisions. The holder’s conversion of the BitNile Metaverse 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
BitNile Metaverse Series A, unless and until the Company obtains stockholder and The Nasdaq Stock Market (“Nasdaq”) approval
for the conversion of more than that amount, in order to comply with Nasdaq Rules. Stockholder 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 stockholders meeting seeking such stockholder approval at the September 9, 2022 meeting. The shares of BitNile Metaverse
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 Company amended the Certificate of Designations of Rights, Preferences and Limitations (the “Certificate”)
of the BitNile Metaverse Series A previously issued to the Purchaser to: (i) increase the stated value of the BitNile Metaverse Series
A from $10,000 to $10,833.33; (ii) provide for the dividends payable under the BitNile Metaverse Series A to be payable in common stock
rather than cash effective November 1, 2022, and (iii) reduce the conversion price of the BitNile Metaverse Series A from $63.00 to the
lesser of (a) $30.00 or (b) the higher of (1) 80% of the 10-day daily volume weighted average price, or (2) $7.50. The amendment on November
28, 2022 constituted a modification to the classification of the BitNile Metaverse 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 BitNile Metaverse 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 19 “ 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 for the three months ended June 30, 2023 and year ended March 31, 2023:
June 30, March 31,
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 Negative Covenants and Approval Rights The BitNile Metaverse 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 BitNile Metaverse 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)) of the BitNile Metaverse 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 BitNile Metaverse Series A Certificate);
(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 exceptions.
(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
( ) 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. Warrant Prior to its cancellation, the Warrant, as amended,
provided the Purchaser or its assignees (the “Holder”) with the right to purchase a number of shares of common stock as would
enable the holder 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 $0.03 per share, including the Commitment Shares and Conversion Shares unless sold. Subject to stockholder
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, 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 holder canceled the
warrant which was originally issued to the holder on June 8, 2022, as subsequently amended and restated, in exchange for $100 as the Company
has substantially met the conditions under Section 1(a) of the Warrant, therefore, the Company did not compute any derivative liability
on the warrants. Registration Rights Pursuant to the Series A Agreement, the Company has agreed to register
the sale by the Purchaser of up to 174,882 shares of common stock, representing the Commitment Shares issued at the closing plus 171,453
of the shares of common stock issuable upon conversion of the BitNile Metaverse 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. On January 23, 2023, the Purchaser agreed
to reduce its secondary offering of shares of our common stock issuable upon conversion of the Series A by $3,500,000. See Note 18 “Stockholders’
Deficit.” 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 Report 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 BitNile Metaverse Series A As discussed herein, the Company determined that the BitNile Metaverse
Series A upon the amendment on November 28, 2022, constituted a derivative liability under ASC 815. As a result of this classification,
the Company determined that on November 28, 2022 (inception), the value of the derivative liability was $7,218,319. On December 9, 2022, the BitNile Metaverse Series A holder converted
50 shares of BitNile Metaverse Series A into 38,015 common shares that resulted in a loss on conversion of $3,923. The derivative liability for the BitNile Metaverse Series A was remeasured
at June 30, 2023 and is valued at $169,323, resulting in a gain of $1,490,879 in the change in fair value. In addition, during March 2023 the Company advanced $635,000 and $1,205,000
during the three months ended June 30, 2023 to a third-party related to an obligation by the BitNile Metaverse 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 WTRV and Wolf Energy Services Corp. divestitures. Activity related to the preferred stock derivative
liabilities for the three months ended June 30, 2023 is as follows:
Beginning balance as of March 31, 2023 $ 1,025,202
Advances to third-party that will be considered redemption of Series A (1,205,000 )
Change in fair value of preferred stock derivative liabilities (1,490,879 )
Ending balance as of June 30, 2023 $ (1,670,677 ) BitNile Metaverse Series B and C On February 8, 2023, the Company entered into the SEA by and among
AAI, a significant shareholder, the owner of approximately 86% of BNC, and the Minority Stockholders. The SEA provided that, subject to
the terms and conditions set forth therein, the Company was to acquire the assets and assume the liabilities of BNC as well as the common
stock of Earnity, Inc. beneficially owned by BNC (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 Series B, and (ii) 1,362.5 shares
of Series C. The Preferred Stock, the terms of which are summarized in more detail below, have a combined Stated Value of $100,000,000,
and subject to adjustment are, subject to Nasdaq and shareholder approval, convertible into a total of up to 13,333,333 shares of the
Company’s common stock, which represent approximately 92.4% of the Company’s outstanding common stock on a fully diluted basis.
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. The terms of the Preferred Stock 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 $7.50, or 1,333 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 300 votes per share of common
stock into which the Series B is convertible. In addition, for as
long as at least 25% of the shares of Series B remain outstanding, AAI (and any transferees) has 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 Care Pending stockholder approval
of the transaction, the Preferred Stock combined are subject to a 19.9% beneficial ownership limitation. That limitation includes shares
of Series A issued to AAI on June 8, 2022 and any common stock held by AAI. Certain other rights are subject to stockholder approval as
described below. The SEA provides that the Company will seek stockholder approval following the closing. The entire transaction is subject
to compliance with Nasdaq Rules and the Certificates each contain a savings clause that nothing shall violate such Rules. Nasdaq may nonetheless
disregard the savings clause. Under the SEA, effective at the closing AAI 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 provides that following the closing the Company will
prepare and distribute a proxy statement and hold a meeting of its stockholders 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 2 and 1-for-20, (iv) a change in the Company’s name to BNC,
(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 Parties shall mutually agree. In addition, pursuant to the SEA the Company agreed to use its reasonable best efforts to effect
its previously announce spin-offs of the common stock of Wolf Energy and WTRV 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 AAI, and financially 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 AAI 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 stockholders of record as of such date. In connection with the SEA, the Company also entered into a Registration
Rights Agreement with AAI 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 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, AAI 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 AAI, BNC will continue as a wholly owned subsidiary of the Company. BNC’s
principal business entails the development and operation of a metaverse platform, the beta for which launched on March 1, 2023. This 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 Preferred Stock was
remeasured at June 30, 2023 and is valued at $2,427,669 resulting in a gain of $16,403,090 in the change in fair value for the three months
ended June 30, 2023. The Company has accrued $1,597,222 in dividends on the Series B and C Preferred stock as of June 30, 2023. Activity related to the preferred stock derivative liabilities for
the Preferred Stock for the three months ended June 30, 2023 is as follows:
Beginning balance as of March 31, 2023 $ 18,830,760
Change in fair value of preferred stock derivative liabilities (16,403,090 )
Ending balance as of June 30, 2023 $ 2,427,670 On April 4, 2023, the Company entered into an agreement with Ault Lending,
LLC (“Ault”) 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’s $3.25 million payable to WTRV from Ault’s exercise of participation
rights in oil and gas exploration and drilling ventures which WTRV granted Ault 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
agreed that in lieu of repayment of the Amounts advanced to WTRV, Ault will permit the Company to redeem shares of the Company’s
Series A Convertible Redeemable Preferred Stock (the “Series A”) held by Ault by dividing the Amounts by the stated value
of such shares, or one share of Series A for each $10,833.33 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 Services Inc. occur which would permit Ault to receive its
full dividends thereunder. |
