| PREFERRED STOCK | 17. PREFERRED STOCK RiskOn International Series A On June 8, 2022, the Company entered into a Securities
Purchase Agreement (the “Series A Agreement”) with Ault Lending, pursuant to which the Company sold Ault Lending 1,200 shares
of Series A Convertible Redeemable Preferred Stock (the “RiskOn International 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 RiskOn
International Series A and the Commitment Shares, the “Securities”) for a total original purchase price of $12,000,000. Ault
Lending is a subsidiary of AAI. The Company determined that the classification of the RiskOn International Series A was mezzanine equity
as the option to convert the shares belong to Ault Lending. A description of the material transaction components are as follows: Conversion Rights Prior to the November 2022 amendment described
below, each share of RiskOn International 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 RiskOn 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 RiskOn International Series A, unless and until the Company obtains shareholder and The Nasdaq Stock Market (“Nasdaq”)
approval for the conversion of more than that amount, in order to comply with Nasdaq Rules. Shareholder 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 shareholders meeting seeking such shareholder approval at the September 9, 2022 meeting. The shares of RiskOn 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 Ault Lending, amended the Certificate of Designations of Rights, Preferences and Limitations (the “Certificate”)
of the RiskOn International Series A previously issued to Ault Lending to: (i) increase the stated value of the RiskOn International Series
A from $10,000 to $10,833.33; (ii) provide for the dividends payable under the RiskOn International Series A to be payable in common stock
rather than cash effective November 1, 2022; and (iii) reduce the conversion price of the RiskOn International 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 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. 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 September 30, 2023 and March 31, 2023:
September 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 As described in Note 19 “ Negative Covenants and Approval Rights 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 RiskOn 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) of the RiskOn 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 RiskOn International 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
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 Ault Lending 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 shareholder
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), and/or (ii) the
Holder together with its affiliates does not beneficially own at least 50% of the Company’s outstanding common 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 Holder
canceled the Warrant in exchange for $100. As the Company had substantially met the conditions under Section 1(a) of the Warrant, the
Company did not compute any derivative liability on the Warrant. Registration Rights Pursuant to the Agreement,
the Company agreed to register the sale by Ault Lending 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 RiskOn 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. On January 23, 2023,
Ault Lending agreed to reduce its secondary offering of shares of the Company’s common stock issuable upon conversion of the RiskOn
International Series A by $3,500,000. See Note 18 “Shareholders’ 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 Reports on Form 8-K
as filed with the SEC on June 9, 2022, July 15, 2022 and 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, Derivatives
and Hedging On December 9, 2022, the RiskOn International
Series A holder converted 50 shares of RiskOn International Series A into 38,015 common shares that resulted in a loss on conversion
of $3,923. The derivative liability for the RiskOn International
Series A was remeasured at September 30, 2023 and was valued at $55,415, resulting in a gain of $1,604,787 in the change in fair value
for the six month period ended September 30, 2023. In addition, the Company advanced $1,205,000 during
the six months ended 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 WTRV and Wolf Energy divestitures. In addition, $635,000 was advanced in the year ended March 31, 2023. The
$1,840,000 has been reclassified to advances to former owners of BitNile.com. Activity related to the preferred stock derivative
liabilities for the six months ended September 30, 2023 was as follows:
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 RiskOn International Series B and C On February 8, 2023,
the Company entered into the SEA by and among AAI, a significant shareholder and the owner of approximately 86% of BNC, and the Minority
Shareholders. 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 securities of Earnity beneficially owned by BNC (which represents approximately 19.9% of
the outstanding common stock of Earnity 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, and subject to Nasdaq and shareholder approval, 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. 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. 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 C are substantially the same as those of the Series B, except that the Series C does not hold negative covenant
and consent 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 26,666,667 shares. Pending shareholder 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 Ault Lending, a wholly owned subsidiary of AAI, on June 8, 2022 and any common stock held by AAI. Certain other
rights are subject to shareholder approval as described below. The SEA provides that the Company will seek shareholder approval following
the closing. The entire transaction is subject to compliance with Nasdaq Rules and the voting rights provision of the B/C Certificates
each contains a savings clause that nothing shall violate such Rules. 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 provided
that following the closing the Company will prepare and distribute a proxy statement and hold a meeting of its shareholders 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 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 parties shall mutually agree. In addition, pursuant to the SEA the Company
agreed to use its reasonable best efforts to effect its previously announced spin-offs of the common stock of Wolf Energy and WTRV held
by or issuable to the Company, 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 shareholders
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. 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
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. |
