UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20212022
OR
☐ 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 000-53361001-40701
ECOARK HOLDINGS, 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 | |
| (Address of principal executive offices) | (Zip 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 | ZEST | The Nasdaq Stock Market LLC (The Nasdaq Capital Market) |
Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 and posted pursuant to Rule 405 of Regulation S-T (§ 232.405(Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check markcheckmark whether the Registrantregistrant 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,”filer”, “smaller reporting company,”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 ☒
As of November 5, 2021,August 12, 2022, there were 26,364,09926,466,980 shares of common stock, par value $0.001 per share, outstanding.
Ecoark Holdings, Inc.
INDEX
i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJune 30, 20212022
Table of ContentsContent
1
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBERJUNE 30, 20212022 (UNAUDITED) AND MARCH 31, 20212022
(in thousands, except per share data)
| JUNE 30, | MARCH 31, | |||||||
| 2022 | 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash ($85,000 pledged as collateral for credit as of June 30, 2022 and March 31, 2022, respectively) | $ | 8,262,263 | $ | 184,524 | ||||
| Accounts receivable | 105,983 | 164,388 | ||||||
| Intangible assets, cryptocurrencies | 10,145 | 19,267 | ||||||
| Prepaid expenses and other current assets | 2,683,406 | 1,388,083 | ||||||
| Current assets held for sale | 1,513,305 | 1,623,864 | ||||||
| Total current assets | 12,575,102 | 3,380,126 | ||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | 8,118,523 | 9,733,109 | ||||||
| Intangible assets, net | 1,652,088 | 1,716,331 | ||||||
| Power development costs | 2,000,000 | 2,000,000 | ||||||
| Secured note receivable and accrued interest receivable | 4,258,385 | - | ||||||
| Goodwill | 4,900,873 | 4,900,873 | ||||||
| Right of use assets - financing leases | 264,535 | 301,126 | ||||||
| Right of use assets - operating leases | 480,084 | 542,309 | ||||||
| Other assets | 25,948 | 25,948 | ||||||
| Non-current assets of discontinued operations/held for sale | 9,375,470 | 13,377,421 | ||||||
| Total non-current assets | 31,075,906 | 32,597,117 | ||||||
| TOTAL ASSETS | $ | 43,651,008 | $ | 35,977,243 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 3,069,773 | $ | 3,097,562 | ||||
| Accrued liabilities | 3,785,453 | 1,729,424 | ||||||
| Warrant derivative liabilities | 4,712,162 | 4,318,630 | ||||||
| Current portion of long-term debt | 719,911 | 1,181,021 | ||||||
| Current portion of lease liability - financing leases | 141,934 | 145,174 | ||||||
| Current portion of lease liability - operating leases | 153,330 | 169,512 | ||||||
| Current liabilities of discontinued operations/held for sale | 857,333 | 1,133,653 | ||||||
| Total current liabilities | 13,439,896 | 11,774,976 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| Lease liability - financing leases, net of current portion | 117,236 | 149,884 | ||||||
| Lease liability - operating leases, net of current portion | 332,131 | 378,515 | ||||||
| Long-term debt, net of current portion | 76,428 | 135,314 | ||||||
| Non-current liabilities of discontinued operations/held for sale | 920,676 | 1,403,966 | ||||||
| Total non-current liabilities | 1,446,471 | 2,067,679 | ||||||
| Total Liabilities | 14,886,367 | 13,842,655 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| MEZZANINE EQUITY | ||||||||
| Series A Convertible Redeemable Preferred Stock, $0.001 par value; 5,000,000 shares authorized; 1,200 and 0 shares issued and outstanding as of June 30, 2022 and March 31, 2022, respectively | 11,806,584 | - | ||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Series A Preferred stock, $0.001 par value; 5,000,000 shares authorized; 1,200 and 0 shares issued and outstanding as of June 30, 2022 and March 31, 2022, respectively | - | - | ||||||
| Common stock, $0.001 par value, 40,000,000 shares authorized, 26,466,980 and 26,364,099 shares issued and 26,350,000 and 26,247,000 shares outstanding as of June 30, 2022 and March 31, 2022, respectively | 26,467 | 26,364 | ||||||
| Additional paid in capital | 188,837,222 | 183,246,061 | ||||||
| Accumulated deficit | (169,064,738 | ) | (158,868,204 | ) | ||||
| Treasury stock, at cost | (1,670,575 | ) | (1,670,575 | ) | ||||
| Total stockholders’ equity before non-controlling interest | 18,128,376 | 22,733,646 | ||||||
| Non-controlling interest | (1,170,319 | ) | (599,058 | ) | ||||
| Total stockholders’ equity | 16,958,057 | 22,134,588 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 43,651,008 | $ | 35,977,243 | ||||
| SEPTEMBER 30, | MARCH 31, | |||||||
| 2021 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash ($85 pledged as collateral for credit as of September 30, 2021 and March 31, 2021, respectively and $250 restricted as of September 30, 2021 and March 31, 2021, respectively) | $ | 7,895 | $ | 1,316 | ||||
| Accounts receivable, net of allowance of $209 and $709 as of September 30, 2021 and March 31, 2021, respectively | 779 | 1,136 | ||||||
| Inventories - Crude Oil | 101 | 122 | ||||||
| Prepaid expenses and other current assets | 1,954 | 1,995 | ||||||
| Total current assets | 10,729 | 4,569 | ||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | 7,788 | 3,695 | ||||||
| Intangible assets, net | 1,891 | 2,065 | ||||||
| Oil and gas properties, full cost-method | 11,940 | 12,352 | ||||||
| Capitalized drilling costs, net of depletion | 2,148 | 2,567 | ||||||
| Goodwill | 10,225 | 10,225 | ||||||
| Right of use assets - financing leases | 374 | 445 | ||||||
| Right of use assets - operating leases | 409 | 479 | ||||||
| Non-current assets of discontinued operations | - | 194 | ||||||
| Total non-current assets | 34,775 | 32,022 | ||||||
| TOTAL ASSETS | $ | 45,504 | $ | 36,591 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 464 | $ | 3,614 | ||||
| Accrued liabilities | 2,366 | 3,591 | ||||||
| Warrant derivative liabilities | 15,389 | 7,213 | ||||||
| Current portion of long-term debt | 879 | 1,056 | ||||||
| Note payable - related parties | - | 578 | ||||||
| Current portion of lease liability - financing leases | 143 | 141 | ||||||
| Current portion of lease liability - operating leases | 221 | 212 | ||||||
| Current liabilities of discontinued operations | - | 9 | ||||||
| Total current liabilities | 19,462 | 16,414 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| Lease liability - financing leases, net of current portion | 223 | 295 | ||||||
| Lease liability - operating leases, net of current portion | 222 | 309 | ||||||
| Long-term debt, net of current portion | 237 | 1,012 | ||||||
| Asset retirement obligations | 1,587 | 1,532 | ||||||
| Total non-current liabilities | 2,269 | 3,148 | ||||||
| Total Liabilities | 21,731 | 19,562 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY (Numbers of shares rounded to thousands) | ||||||||
| Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding as of September 30, 2021 and March 31, 2021, respectively | - | - | ||||||
| Common stock, $0.001 par value, 30,000 shares authorized, 26,364 and 22,723 shares issued and 26,247 and 22,606 shares outstanding as of September 30, 2021 and March 31, 2021, respectively | 26 | 23 | ||||||
| Additional paid in capital | 177,625 | 167,588 | ||||||
| Accumulated deficit | (152,207 | ) | (148,911 | ) | ||||
| Treasury stock, at cost | (1,671 | ) | (1,671 | ) | ||||
| Total stockholders’ equity | 23,773 | 17,029 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 45,504 | $ | 36,591 | ||||
See notes to condensed consolidated financial statements.
2
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX AND THREE MONTHS ENDED SEPTEMBERJUNE 30, 20212022 AND 20202021
(in thousands, except per share data)
| SIX MONTHS ENDED | THREE MONTHS ENDED | |||||||||||||||||||||||
| SEPTEMBER 30, | SEPTEMBER 30, | JUNE 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | |||||||||||||||||||
| CONTINUING OPERATIONS: | ||||||||||||||||||||||||
| REVENUES | $ | 12,990 | $ | 5,591 | $ | 6,111 | $ | 3,278 | $ | 5,418,655 | $ | 5,156,213 | ||||||||||||
| COST OF REVENUES | 7,166 | 3,426 | 3,224 | 2,333 | 4,607,872 | 3,597,941 | ||||||||||||||||||
| GROSS PROFIT | 5,824 | 2,165 | 2,887 | 945 | 810,783 | 1,558,272 | ||||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||||||
| Salaries and salaries related costs | 3,838 | 3,617 | 2,269 | 1,605 | 6,273,380 | 1,286,711 | ||||||||||||||||||
| Professional and consulting fees | 382 | 498 | 245 | 236 | 253,476 | 130,486 | ||||||||||||||||||
| Oilfield supplies and repairs | 1,200 | 874 | 856 | 869 | ||||||||||||||||||||
| Selling, general and administrative costs | 6,382 | 2,271 | 4,110 | 1,665 | 2,532,045 | 1,856,150 | ||||||||||||||||||
| Depreciation, amortization, depletion, and accretion | 1,738 | 624 | 722 | 323 | ||||||||||||||||||||
| Research and development | - | 366 | - | 136 | ||||||||||||||||||||
| Depreciation, amortization, and impairment | 148,805 | 252,179 | ||||||||||||||||||||||
| Cryptocurrency impairment losses | 9,122 | - | ||||||||||||||||||||||
| Total operating expenses | 13,540 | 8,250 | 8,202 | 4,834 | 9,216,828 | 3,525,526 | ||||||||||||||||||
| LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) | (7,716 | ) | (6,085 | ) | (5,315 | ) | (3,889 | ) | ||||||||||||||||
| LOSS FROM CONTINUING OPERATIONS BEFORE OTHER INCOME (EXPENSE) | (8,406,045 | ) | (1,967,254 | ) | ||||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||
| Change in fair value of derivative liabilities | 4,316 | (16,382 | ) | (629 | ) | 1,011 | (393,532 | ) | 4,945,819 | |||||||||||||||
| Gain (loss) on exchange of warrants for common stock | - | 16,583 | - | 14,952 | ||||||||||||||||||||
| Loss on conversion of long-term debt and accrued expenses | - | (3,969 | ) | - | (1,775 | ) | ||||||||||||||||||
| Gain (loss) on disposal of fixed assets | - | (105 | ) | - | - | (950,024 | ) | - | ||||||||||||||||
| Loss on abandonment of oil and gas property | - | (83 | ) | - | - | |||||||||||||||||||
| Gain on disposal of ARO related to sale of oil and gas property | 8 | - | 1 | - | ||||||||||||||||||||
| Gain on sale of oil and gas property | 713 | - | 121 | - | ||||||||||||||||||||
| Interest expense, net of interest income | (617 | ) | (2,155 | ) | (33 | ) | (1,314 | ) | (44,106 | ) | (585,499 | ) | ||||||||||||
| Total other income (expense) | 4,420 | (6,111 | ) | (540 | ) | 12,874 | (1,387,662 | ) | 4,360,320 | |||||||||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS AND (PROVISION) FOR INCOME TAXES | (3,296 | ) | (12,196 | ) | (5,855 | ) | 8,985 | |||||||||||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES AND DISCONTINUED OPERATIONS | (9,793,707 | ) | 2,393,066 | |||||||||||||||||||||
| DISCONTINUED OPERATIONS: | ||||||||||||||||||||||||
| Loss from discontinued operations | - | - | - | - | ||||||||||||||||||||
| (Loss) income from discontinued operations | (1,642,442 | ) | 166,458 | |||||||||||||||||||||
| Gain on disposal of discontinued operations | - | - | - | - | 711,505 | - | ||||||||||||||||||
| Total discontinued operations | - | - | - | - | (930,937 | ) | 166,458 | |||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS BEFORE BENEFIT (PROVISION) FOR INCOME TAXES | (3,296 | ) | (12,196 | ) | (5,855 | ) | 8,985 | |||||||||||||||||
| (LOSS) INCOME FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES | (10,724,644 | ) | 2,559,524 | |||||||||||||||||||||
| BENEFIT (PROVISION) FOR INCOME TAXES | - | - | - | - | ||||||||||||||||||||
| PROVISION FOR INCOME TAXES | - | - | ||||||||||||||||||||||
| NET INCOME (LOSS) | $ | (3,296 | ) | $ | (12,196 | ) | $ | (5,855 | ) | $ | 8,985 | |||||||||||||
| NET (LOSS) INCOME | (10,724,644 | ) | 2,559,524 | |||||||||||||||||||||
| NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | 571,261 | - | ||||||||||||||||||||||
| NET INCOME (LOSS) PER SHARE - BASIC | $ | (0.138 | ) | $ | (0.633 | ) | $ | (0.233 | ) | $ | 0.445 | |||||||||||||
| NET (LOSS) INCOME TO CONTROLLING INTEREST | $ | (10,153,383 | ) | $ | 2,559,524 | |||||||||||||||||||
| Less: Preferred Stock Dividends | 43,151 | - | ||||||||||||||||||||||
| NET (LOSS) INCOME TO CONTROLLING INTEREST OF COMMON SHAREHOLDERS | $ | (10,196,534 | ) | $ | 2,559,524 | |||||||||||||||||||
| NET (LOSS) INCOME PER SHARE - BASIC | ||||||||||||||||||||||||
| Continuing operations | $ | (0.37 | ) | $ | 0.10 | |||||||||||||||||||
| Discontinued operations | (0.04 | ) | 0.01 | |||||||||||||||||||||
| $ | (0.41 | ) | $ | 0.11 | ||||||||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC | 23,905 | 19,271 | 25,092 | 20,176 | 26,388,971 | 22,804,172 | ||||||||||||||||||
| NET INCOME (LOSS) PER SHARE - DILUTED | $ | (0.138 | ) | $ | (0.633 | ) | $ | (0.233 | ) | $ | 0.380 | |||||||||||||
| NET (LOSS) PER SHARE - DILUTED (see NOTE 1) | $ | (0.41 | ) | $ | (0.09 | ) | ||||||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED | 23,905 | 19,271 | 25,092 | 23,645 | ||||||||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (see NOTE 1) | 26,388,971 | 26,372,172 | ||||||||||||||||||||||
See notes to condensed consolidated financial statements.
3
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
FOR THE SIXTHREE MONTHS ENDED SEPTEMBERJUNE 30, 20212022 AND 2020
(Dollar amounts and number of shares in thousands)2021
| Additional | ||||||||||||||||||||||||||||||||
| Preferred | Common Stock | Paid-In | Accumulated | Treasury | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | |||||||||||||||||||||||||
| Balance - March 31, 2020 | 1 | $ | - | 17,175 | $ | 17 | $ | 135,424 | $ | (128,023 | ) | $ | (1,671 | ) | $ | 5,747 | ||||||||||||||||
| Shares issued in the exercise of warrants, net of expenses | - | - | 1,531 | 2 | 6,674 | - | - | 6,676 | ||||||||||||||||||||||||
| Shares issued in the exercise of stock options | - | - | 89 | - | 349 | - | - | 349 | ||||||||||||||||||||||||
| Shares issued in conversion of debt and accrued interest | - | - | 524 | 1 | 3,941 | - | - | 3,942 | ||||||||||||||||||||||||
| Shares issued in conversion of accounts payable and accrued expenses | - | - | 93 | - | 677 | - | - | 677 | ||||||||||||||||||||||||
| Conversion of preferred shares (Series C) to common shares | (1 | ) | - | 308 | - | - | - | - | - | |||||||||||||||||||||||
| Share-based compensation | - | - | - | - | 1,114 | - | - | 1,114 | ||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | (21,181 | ) | - | (21,181 | ) | ||||||||||||||||||||||
| Balance - June 30, 2020 | - | - | 19,720 | 20 | 148,179 | (149,204 | ) | (1,671 | ) | (2,676 | ) | |||||||||||||||||||||
| Shares issued in the conversion of long-term debt and accrued interest | - | - | 192 | - | 2,635 | - | - | 2,635 | ||||||||||||||||||||||||
| Shares issued services rendered | - | - | 30 | - | 485 | - | - | 485 | ||||||||||||||||||||||||
| Shares issued in acquisition of oil and gas reserves and fixed assets | - | - | 171 | - | 2,750 | - | - | 2,750 | ||||||||||||||||||||||||
| Shares issued in the exercise of warrants | - | - | 1,088 | 1 | 5,575 | - | - | 5,576 | ||||||||||||||||||||||||
| Shares issued in the exercise of cashless stock options | - | - | 1 | - | - | - | - | - | ||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | 36 | - | - | 36 | ||||||||||||||||||||||||
| Net income for the period | - | - | - | - | - | 8,985 | - | 8,985 | ||||||||||||||||||||||||
| Balance - September 30, 2020 | - | $ | - | 21,202 | $ | 21 | $ | 159,660 | $ | (140,219 | ) | $ | (1,671 | ) | $ | 17,791 | ||||||||||||||||
| Balance - March 31, 2021 | - | $ | - | 22,705 | $ | 23 | $ | 167,588 | $ | (148,911 | ) | $ | (1,671 | ) | $ | 17,029 | ||||||||||||||||
| Shares issued in the exercise of stock options, including cashless exercises | - | - | 20 | - | 28 | - | - | 28 | ||||||||||||||||||||||||
| Shares issued for services rendered | - | - | 115 | - | 675 | - | - | 675 | ||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | 399 | - | - | 399 | ||||||||||||||||||||||||
| Net income for the period | - | - | - | - | - | 2,559 | - | 2,559 | ||||||||||||||||||||||||
| Balance - June 30, 2021 | - | - | 22,840 | 23 | 168,690 | (146,352 | ) | (1,671 | ) | 20,690 | ||||||||||||||||||||||
| Shares issued for services rendered, net of amounts prepaid | - | - | 45 | - | 92 | - | - | 92 | ||||||||||||||||||||||||
| Shares issued in registered direct offering, net of amount allocated to derivative liability | - | - | 3,478 | 3 | 8,024 | - | - | 8,027 | ||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | 819 | - | - | 819 | ||||||||||||||||||||||||
| Fractional adjustment | - | - | 1 | - | - | - | - | - | ||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | (5,855 | ) | - | (5,855 | ) | ||||||||||||||||||||||
| Balance - September 30, 2021 | - | $ | - | 26,364 | $ | 26 | $ | 177,625 | $ | (152,207 | ) | $ | (1,671 | ) | $ | 23,773 | ||||||||||||||||
| Additional | Non- | |||||||||||||||||||||||||||||||||||
| Preferred | Common Stock | Paid-In | Accumulated | Treasury | 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 | ||||||||||||||||||
| 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 | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED(UNAUDITED)
FOR THE SIXTHREE MONTHS ENDED SEPTEMBERJUNE 30, 20212022 AND 20202021
(in thousands, except per share data)
| JUNE 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS | ||||||||
| Net (loss) income | $ | (10,196,534 | ) | $ | 2,559,524 | |||
| Adjustments to reconcile net (loss) income to net cash used in operating activities | ||||||||
| Change in non-controlling interest | (571,261 | ) | - | |||||
| Depreciation, amortization, and impairment | 148,804 | 249,679 | ||||||
| Cryptocurrency impairment losses | 9,122 | - | ||||||
| Share-based compensation | 182,561 | 399,173 | ||||||
| Change in fair value of derivative liabilities | 393,532 | (4,945,819 | ) | |||||
| Loss on disposal of fixed assets | 950,024 | - | ||||||
| (Gain) on disposal of Trend Discovery Holdings | (711,505 | ) | - | |||||
| Common shares issued for services | - | 675,000 | ||||||
| Common shares issued for services - Agora | 5,215,287 | - | ||||||
| Warrants granted for interest expense | - | 545,125 | ||||||
| Commitment fees on long-term debt | 17,681 | - | ||||||
| Changes in assets and liabilities | ||||||||
| Accounts receivable | 58,405 | (48,089 | ) | |||||
| Prepaid expenses and other current assets | (1,295,323 | ) | 77,187 | |||||
| Amortization of right of use asset - financing leases | 36,591 | 35,540 | ||||||
| Amortization of right of use asset - operating leases | 62,225 | 17,768 | ||||||
| Accrued interest receivable | (8,385 | ) | - | |||||
| Interest on lease liability - financing leases | (6,113 | ) | (2,984 | ) | ||||
| Operating lease expense | (62,566 | ) | (19,547 | ) | ||||
| Accounts payable | (27,789 | ) | 432,437 | |||||
| Accrued liabilities | 2,056,029 | (726,253 | ) | |||||
| Total adjustments | 6,447,319 | (3,310,783 | ) | |||||
| Net cash used in operating activities of continuing operations | (3,749,215 | ) | (751,259 | ) | ||||
| Net cash (used in) provided by discontinued operations | (725,259 | ) | 440,391 | |||||
| Net cash used in operating activities | (4,474,474 | ) | (310,868 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITES | ||||||||
| Proceeds from the sale of fixed assets | 580,000 | 2,500 | ||||||
| Net cash provided by investing activities of continuing operations | 580,000 | 2,500 | ||||||
| Net cash provided by investing activities of discontinued operations | 394,399 | - | ||||||
| Net cash provided by investing activities | 974,399 | 2,500 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITES | ||||||||
| Proceeds from exercise of stock options | - | 28,297 | ||||||
| Reduction of finance lease liability | (29,775 | ) | (31,854 | ) | ||||
| Proceeds from notes payable - related parties | 616,000 | - | ||||||
| Repayments of notes payable - related parties | (616,000 | ) | - | |||||
| Proceeds from long-term debt | 492,171 | - | ||||||
| Repayment of long-term debt | (1,029,848 | ) | (213,957 | ) | ||||
| Proceeds from the sale of preferred stock | 12,000,000 | - | ||||||
| Net cash provided by (used in) financing activities of continuing operations | 11,432,548 | (217,514 | ) | |||||
| Net cash provided by financing activities of discontinued operations | 145,266 | - | ||||||
| Net cash provided by (used in) financing activities | 11,577,814 | (217,514 | ) | |||||
| NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH | 8,077,739 | (525,882 | ) | |||||
| CASH - BEGINNING OF PERIOD | 184,524 | 1,105,227 | ||||||
| CASH - END OF PERIOD | $ | 8,262,263 | $ | 579,345 | ||||
| SUPPLEMENTAL DISCLOSURES | ||||||||
| Cash paid for interest expense | $ | 11,173 | $ | 22,860 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| SUMMARY OF NON-CASH ACTIVITIES: | ||||||||
| Reclassification of assets of discontinued operations to current operations in fixed assets | $ | - | $ | 193,904 | ||||
| Lease liability recognized for ROU asset | $ | - | $ | 29,049 | ||||
| Issuance costs on mezzanine equity | $ | 193,416 | $ | - | ||||
| 2021 | 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| CASH FLOW FROM OPERATING ACTIVIITIES | ||||||||
| Net loss | $ | (3,296 | ) | $ | (12,196 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation, amortization, depletion, and accretion | 1,738 | 624 | ||||||
| Share-based compensation | 1,218 | 1,150 | ||||||
| Bad debt, net of recovery | - | 184 | ||||||
| Change in fair value of derivative liabilities | (4,316 | ) | 16,382 | |||||
| (Gain) on disposal of oil and gas property | (18 | ) | - | |||||
| (Gain) loss on exchange of warrants | - | (16,583 | ) | |||||
| Common shares issued for services | 767 | 485 | ||||||
| Loss on sale of fixed assets | - | 105 | ||||||
| Loss on abandonment of oil and gas property | - | 83 | ||||||
| Warrants granted for interest expense | 545 | 1,790 | ||||||
| Warrants granted for commissions | 744 | - | ||||||
| Loss on conversion of debt and liabilities to common stock | - | 3,969 | ||||||
| Amortization of debt discount | - | 149 | ||||||
| Changes in assets and liabilities | ||||||||
| Accounts receivable | 357 | (513 | ) | |||||
| Inventory | 11 | (175 | ) | |||||
| Prepaid expenses and other current assets | 41 | (1,002 | ) | |||||
| Amortization of right of use asset - financing leases | 71 | 74 | ||||||
| Amortization of right of use asset - operating leases | 70 | 51 | ||||||
| Other assets | - | (4 | ) | |||||
| Interest on lease liability - financing leases | (6 | ) | (8 | ) | ||||
| Operating lease expense | (78 | ) | (43 | ) | ||||
| Accounts payable | (3,159 | ) | 635 | |||||
| Accrued liabilities | (1,225 | ) | (268 | ) | ||||
| Total adjustments | (3,240 | ) | 7,085 | |||||
| Net cash used in operating activities of continuing operations | (6,536 | ) | (5,111 | ) | ||||
| Net cash used in discontinued operations | - | - | ||||||
| Net cash used in operating activities | (6,536 | ) | (5,111 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITES | ||||||||
| Advance of note receivable | - | (275 | ) | |||||
| Purchases of oil and gas properties, net of asset retirement obligations | (54 | ) | (2,698 | ) | ||||
| Purchase of oil and gas property – related party | (250 | ) | - | |||||
| Proceeds from the sale of fixed assets | 2 | 43 | ||||||
| Purchase of fixed assets | (4,247 | ) | (241 | ) | ||||
| Net cash used in investing activities of continuing operations | (4,549 | ) | (3,171 | ) | ||||
| Net cash used in discontinued operations | - | - | ||||||
| Net cash used in investing activities | (4,549 | ) | (3,171 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITES | ||||||||
| Proceeds from the issuance of common stock in a registered direct offering, net of fees | 19,230 | - | ||||||
| Proceeds from exercise of warrants, net of fees | - | 12,253 | ||||||
| Proceeds from exercise of stock options | 28 | 349 | ||||||
| Reduction of finance lease liability | (64 | ) | (60 | ) | ||||
| Proceeds from notes payable - related parties | 45 | 559 | ||||||
| Repayments of notes payable - related parties | (623 | ) | (1,384 | ) | ||||
| Proceeds from long-term debt | - | 1,869 | ||||||
| Repayment of long-term debt | (952 | ) | (3,730 | ) | ||||
| Repayment to prior owners | - | (316 | ) | |||||
| Net cash provided by financing activities | 17,664 | 9,540 | ||||||
| NET INCREASE IN CASH AND RESTRICTED CASH | 6,579 | 1,258 | ||||||
| CASH AND RESTRCITED CASH - BEGINNING OF PERIOD | 1,316 | 406 | ||||||
| CASH AND RESTRICTED CASH - END OF PERIOD | $ | 7,895 | $ | 1,664 | ||||
| SUPPLEMENTAL DISCLOSURES | ||||||||
| Cash paid for interest expense | $ | 138 | $ | 361 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| SUMMARY OF NON-CASH ACTIVITIES: | ||||||||
| Reclassification of assets of discontinued operations to current operations in fixed assets | $ | 194 | $ | - | ||||
| Bifurcation of derivative liability in registered direct offering | $ | 11,203 | $ | - | ||||
| Preferred stock converted into common stock | $ | - | $ | 2 | ||||
| Conversion of long-term debt and notes payable and accrued interest into common stock | $ | - | $ | 6,577 | ||||
| Conversion of accounts payable and accrued liabilities into common stock | $ | - | $ | 677 | ||||
| Shares issued for acquisition of oil and gas reserves and fixed assets, net of asset retirement obligations | $ | - | $ | 2,750 | ||||
| Note receivable offset against oil and gas reserves in acquisition of Rabb | $ | - | $ | 304 | ||||
| Lease liability recognized for ROU asset | $ | - | $ | 442 | ||||
See notes to condensed consolidated financial statements.
5
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dollar amounts and numbers of shares that follow in this report are presented in thousands, except per share amounts.
Ecoark Holdings Inc. (“Ecoark Holdings” or the “Company”) is a diversified holding company, incorporated in the State of Nevada on November 19, 2007. Through Ecoark HoldingsHoldings’ wholly owned subsidiaries, the Company has operations in three areas: (i) oil and gas including exploration, production and drilling operations on over 20,000 cumulative acres of active mineral leases in Texas, Louisiana, and Mississippi and transportation services, (ii) post-harvest shelf-life and freshness food management technology, and (iii) Bitcoin mining. The Company recently sold its financial services including preparingbusiness, and on July 25, 2022, sold all of its oil and gas production business to launchFortium Holdings, Inc. (“Fortium”) in exchange for Fortium convertible preferred stock. See below in this Note 1 and Note 21 – “Subsequent Events.” Since this disposal represents a Bitcoin mining operation.strategic shift that will have a major effect on the Company’s operation and financial results, the Company has reclassified the assets and liabilities related to this business as assets and liabilities held for sale and reclassified the operations of this business as discontinued operations as of June 30, 2022 and for the three months ended June 30, 2022 and 2021. The Company also reclassified the assets and liabilities of this business as assets and liabilities held for sale as of March 31, 2022. See Note 2, “Discontinued Operations” and Note 21, “Subsequent Events” for further information regarding these transactions. Since the acquisition of Banner Midstream Corp. on March 27, 2020, which currently comprises the exploration, production and drilling operations, the Company has focused its efforts to a considerable extent on expanding its exploration and production footprint and capabilities by acquiring real property and working interests in oil and gas mineral leases. The Company’s principal subsidiaries consist of Ecoark, Inc. (“Ecoark”), a Delaware corporation which is the parent of Zest Labs, Inc. (“Zest Labs”), Banner Midstream Corp., a Delaware corporation (“Banner Midstream”) and Agora Digital Holdings, Inc., a Nevada corporation (“Agora”) whowhich 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.formation, which includes Bitstream Mining, LLC, the Company’s Bitcoin mining subsidiary.
As disclosed in these Notes, the Company has decided it is in the best interests of its shareholders that it divest all of its operating assets through a series of spin-offs or stock dividends to the Company’s shareholders. It intends to do so either by engaging in business combinations with existing public companies which have trading symbols and markets like Fortium or by direct dividends. The Company’s plan is also driven by the dividends it must pay to an investor which provided $12 million on June 8, 2022. The Company’s goal is to complete these spin-offs in calendar 2022 and acquire a new business prior to the last spin-off so it does not become a shell corporation. Because all spin-offs require the transactions or the subsidiaries to be registered with the Securities and Exchange Commission, the Company may not complete all spin-offs in 2022.
On March 27, 2020, the Company and Banner Energy Services Corp., a Nevada corporation (“Banner Parent”), entered into a Stock Purchase and Sale Agreement (the “Banner Purchase Agreement”) to acquire Banner Midstream Corp., a Delaware corporation (“Banner Midstream”). Pursuant to the acquisition, Banner Midstream became a wholly ownedwholly-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.
Banner Midstream hashad four operating subsidiaries: Pinnacle Frac Transport LLC (“Pinnacle Frac”), Capstone Equipment Leasing LLC (“Capstone”), White River Holdings Corp. (“White River”), and Shamrock Upstream Energy LLC (“Shamrock”). Pinnacle Frac provides transportation of frac sand and logistics services to major hydraulic fracturing and drilling operations. Capstone procures and finances equipment to oilfield transportation service contractors. These two operating subsidiaries of Banner Midstream are revenue producing entities. White River is and Shamrock arewas engaged in oil and gas exploration, production, and drilling operations on over 20,00030,000 cumulative acres of active mineral leases in Texas, Louisiana, and Mississippi.
On June 11, 2020, the Company acquired certain energy assets from SR Acquisition I, LLC for $1 as part of the ongoing bankruptcy reorganization of Sanchez Energy Corporation. The transaction includes the transfer of 262 total wells in Mississippi and Louisiana, approximately 9,000 acres of active mineral leases, and drilling production materials and equipment. The 262 total wells include 57 active producing wells, 19 active disposal wells, 136 shut-in with future utility wells, and 50 shut-in pending plugging wells. Included in the assignment are 4 wells in the Tuscaloosa Marine Shale formation. One of the leases acquired in this transaction was sold in November 2020.
On June 18, 2020, the Company acquired certain energy assets from SN TMS, LLC for $1 as part of the ongoing bankruptcy reorganization of Sanchez Energy Corporation. The transaction includes the transfer of wells, active mineral leases, and drilling production materials and equipment.
On August 14, 2020, the Company entered into an Asset Purchase Agreement by and among the Company, White River E&P LLC, a Texas Limited Liability Company and a wholly ownedwas the operating subsidiary of the Company Rabb Resources, LTD.Banner Midstream that has been reclassified to assets and Claude Rabb, the sole owner of Rabb Resources, LTD. Pursuant to the Asset Purchase Agreement, the Company completed the acquisition of certain assets of Rabb Resources, LTD. The acquired assets consisted of certain real propertyliabilities held for sale and working interests in oil and gas mineral leases. The Company in June 2020 previously provided for bridge financing to Rabb Resources, LTD under the $225 Senior Secured Convertible Promissory Note. As consideration for entering into the Asset Purchase Agreement, the Company agreed to pay Rabb Resources, LTD. A total of $3,500 consisting of (i) $1,500 in cash, net of $304 in outstanding amounts related to the note receivable and accrued interest receivable, and (ii) $2,000 payable in common stock of the Company, which based on the closing price of the common stock as of the date of the Asset Purchase Agreement equaled 103 shares. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the Rabb Resources, LTD historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.discontinued operations.
6
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
On September 4, 2020,For a full description of the operations of White River, SPV 3, LLC, a wholly owned subsidiary of Banner Midstream entered into an Agreement and Assignment of Oil, Gas and Mineral Lease with a privately held limited liability company (the “Assignor”). Underrefer to the Lease Assignment,Annual Report filed on Form 10-K for the Assignor assigned a 100% working interest (75% net revenue interest) in a certain oil and gas lease covering in excess of 1,600 acres (the “Lease”), andyear ended March 31, 2022 filed on July 7, 2022. White River paid $1,500 in cash to the Assignor. The Company accountedis now part of our assets and liabilities held for this acquisitionsale and discontinued operations as an asset acquisition under ASC 805of June 30, 2022. Shamrock sold off its assets and that the Company has early adopted the amendmentswas inactive as of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.June 30, 2022.
On October 9, 2020,July 25, 2022, the Company and White River SPV, entered into and closed a ParticipationShare Exchange Agreement, (the “Participation Agreement”) by and among the Company, White River SPV, BlackBrush Oil & Gas, L.P. (“BlackBrush”) and GeoTerre, LLC, an unrelated privately held limited liability company (the “Assignor”), to conduct drilling of wells in the Austin Chalk formation.
Pursuant to the Participation Agreement, the Company andFortium. As a result, White River SPV pre-funded a majority of the cost, approximately $5,800, associated with the drilling and completion of an initial deep horizontal well in the Austin Chalk formation of which $3,387 was expensed as drilling costs. The Participation Agreement required the drilling costs that were paid into a designated escrow account at the commencement of the drilling in January 2021, which it was. BlackBrush agreed to assign to the other parties to the Participation Agreement, subject to certain exceptions and limitations specified therein, specified portions of its leasehold working interest in certain Austin Chalk formation units. The Participation Agreement provides for an initial allocation of the working interests and net revenue interests among the assignor, BlackBrush and the Company and then a re-allocation upon payout or payment of drilling and completion costs for each well drilled. Prior to payout, the Company will own 90% of the working interest and 67.5% of the net revenue interest in each well. Following payout, the Company will own 70% of working interest and 52.5% net revenue interest in each well.
The Parties to the Participation Agreement, except for the Company, had previously entered into a Joint Operating Agreement, dated September 4, 2020 (the “Operating Agreement”) establishing an area of mutual interest, including the Austin Chalk formation, and governing the parties’ rights and obligations with respect to drilling, completion and operation of wells therein. The Participation Agreement and the Operating Agreement require, among other things, that White River SPV and the Company drill and complete at least one horizontal Austin Chalk well with a certain minimum lateral each calendar year and/or maintain leasehold by paying its proportionate share of any rental payments.
On September 30, 2020, the Company and White River Energy, LLC (“White River Energy”), a wholly owned subsidiary of the Company entered into three Asset Purchase Agreements (the “Asset Purchase Agreements”) with privately held limited liability companies to acquire working interests in the Harry O’Neal oil and gas mineral lease (the “O’Neal OGML”), the related well bore, crude oil inventory and equipment. Immediately prior to the acquisition, White River Energy owned an approximately 61% working interest in the O’Neal OGML oil well and a 100% working interest in any future wells.
The purchase prices of these leases were $126, $312 and $312, respectively, totaling $750. The consideration paid to the Sellers was in the form of 68 shares of common stock. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.
In February and March 2021, the Company acquired additional leases for $916 under the Blackbrush/Deshotel lease related to the Participation Agreement.
On August 16, 2021 the Company and Shamrock Upstream Energy, LLC,became a wholly-owned subsidiary of Fortium and issued the Company enterednon-voting Series A Convertible Preferred Stock (the “Series A”) which convert into an agreement with a privately-held limited liability company to acquire working interests in the Luling Prospect for $250. No other assets were acquired in this transaction, nor was there any recognized ARO for this working interest.approximately 82% of Fortium’s common stock. The Company accounted for this acquisition as an asset acquisition under ASC 805 and thatSeries A is only convertible after the Company elects to spin-off Fortium common stock to the Company’s shareholders and a Registration Statement covering the spin-off has early adoptedbeen declared effective. The Company’s Executive Chairman is also the amendmentsExecutive Chairman of Regulation S-X dated May 21, 2020Fortium and has concluded that this acquisition was not significant. Accordingly, as a resultthe Company’s Chief Financial Officer is the Chief Executive Officer of Fortium. The former Chief Executive Officer and director of Fortium is the son-in-law of the amendment,Company’s Executive Chairman. He resigned from all positions and the presentationnew Board of Directors (the “Board”) of Fortium includes the Company’s Executive Chairman and the Executive Chairman’s daughter as well as three other designees of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.Company.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
On September 1, 2021 the Company and White River Energy, LLC, a wholly-owned subsidiary of the Company entered into an agreement with several individuals to acquire working interests in the various leases in Concordia, LA for $54. No other assets were acquired in this transaction, nor was there any recognized ARO for this working interest. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.
Effective with the opening of trading on December 17, 2020, the Company effected a one-for-five reverse split of its issued and outstanding common stock and a simultaneous proportionate reduction of its authorized common stock. The reverse stock split was implemented without obtaining stockholder approval as permitted by Nevada law, and the authorized common stock was proportionately reduced to 40,00040,000,000 shares. All share and per share figures are reflected on a post-split basis herein.
Effective December 29, 2020, the Company amended its Articles of Incorporation to reduce the authorized common stock from 40,000 shares to 30,000 shares.
On December 31, 2020, the Company completed a registered direct offering, whereby the Company issued 889 shares of common stock and 889 accompanying warrants to one institutional investor under the effective Form S-3 at $9.00 per share and accompanying warrant for a total of $8,000 in gross proceeds, before placement agent fees and other offering expenses. The warrants are exercisable for a two-year term at a strike price of $10.00 per share. The Company granted 62 warrants to the placement agent as compensation in addition to the $560 cash commission received by the placement agent. The placement agent warrants are exercisable at $11.25 per share and expire on January 2, 2023.
On April 9, 2021, a Little Rock, Arkansas jury awarded Ecoark and Zest a total of $115 million in damages 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 Inc. misappropriated Zest’s trade secrets, failed to comply with a written contract, and acted willfully and maliciously in misappropriating Zest’s trade secrets. The Company has filed post-trial motions to add an award for their attorneys’ fees as the prevailing party in the litigation. In addition to other post-trial motions, Walmart, Inc. has 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 not ruled on any of the post-trial motionssecrets See Note 15 – Commitments and Contingencies – Legal Proceedings..
Trend Holdings formed four subsidiaries:subsidiaries including: Bitstream Mining, LLC, a Texas Limited Liability Corp.limited liability company (“Bitstream”) on May 16, 2021, REStream Processing LLC, a Texas Limited Liability Corp (“REStream”) on May 16, 2021,2021. In addition, Trend Discovery Exploration LLC, a Texas Limited Liability Corp. (“Trend Exploration”) on May 27, 2021, and OTZI, LLC, a Delaware Limited Liability Corp. (“OTZI”) on September 2, 2021, in addition toHoldings owned Barrier Crest, LLC (“Barrier Crest”) that was acquired along with Trend Capital Management, Inc. (“TCM”) that was acquired by Ecoark 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 digital assetBitcoin mining business. Because of regulatory uncertainty over digital assetsBitcoin being deemed to be securities, Agora’s initial focus is on mining Bitcoin which the Securities and Exchange Commission (the “SEC”) administratively determinedwe believe is not a security. Because of regulatory concerns and the changing regulatory environment, Agora intends to seek opportunities to engage with cryptocurrencies that do not involve the offer or sale of any securities. Because of the plunge in the price of Bitcoin and the type of miners Agora acquired pending its attempt to close an initial public offering, Agora determined it was not presently feasible to conduct Bitcoin mining operations and temporarily ceased such activities on March 3, 2022.
8
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
On November 19, 2021 Agora filed a registration statement on Form S-1 (File No. 333-261246) in connection with its initial public offering of 10,000,000 units comprised of shares of common stock and warrants to purchase an equal number of shares of common stock. The Agora registration statement has undergone a series of amendments since its initial filing in November 2021 and has not yet been declared effective by the Securities and Exchange Commission (“SEC”). In addition, in connection with Agora public offering, Agora has applied for its common stock and warrants to be listed on The Nasdaq Capital Market. Agora has encountered extensive review of its accounting disclosure policies by the Staff of the Securities and Exchange Commission as the Staff seeks to impose uniformity upon the industry. These delays and the fall of the price of Bitcoin has made the feasibility of the initial public offering uncertain.
The Company intends to issue a stock dividend through a pro rata distribution of Agora’s common stock to Ecoark’s common shareholders and holders of common stock equivalents. Ecoark plans to distribute 80% of the Agora common stock it holds to its shareholders as of a future record date to be determined upon completion of regulatory compliance. Ecoark plans to retain the remaining 20% ownership in Agora on its balance sheet. As a result of the approval by the board of directors of the CompanyCompany’s Board to divest Agora, the Company has accounted for this as a disposal other than by sale. Assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of. Upon disposal, the Company must assess whether the disposed of assets qualify for discontinued operations reporting. If so, the Company will apply the presentation and disclosure requirements of ASC 205-20, and if not, the Company will apply the presentation and disclosure requirements of ASC 360-10. Regardless of the outcome of the proposed initial public offering, Ecoark intends to spin-off Agora to its shareholders either directly or through a business combination.
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 one hundred shares for ten dollars. On October 1, 2021, the Company purchased 41,671 shares of Agora common stock for $4,167 which Agora used to purchase equipment to commence the Bitstream operations.
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)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
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 30,00030,000,000 shares to 40,00040,000,000 shares; (b) an amendment to the Ecoark Holdings Inc. 2017 Omnibus Incentive Plan to increase the number of shares of common stock authorized for issuance under this plan from 800800,000 shares to 1,3001,300,000 shares; and (c) the issuance of 272272,252 restricted stock units and an additional 6463,998 restricted stock units to the then President of Zest Labs and director of the Company under this plan,Plan, in exchange for the cancellation of 672672,499 previously issued stock options.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
Overview of Agora Digital Holdings, Inc.
Bitstream
Bitstream was organized to be our principal cryptocurrencyBitcoin mining subsidiary. Bitstream has entered into a series of agreements and arrangements including arranging for a reliable and economical electric power source needed to efficiently mine Bitcoin, orderingorder miners, housing infrastructure and other infrastructure to mine Bitcoin and locatinglocate a third-party hosting service to operate the miners and the service’s more advanced miners. Agora has spent (and agreed to spend) between $12-$14 million in connection with these agreements, not including future revenue sharing. Agora anticipates that the initial miners will begin operating in early November and by late December or January 2022, the Bitmain S19 Pro miners supplied by the hosting service will be operational. As of October 25, 2021, Bitstream has paid unaffiliated third parties a total of $4,755 and is obligated to pay certain of these third parties an additional $8,686 pursuant to the arrangements described below.
Bitstream anticipates that they will deploy and operate modularized data centers (facilities) with the sole purpose of mining digital assets, with Bitcoin initially as the focus. Agora anticipates powering these data centers by acquiring a long-term power contractAll significant accounting policies related to purchase electric power from the electric grid in Texas. Once the business is operational, Bitstream intends to continuously add data center facilities by reinvesting their revenues. All data centers will be remotely managed with onsite personnel for servicing and troubleshooting any operational issues. Bitstream plans to utilize the energy to power its energy intensive operations of digital asset mining. Additionally, if Texas experiences another power shortage during the winter or summer months from extreme weather conditions, Bitstream would be able to arbitrage power at favorable margins. Bitstream will do this by temporarily shutting down their cryptocurrency mining operations and selling their purchased power back to the grid at favorable margins. Last winter, during the blackout, the price per kWh exceeded $10 at its peak imbalance, whereas Bitstream’s power cost is expected to be $0.023 per kWh.
Bitstream has
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
Mining Equipment
Because Bitstream has secured a source for 42 MW of electrical power as more fully described below and expects to increase the capacity through conditional and unconditional rights to a number of sites across West Texas to up to 372 MW assuming this can be done on acceptable terms. In September 2021 Bitstream ordered 5,000 used Canaan Avalon 841 13 TH/s miners for $1,350. Delivery of the first shipment of 2,000 of these miners occurred in October 2021. Bitstream’s plan is to use trailer or shipping container-like units as housing infrastructure to house our miners. Bitstream will either build their own or partner with another third-party vendor to build entry level housing infrastructure to deploy the initial mining equipment in November. In August 2021, Bitstream entered into an agreement with a third party which will supply Bitstream with more advanced housing infrastructure in exchange for approximately $375. Delivery of these enhanced housing infrastructure is expected in late 2021 or early 2022.
In September 2021, Bitstream entered into a binding agreement referred to as a Memorandum of Understanding with Elite Mining Inc. (the “Hosting Company”) that will supply high speed miners, host the Company’s data center and operate the miners it installs. In Phase 1 which is a beta test phase, Bitstream paid $600 to the Hosting Company which will also supply 6 MW capacity’s worth of very high speed and efficient miners by mid-January 2022. Bitstream has an option to purchase these high-speed miners at replacement cost (which may be higher than current cost). The Hosting Company may provide hosting for third parties during Phase 1 which reduces the cash flow for Bitstream. This agreement will also allow Bitstream to utilize a minimum of 25 MW of electricity under the initial power purchase agreement in Phase 2. Bitstream can terminate the hosting agreement as soon as Bitstream has secured sufficient capital to replace the hosted Bitmain S19 Pros with their own. Once Bitstream purchases the high-efficiency miners, the Hosting Company cannot host third parties.
The Hosting Company uses immersion cooling, and other technological enhancements, for the miners it will install for Bitstream. Immersion cooling is a technique where Bitcoin mining units are submerged in a dielectric fluid to keep the integrated circuits operating at lower temperatures. When successful, this has the potential to: prolong equipment life, enhance hashing efficiencies, and provides the opportunity to “overclock” the processors, i.e., running at speeds beyond factory specified design. Overclocking, including when assisted by immersion cooling, is a technique that can be used to increase a miner’s overall hash rate.
Phase 2 is planned to begin in May 2022 which is subject to Bitstream agreeing to proceed. If Bitstream elects to enter Phase 2, it will be required to loan the Hosting Company the funds to develop a production facility in Texas on terms to be negotiated. Bitstream will have certain rights to the production facility capacity from Phase 2 and will pay the Hosting Company for its services.
In October 2021 Bitstream secured an additional 30 MWs of electrical capacity at a different West Texas location. This supplements the Company’s prior agreement to secure 12 MWs and as a result the Company will have a total of 42 MWs of electric power for immediate use and benefit to Bitstream. Bitstream also plans to participate in the Electric Reliability Council of Texas’ (“ERCOT”) responsive reserve market by relinquishing its power back to the Texas grid as power stabilization events are needed. Additionally, Bitstream has procured mining infrastructure to power the 42 MWs and expects the equipment and infrastructure to be delivered over the next 120 days. This mining infrastructure includes twenty-one 2,600 kilo-volt amp (KVA) or similar transformers and the Company’s first shipment of Bitcoin mining application-specific integrated circuits (“ASIC”). The Company has agreed to pay a total $3,376 for the new equipment and infrastructure as follows: (i) $506 upon the order which has been paid, (ii) $506 by November 11, 2021, and (iii) the remaining $2,364 by December 15, 2021.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
In connection with the increase in electrical capacity, Bitstream entered into a second binding letter of intent with the power management company pursuant to which the Company has paid a total of $2,955, consisting of a $2,628 development fee and a $327 reimbursement for payments made by the power management company to the electric utility to secure the power. In addition, the Company agreed to pay a total of $450 upon the power management company signing a binding agreement to acquire or lease 20 or more acres of usable land for Bitstream’s facility and construct a transmission line to the mining site.
Once the business is operational, Bitstream intends to continuously add data center platforms by reinvesting cash and potentially utilizing leverage to scale operations. All data centers will be remotely managed with onsite personnel for servicing and troubleshooting any operational issues.
White River, Shamrock, Barrier Crest provides fund administration and related services for small hedge funds. Trend Discovery Holdings LLC (“Trend Discovery”) owns an entity which is the general partner but not the investment manager of two investment funds. These investment funds own shares of Ecoark and one also owns warrants of Ecoark.
Trend Exploration was assigned an 80% working interest in fourteen wells from White River SPV 2, LLC and White River E&P LLC (“Assignors”) on July 1, 2021. In accordance with ASC 205-20, there is a scope exception for oil and gas properties that use the full-cost method of accounting. Under the full-cost method of accounting, all costs associated with property acquisition, exploration, and development activitiesCapital Management have been removed as these entities are capitalized to cost centers, which are established on a country-by-country basis. The definition of discontinued operations, however, applies to disposals of components of an entity, which is defined as the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. As a result, the definition of discontinued operations will not be operable under the full-cost method of accounting because of differences in the tracking and allocation of costs, which is at a much higher level. The Company as a result has not reflected the working interest on the fourteen wells in discontinued operations. The Trend Exploration business is identicalFor full details on the policies refer to the business noted herein for Banner Midstream.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
Principles of Consolidation
The condensed consolidated financial statements of Ecoark Holdings and its subsidiaries and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature.
The unaudited condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021. Therefore, the interim unaudited condensed consolidated financial statements should be read in conjunction with that Annual Report2022 filed on Form 10-K.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 they owned in Trend Holdings to Agora on September 22, 2021 when the Company purchased 100 shares of Agora common stock for ten dollars.$10.
The Company intends to issue a stock dividend through a pro rata distribution of Agora’s common stock to Ecoark’s common shareholders and holders of common stock equivalents. Ecoark plans to distribute 80% of the Agora common stock it holds to its shareholders as of a future record date to be determined upon completion of regulatory compliance. Ecoark plans to retain the remaining 20% ownership in Agora on its balance sheet. As a result of the approval by the board of directors of the CompanyBoard to divest Agora, the Company, has accounted for this as a disposal other than by sale. Assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of. Upon disposal, the Company must assess whether the disposed of assets qualify for discontinued operations reporting.
If so, the Company will apply the presentation and disclosure requirements of ASC 205-20, and if not, the Company will apply the presentation and disclosure requirements of ASC 360-10.
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
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 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. 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 90.1%), 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.
There were no changes in the three months ended June 30, 2022 related to the non-controlling interest the Company has in Agora.
Reclassifications
The Company has reclassified certain amounts in the SeptemberJune 30, 2020 unaudited2021 condensed consolidated financial statements to be consistent with the SeptemberJune 30, 2022 presentation, including the reclassification of Barrier Crest, TCM, and White River assets and liabilities from continuing operations to held for sale and reclassifications of operations of Barrier Crest, TCM, and White River to discontinued operations. The March 31, 2022 consolidated balance sheet has been reclassified to include the assets and liabilities held for sale for White River as well. Additionally, we have removed all rounding of amounts and shares from the June 30, 2021 presentation to conform to the June 30, 2022 presentation. These changes had no impact on the Company’s financial position or result of operations for the periods presented.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
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, with the issuance of restricted common stock to directors, management and advisors, the Company no longer owns 100% of Agora. As of June 30, 2022 and March 31, 2022, approximately 9.1% is reflected as non-controlling interest of that entity.
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:
| ● | Step 1: Identify the contract with the customer |
| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
The estimates of proved, probable and possible oil and gas reserves are used as significant inputs in determining the depletion of oil and gas properties and the impairment of proved and unproved oil and gas properties. There are numerous uncertainties inherent in the estimation of quantities of proven, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves and commodity price outlooks. Actual results could differ from the estimates and assumptions utilized.
Oil and Gas Properties
The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under the full cost method of accounting, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs are capitalized. General and administrative costs related to production and general overhead are expensed as incurred.
All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit of production method using estimates of proved reserves. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in operations. Unproved properties and development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the loss from operations before income taxes and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method.
There was $1,140 and $126 and $422 and $73 in depreciation, depletion and amortization expense for the Company’s oil and gas properties for the six and three months ended September 30, 2021 and 2020, respectively.
Limitation on Capitalized Costs
Under the full-cost method of accounting, we are required, at the end of each reporting period, to perform a test to determine the limit on the book value of our oil and gas properties (the “Ceiling” test). If the capitalized costs of our oil and natural gas properties, net of accumulated amortization and related deferred income taxes, exceed the Ceiling, the excess or impairment is charged to expense. The expense may not be reversed in future periods, even though higher oil and gas prices may subsequently increase the Ceiling. The Ceiling is defined as the sum of: (a) the present value, discounted at 10% and assuming continuation of existing economic conditions, of (1) estimated future gross revenues from proved reserves, which is computed using oil and gas prices determined as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month hedging arrangements pursuant to Staff Accounting Bulletin (“SAB”) 103, less (2) estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves; plus, (b) the cost of properties being amortized; plus, (c) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; net of (d) the related tax effects related to the difference between the book and tax basis of our oil and natural gas properties. A ceiling test was performed as of September 30, 2021 and there was no indication of impairment on the oil and gas properties.
| ● | Step 5: Recognize revenue when the Company satisfies a performance obligation |
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
Oil and Gas Reserves
Reserve engineering is a subjective process that is dependent uponIn order to identify the quality of available data and interpretation thereof, including evaluations and extrapolations of well flow rates and reservoir pressure. Estimates by different engineers often vary sometimes significantly. In addition, physical factors such as results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changesperformance obligations in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using recent prices of the evaluation, estimated reserve quantities can be significantly impacted by changes in product prices.
Joint Interest Activities
Certain of our exploration, development and production activities are conducted jointly with other entities and, accordingly, the consolidated financial statements reflect only our proportionate interest in such activities.
Inventories
Crude oil, products and merchandise inventories are carried at the lower of cost (last-in-first-out (LIFO)) or net realizable value. Inventory costs include expenditures and other charges directly and indirectly incurred in bringing the inventory to its existing condition and location.
Accounting for Asset Retirement Obligation
Asset retirement obligations (“ARO”) primarily represent the estimated present value of the amount the Company will incur to plug, abandon and remediate its producing properties at the projected end of their productive lives, in accordance with applicable federal, state and local laws. The Company determined its ARO by calculating the present value of the estimated cash flows related to the obligation. The retirement obligation is recorded as a liability at its estimated present value as of the obligation’s inception, with an offsetting increase to proved properties or to exploration costs in cost of revenue.
Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.
The Company accounts for a contract when it has been approved and committed to, each party’s rights regarding the goods or services to be transferred have been identified, the payment terms have been identified, the contract has commercial substance, and collectability is probable. Revenue is generally recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
Revenue from software license agreements of Zest Labs is recognized over time or atwith a point in time depending on the evaluation of when the customer, obtains control ofa company must assess the promised goods or services overin the termcontract 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 agreement. For agreements wherefollowing criteria are met: The customer can benefit from the software requires continuous updatesgood or service either on its own or together with other resources that are readily available to provide the intended functionality, revenuecustomer (i.e., the good or service is recognized overcapable of being distinct), and the termentity’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 agreement. For software ascontract).
If a good or service (“SaaS”) contractsis 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 multiple performance obligations, including hardware, perpetual software licenses, subscriptions, term licenses, maintenance and other services,fixed amounts, variable amounts, or both. When determining the Company allocatestransaction price, an entity must consider the effects of all of the following:
| ● | Variable consideration |
| ● | Constraining estimates of variable consideration |
| ● | The existence of a significant financing component in the contract |
| ● | Noncash consideration |
| ● | Consideration payable to a customer |
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 based on estimates ofa relative standalone selling price basis. The standalone selling price is the price that would be charged to the customer for each promised product or service if it were sold on a standalone basis. For contracts for new products and services where standalone pricing has not been established,at which the Company allocates revenuewould sell a promised service separately to a customer. The relative selling price for each performance obligation based on estimatesis estimated using the adjusted market assessment approach, the expected cost plus a margin approach or the residual approach as appropriate under the circumstances. Contracts are typically on thirty-day payment terms from whenobservable objective evidence if it is available. If observable objective evidence is not available, the Company satisfies the performance obligation in the contract. The Company did not have material revenue from software license agreements in the six and three months ended September 30, 2021 and 2020, respectively.
Revenue under master service agreements is recorded upon the performance obligation being satisfied. Typically, the satisfactionuses its best estimate of the performance obligation occurs uponselling price for the frac sand load being delivered topromised service. In instances where the customer site and this load being successfully invoiced and accepted by the Company’s factoring agent.Company does not sell a service separately, establishing standalone selling price requires significant judgment.
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
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.
The Company recognizes revenue upon satisfaction of its performance obligation at a point in time in accordance with ASC 606-10-25-30 for its contracts in its Commodities segment or 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.
Bitcoin Mining
The discussion here should be understood as being applicable while Agora was conducting mining operations which it temporarily ceased beginning March 3, 2022, and will apply at such time as it mines again. As consideration for providing computing power, Agora received Bitcoin from the mining pool in which it participates. Income from Bitcoin mining (mining earnings are made up of the baseline block reward and transaction fees, defined as “rewards”) which is measured based on the fair value of the Bitcoin received.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
Providing computing power in Bitcoin transaction verification services (known as “mining”) is an output of Agora’s ordinary activities. The provision of computing power is the only performance obligation in Agora’s contracts with mining pool operators, its customers. At such time as Agora re-commences mining activities, it will recognize income from Bitcoin mining for the provision of computing power upon satisfaction of its performance obligation. As consideration for the provision of computing power, Agora is entitled to payment in Bitcoin, which is a form of noncash consideration. Noncash consideration is measured at fair value at contract inception. Fair value of the Bitcoin consideration is determined using the quoted price on Agora’s primary trading platform of the Bitcoin at the beginning of the contract period, which is considered to be the beginning of each twenty-four-hour period (at contract inception). Specifically, fair value at contract inception is based on the market price at the beginning of the contract term, at the single Bitcoin level (one Bitcoin). This amount is recognized in revenue over the contract term as hash rate is provided. Changes in the fair value of the noncash consideration due to form of the consideration (changes in the market price of Bitcoin) are not included in the transaction price and hence are not included in revenue. Changes in fair value of the noncash consideration post-contract inception that are due to reasons other than form of consideration (other than changes in the market value of bitcoin) are measured based on the guidance on variable consideration, including the constraint on estimates of variable consideration.
Because the consideration to which Agora expects to be entitled for providing computing power is entirely variable, as well as being noncash consideration, the Company assesses the estimated amount of the variable noncash consideration to which it expects to be entitled for providing computing power at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved (the “constraint”). Only when significant revenue reversal is concluded probable of not occurring can estimated variable consideration be included in revenue. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the estimated variable noncash consideration is constrained from inclusion in revenue until the end of the contract term, when the underlying uncertainties have been resolved and number of Bitcoin to which Agora is entitled becomes known.
Bitcoin is recorded on the consolidated balance sheet, as intangible asset — Bitcoin.
Agora has entered into a Bitcoin mining pool with the mining pool operator F2Pool, to provide computing power to the mining pool. The arrangement is terminable at any time by either party and Agora’s enforceable right to Bitcoin compensation only begins when Agora provides computing power to the mining pool operator.
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JUNE 30, 2022
Agora’s performance obligation extends over the contract term given the Company’s continuous provision of hash rate. This period of time corresponds with the period of service for which the mining pool operator determines compensation due Agora. Given cancelation terms of the contracts, all contracts effectively provide Agora with the option to renew for successive contract terms of twenty-four hours. The options to renew are not material rights because they are offered at the standalone selling price of computing power. In exchange for providing computing power, Agora is entitled to consideration equal to a fractional share of the fixed Bitcoin reward the mining pool operator receives (referred to as a “block reward”) after such amount has been reduced by a digital asset transaction fee retained by the mining pool operator, and potentially network transaction fees. Agora’s fractional share is based on the proportion of computing power Agora contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm, over the contract term. Agora is entitled to compensation for providing computing power to a mining pool even if a block is not successfully placed. The block reward provides an incentive for Bitcoin miners to process transactions made with Bitcoin. Creating an immutable record of these transactions is vital for Bitcoin to work as intended. The blockchain is like a decentralized bank ledger, one that cannot be altered after being created. The miners are needed to verify the transactions and keep this ledger up to date. Block rewards, and to a lesser extent, network transaction fees, are their payment for doing so.
The terms of the agreement with the mining pool operator provide that neither party can dispute settlement terms after thirty-five days following settlement.
For the mining pool in which Agora participates, Agora is entitled to a transaction price, calculated by Agora’s mining pool operator. Specifically, the mining pool operator determines the amount of block rewards to which Agora is entitled by using the Pay-Per-Shares-Plus (PPS+) payment method, retaining 2.5% to cover costs of operating the pool (the “digital asset transaction fee”), and includes network transaction fees as applicable. When Agora’s number of Bitcoin reaches the minimum threshold of 0.005 Bitcoin, Agora receives a payout and the pool transfers the Bitcoin consideration to Agora’s designated wallet within 8 hours, between 00:00 and 08:00 UTC.
The PPS+ payment method pays miners for the number of shares they contribute to the pool (effectively, the amount of computing power provided to the pool) plus network transaction fees. Shares can be described as discrete amounts of valid work each miner or mining farm contributes to the pool. The value of each share contributed is determined by the Bitcoin’s current network difficulty and the number of total shares contributed from miners and mining farms. Bitcoin rewards are received regardless if a pool successfully found a block because the mining pool operator understands that, probabilistically, blocks will be successfully found in a statistically predictable manner by the pool depending on the total amount of hashing power (shares) contributed by the miners and mining farms and therefore, pays out as if a block was found. This is a strategy that provides regular payments to miners and allows consistent payouts.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
Network transaction fees, however, are paid out based on blocks actually found and solved and therefore the network transaction fee revenue is not consistently paid out. We expect that network transaction fees will be a very small contributor to total miner Bitcoin rewards.
Agora’s cost of Bitcoin revenue consists primarily of direct costs of earning the Bitcoin related to mining operations, namely electric power costs, other utilities, labor, insurance whether incurred directly from self-mining operations or reimbursed, including any revenue sharing arrangements under ASC 606hosting agreements, but excluding depreciation and amortization, which are separately stated in the Company’s Consolidated Statement of Operations.
Commodities
The Company recognized revenue for their proportionate share of oil and gas drilling revenue when: (i) the Company receives notification of the successful sale of a load of crude oil to a buyer; (ii) the buyer will provide a price based on the average monthly price of crude oil in the most recent month; and (iii) cash is received the following month from the crude oil buyer.
The Company will recognize income from digital currency mining from the provision of transaction services within digital currency networks, commonly termed “cryptocurrency mining”. As consideration for those services, the Company will receive digital currency from each specific network in which it participates (“coins”). Income from digital currency mining is measured based on the fair value of the coins received. The fair value is determined using the spot price of the coin on the date of receipt. The coins are recorded on the consolidated balance sheet, as intangible asset – digital currency, at their fair value less costs to sell and re-measured each reporting date, if not sooner. Revaluation gains or losses on the sale of coins for traditional (fiat) currencies will be included in the consolidated statements of operations in accordance with the Company’s treatment of its digital currencies as a traded commodity.
The Company accounts for contract costs in accordance with ASC Topic 340-40, Contracts with Customers. The Company recognizes the cost of sales of a contract as expense when incurred or at the time a performance obligation is satisfied. The Company recognizes an asset from the costs to fulfil 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 incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained.
Cost of sales for Pinnacle Frac includes all direct expenses incurred to produce the revenue for the period. This includes, but is not limited to, direct employee labor, direct contract labor and fuel.
Revenue under master service agreements is recorded upon the performance obligation being satisfied. Typically, the satisfaction of the performance obligation occurs upon the frac sand load being delivered to the customer site and this load being successfully invoiced and accepted by the Company’s factoring agent.
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.
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
For Pinnacle Frac, accounts receivable is comprised of unsecured amounts due from customers that have been conveyed to a factoring agent for both with and without recourse. Pinnacle Frac receives an advance from the factoring agent of 98% of the amount invoiced to the customer within one business day. The Company recognizes revenue for 100% of the gross amount invoiced, records an expense for the 2% finance charge by the factoring agent, and realizes cash for the 98% net proceeds received. The Company has recognized an allowance for doubtful accounts of $209 and $109 as of September 30, 2021 and March 31, 2021, respectively.
Fair Value Measurements
ASC 820 Fair Value Measurements defines fair value, establishes a framework for measuring fair value in accordance with GAAP,U.S. generally accepted accounting principles (“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. |
| 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. |
| Level 3 inputs: Instruments with primarily unobservable value drivers. |
Level 1 inputs: Quoted prices for identicalThe carrying values of the Company’s financial instruments in active markets.such as cash, accounts payable, and accrued expenses approximate their respective fair values because of the short-term nature of those financial instruments.
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.
Level 3 inputs: Instruments with primarily unobservable value drivers.
Digital currencies will consist of cryptocurrency denominatedBitcoin assets and will be includedpresented in current assets. Digital currencies will be carried at their fair value determined by the spot rate less costs to sell. The digital currency market is still a new market and is highly volatile; historical prices are not necessarily indicative of future value; a significant change in the market prices for digital currencies would have a significant impact on the Company’s earnings and financial position. Fair value will be determined by taking the price of the coins from the exchangestrading platforms which the CompanyAgora will most frequently use.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
Digital CurrenciesBitcoin
Digital currencies will beBitcoin is included in current assets in the consolidated balance sheets as intangible assets with indefinite useful lives. Digital currencies areBitcoin is recorded at cost less impairment.
The Company accounts for Agora’s Bitcoin as indefinite-lived intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value.
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
The Company determines the fair value whichof Agora’s Bitcoin on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active trading platform that Agora has determined is measured usingits principal market for Bitcoin (Level 1 inputs). Agora performs an analysis each day comparing the quoted pricecarrying amount of the digital currencyAgora’s Bitcoin with their fair value based on the lowest market price that day at the time its fair value is being measured. In testing forsingle Bitcoin level (one bitcoin). The excess, if any, represents a recognized impairment loss. Impairment losses are recorded in the Company hasline item “Bitcoin impairment losses” in the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. Company’s Consolidated Statements of Operations.
To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. Bitcoin awarded to Agora through its mining activities are included as an adjustment to reconcile net loss to cash provided by (or used in) operating activities on the accompanying Consolidated Statements of Cash Flows. The sales (if any) of Bitcoin are included within investing activities in the accompanying Consolidated Statements of Cash Flows and any realized gains or losses (if any) from such sales are included in operating income in the Company’s Consolidated Statement of Operations. The Company accounts for sales of Bitcoin in accordance with the first in first out (FIFO) method of accounting.
Impairment losses related to Bitcoin is included in the Bitcoin Mining segment.
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. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. The Company and its chief operating decision makers determined that the Company’s operations effective with the May 31, 2019, acquisition of Trend Holdings and the March 27, 2020 acquisition of Banner Midstream consisted of three segments, Financial, Commodities and Technology. Effective July 1, 2021, the Company’s chief operating decision makers in discussion with the finance team determined that the Company willwould add a fourth reporting segment to account for their Digital AssetBitcoin mining business. Additionally, on July 1, 2021 the Company will reportnow reports its home office costs into the Commodity segment, chargeand charged its Technology segment a monthly overhead fee, and has recorded typical overhead expenses in their Finance and Digital AssetBitcoin Mining segments to account for this home office allocation.
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
The Company classified their 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 three months ended June 30, 2021. Effective April 1, 2022, the Company has classified their segments in the Commodity Segment, Technology Segment and Bitcoin Mining Segment. They now charge 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. The Company determined that pursuant to ASC 205-20-45-1E that the operations related to White River’s oil and gas production business would be reclassified as held for sale as those criteria identified in the pronouncement had been satisfied as of July 25, 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 three months ended June 30, 2022.
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.
The Company has adjusted the diluted EPS for the three months ended June 30, 2021 for warrants classified as derivative liabilities in accordance with ASC 260-10-45 as follows. No calculation is necessary for the three months ended June 30, 2022 because to do so would be anti-dilutive.
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
| June 30, 2021 | ||||
| Diluted EPS: | ||||
| Net income to controlling interest | $ | 2,559,525 | ||
| Change in fair value of derivative liability | (4,945,819 | ) | ||
| Adjusted net loss | $ | (2,386,294 | ) | |
| Weighted Average Shares Outstanding | 26,372,172 | |||
| Adjusted (loss) per share | $ | (0.09 | ) | |
Derivative Financial Instruments
The Company does not currently use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.risks, but may explore hedging oil prices in the current fiscal year. 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.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
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 is currently evaluating the impact thatdoes not believe this new guidance will have a material impact on its consolidated financial statements.
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
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 is currently evaluating thedoes not believe this new guidance will have a material impact of this standard 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 sixthree months ended SeptemberJune 30, 20212022 and 2020,2021, the Company had a net lossincome (loss) of $(3,296)$(10,196,534) and ($12,196),$2,559,525, respectively, has a working capital deficit of $8,733$864,794 and $11,845$8,394,850 as of SeptemberJune 30, 20212022 and March 31, 2021,2022, and has an accumulated deficit as of SeptemberJune 30, 20212022 of $152,207.$(169,064,738). As of SeptemberJune 30, 2021,2022, the Company has $7,895$8,325,121 in cash and cash equivalents from continuing operations. The Company alleviatedwhich includes $3,000,000 transferred to White River prior to the substantial doubt regarding this uncertainty as of March 31, 2020 which continues to be alleviated at September 30, 2021 as a result of the Company’s acquisition of Banner Midstream on March 27, 2020, coupled with the raising of funds through the exercise of warrants and options and the sale of common stock and warrants during the year ended March 31, 2021 and through the six months ended September 30, 2021.Fortium sale.
IfSee Note 13, “Mezzanine Equity” 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 raises additional funds by issuingto engage in any equity securities, its stockholders would experience dilution. Additionalor debt financing, if available, may involve covenants restricting its operations or its ability to incur additional debt. Any additional debtand it is not likely approval for any financing or additional equity that the Company raises may contain terms that are not favorable to it or its stockholders and require significant debt service payments, which diverts resourceswill be obtained unless from other activities. If the Company is unable to obtain additional financing, it may be required to significantly scale back its business and operations. such investor.
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
The Company’s ability to raise additional capital will also be impacted by the heightened societal and regulatory focus onSEC’s proposed climate change rules which are expected to become effective in the 2023 fiscal year and may also be impacted by the COVID-19 pandemic including the current supply chain shortages.
The Company believes that the current cash on hand and anticipated cash from operations is sufficient to conduct planned operations for one year from the issuance of the consolidated financial statements.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
Impact of COVID-19
The COVID-19 pandemic previouslyhas had a profound effect on the U.S. and global economy and 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 six and three months ended SeptemberJune 30, 20212022 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 the world.its business.
Because the federal government and some state and local authorities are reacting to the current Delta variant of COVID-19, it is creating uncertainty on whether these actions could disrupt the operation of the Company’s business and have an adverse effect on the Company. The extent to which the COVID-19 outbreak 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 businessbusinesses 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.
In April 2020, the Company and one of its subsidiaries entered into PPP loans with financial institutions. Of the $1,869 in PPP loans obtained this fiscal year, the Company was informed that $1,850 (including $11 in accrued interest) had been forgiven in the three months ended December 31, 2020. The remaining $30 with accrued interest of $2 was converted into a loan that is due in May 2022, with payments of $2 per month that commenced December 19, 2020. The Company repaid this loan in full in September 2021.23
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
NOTE 2: 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 (see 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 sale and the operations as discontinued operations as of and for the year ended March 31, 2022 as well as for the period April 1, 2022 through June 17, 2022. The Company accounted for this sale as a disposal of the business under ASC 205-20-50-1(a) on June 17, 2022 at which time the gain was recognized. As a result of this reclassification, the Company identified the following assets and liabilities that were reclassified from continuing 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. The Company determined that pursuant to ASC 205-20-45-1E that the operations related to the oil and gas production business would be reclassified as held for sale as those criteria identified in the pronouncement had been satisfied as of July 25, 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 three months ended June 30, 2022.
Current assets as of June 30, 2022 and March 31, 2022 – Discontinued Operations:
| June 30, 2022 | March 31, 2022 | |||||||
| Cash | $ | 62,858 | $ | 291,673 | ||||
| Accounts receivable | 795,178 | 658,481 | ||||||
| Inventory | 136,007 | 107,026 | ||||||
| Prepaid expenses | 519,262 | 313,593 | ||||||
| $ | 1,513,305 | $ | 1,370,773 | |||||
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
Non-current assets as of June 30, 2022 and March 31, 2022 – Held for Sale / Discontinued Operations:
| June 30, 2022 | March 31, 2022 | |||||||
| Goodwill | $ | 2,100,374 | $ | 5,323,173 | ||||
| Property and equipment, net | 1,182,034 | 596,464 | ||||||
| Oil and gas properties, full cost-method | 5,536,495 | 6,626,793 | ||||||
| Capitalized drilling costs, net of depletion | 348,725 | 604,574 | ||||||
| Right of use asset – operating leases | 207,842 | 226,417 | ||||||
| $ | 9,375,470 | $ | 13,377,421 | |||||
Pursuant
Current liabilities as of June 30, 2022 and March 31, 2022 – Held for Sale / Discontinued Operations:
| June 30, 2022 | March 31, 2022 | |||||||
| Accounts payable and accrued expenses | $ | 659,660 | $ | 985,447 | ||||
| Current portion of long-term debt | 41,414 | - | ||||||
| Current portion of lease liability – operating leases | 156,259 | 148,206 | ||||||
| $ | 857,333 | $ | 1,133,653 | |||||
Non-current liabilities as of June 30, 2022 and March 31, 2022 – Held for Sale / Discontinued Operations:
| June 30, 2022 | March 31, 2022 | |||||||
| Lease liabilities – operating leases, net of current portion | $ | 70,762 | $ | 100,215 | ||||
| Long-term debt | 103,853 | - | ||||||
| Asset retirement obligations | 746,061 | 1,303,751 | ||||||
| $ | 920,676 | $ | 1,403,966 | |||||
The Company reclassified the following operations to ASC 205-20, Presentationdiscontinued operations for the three months ended June 30, 2022 and 2021, respectively.
| 2022 | 2021 | |||||||
| Revenue | $ | 1,741,106 | $ | 1,722,779 | ||||
| Operating expenses | 3,781,504 | 2,155,181 | ||||||
| Other (income) loss | (397,956 | ) | (598,860 | ) | ||||
| Net (loss) income from discontinued operations | $ | (1,642,442 | ) | $ | 166,458 | |||
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
The following represents the calculation of Financial Statements – Discontinued Operations, ASC-20-45-1B, paragraph 360-10-45-15,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 | $ | - | ||||
As of April 1, 2021, all of the equipment assets and accounts payable of Pinnacle Vac Services LLC (“Pinnacle Vac”) were transitioned into Capstone to continue servicing the debt. As a result, there are no assets or liabilities of discontinued operations that remain, and no income or loss from discontinued operations for the six and three months ended September 30, 2021 and 2020.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
NOTE 3: 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.
The following table disaggregates the Company’s revenue by major source for the six and three months ended September 30:June 30 for continuing operations:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue: | ||||||||||||||||
| Financial Services | $ | 200 | $ | 104 | $ | 348 | $ | 194 | ||||||||
| Oil and Gas Production | 1,269 | 525 | 2,837 | 676 | ||||||||||||
| Transportation Services | 4,577 | 2,575 | 9,617 | 4,549 | ||||||||||||
| Fuel Rebate | 57 | 31 | 154 | 77 | ||||||||||||
| Equipment Rental | 8 | 43 | 34 | 95 | ||||||||||||
| $ | 6,111 | $ | 3,278 | $ | 12,990 | $ | 5,591 | |||||||||
| 2022 | 2021 | |||||||
| Revenue from continuing operations: | (unaudited) | (unaudited) | ||||||
| Bitcoin mining | $ | - | $ | - | ||||
| Transportation Services | 5,348,225 | 5,037,994 | ||||||
| Fuel Rebate | 63,095 | 92,406 | ||||||
| Equipment Rental and other | 7,335 | 25,813 | ||||||
| $ | 5,418,655 | $ | 5,156,213 | |||||
There were no significant contract asset or contract liability balances for all periods presented. The Company elected the practical expedients in paragraphs 606-10-50-14 and 50-14A and does not disclose the valueamount of unsatisfiedtransaction price allocated to remaining performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.performed, or variable consideration related to future service periods.
Collections of the amounts billed are typically paid by the customers within 30 to 60 days.
NOTE 4: INVENTORIES
The Company’s inventory as of September 30, 2021 and March 31, 2021 of $101 and $122, respectively, consisted of crude oil of approximately 4,912 and 6,198 barrels of unsold crude oil (these amounts are not rounded in thousands), respectively, using the lower of cost (LIFO) or net realizable value.
NOTE 5: NOTE RECEIVABLE
The Company entered into a $225 senior secured convertible promissory note on June 18, 2020 with Rabb Resources, LTD. The Company had an existing note in the amount of $25 that had not been secured, and rolled an additional $200 into Rabb Resources, LTD, whereby the entire amount became secured. The note was non-interest bearing if paid or converted within forty-five days of the issuance date of June 18, 2020 (August 2, 2020, which is the maturity date). If not paid or converted, the note bore interest at 11% per annum, paid in cash on a quarterly basis.26
This note was convertible into shares of Rabb Resources, LTD. based on a valuation of Rabb Resources, LTD. into shares of that company at a value of the $225. The Company advanced an additional $50 on July 8, 2020 and $25 on August 7, 2020 to bring the total note receivable to $300. This amount plus the accrued interest receivable of $4 was due as of August 14, 2020.
On August 14, 2020, the Company entered into an Asset Purchase Agreement with Rabb Resources, LTD. which included the acquisition of real property. The purchase price for this acquisition was $3,500, of which $1,196 was paid in cash (after applying the outstanding principal of the note receivable and accrued interest receivable against the $1,500 agreed upon cash consideration) and the balance was paid in common stock of the Company. The Company accounted for this acquisition as an asset purchase (see Note 16). There were no amounts outstanding as of September 30, 2021 and March 31, 2021, respectively.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
Bitcoin Mining
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 resolved 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 for the bitcoin network) 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.
27
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
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.
NOTE 4: 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. The Trend Ventures Note is in the principal amount of $4,250,000, bears interest at the rate of 5% per annum, and matures June 16, 2025. Under 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 Agreement executed on the same date as the Trend Ventures Note, by and among Trend Ventures, LP, its future subsidiaries (each a Guarantor) and Agora dated as of June 16, 2022.
As of June 30, 2022, the Company has recognized $8,385 in interest income and accrued interest receivable.
NOTE 5: BITCOIN
Agora commenced their Bitcoin mining operations in November 2021. Through June 30, 2022, Agora mined 0.57361732 Bitcoins (none in the three months ended June 30, 2022). Agora temporarily ceased Bitcoin mining on March 3, 2022. The value of the Bitcoin mined was $26,495 of which $16,351 has been impaired through June 30, 2022. During the three months ended June 30, 2022, the Company recognized Bitcoin impairment losses of $9,122, to bring the carrying value of the Bitcoin down to its fair value. The carrying value at June 30, 2022 was $10,145, which represents the lowest fair value of the Bitcoins at any time since their mining. Agora did not sell any of its Bitcoin at any point during this period.
The following table presents additional information about Agora’s Bitcoin holdings during the three months ended June 30, 2022:
| Beginning balance – April 1, 2022 | $ | 19,267 | ||
| Bitcoin mined at initial fair value | - | |||
| Bitcoin impairment losses | (9,122 | ) | ||
| Ending balance – June 30, 2022 | $ | 10,145 |
28
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
NOTE 6: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of SeptemberJune 30, 20212022 and March 31, 2021:2022:
| September 30, 2021 | March 31, 2021 | June 30, 2022 | March 31, 2022 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Zest Labs freshness hardware | $ | 2,493 | $ | 2,493 | ||||||||||||
| Computers and software costs | 222 | 222 | ||||||||||||||
| Zest Labs freshness hardware, equipment and computer costs | $ | 2,915,333 | $ | 2,915,333 | ||||||||||||
| Land | 140 | 140 | 125,000 | 125,000 | ||||||||||||
| Buildings | 236 | 236 | - | - | ||||||||||||
| Leasehold improvements – Pinnacle Frac | 18 | 18 | 18,052 | 18,052 | ||||||||||||
| Mining technology equipment – Digital Asset | 4,247 | - | ||||||||||||||
| Machinery and equipment – Technology | 200 | 200 | ||||||||||||||
| Mining technology equipment– Bitcoin | 7,065,640 | 7,065,640 | ||||||||||||||
| Machinery and equipment – Bitcoin | 91,132 | 91,132 | ||||||||||||||
| Machinery and equipment – Commodities | 3,577 | 3,385 | 699,512 | 3,256,686 | ||||||||||||
| Total property and equipment | 11,133 | 6,694 | 10,914,669 | 13,471,843 | ||||||||||||
| Accumulated depreciation and impairment | (3,345 | ) | (2,999 | ) | (2,796,146 | ) | (3,738,734 | ) | ||||||||
| Property and equipment, net | $ | 7,788 | $ | 3,695 | $ | 8,118,523 | $ | 9,733,109 | ||||||||
As of September 30, 2021 and 2020,March 31, 2022, the Company performed an evaluation of the recoverability of these long-lived assets. The analysis resulted inAs a result of the evaluation, there was no impairment as of related to these assets.the fixed assets necessary.
On April 1, 2021, the Company placed back in service equipment of $201$201,388 with accumulated depreciation of $7$7,484 which were part of discontinued operations related to Pinnacle Vac. These assets are equipment related to Capstone who is servicing the debt related to the assets. The Company has $6,720,809 in assets that have not placed into service as of March 31, 2022.
The Company in April 2021 traded in a truck with a value of $5$5,447 for a new truck with a value of $3$2,532 and received cash of $2$2,500 in the exchange. In February 2022, the Company traded in a vehicle valued at $51,806 for a new vehicle valued at $91,132.
On April 11, 2022, the Company sold equipment of $2,557,172, that had accumulated depreciation of $1,027,148 for a net value of $1,530,024 for $580,000. The mining technology equipment – digital assets have not been placed into service asresult was a loss on sale of September 30 2021, therefore there has been no depreciation taken on these assets as of September 30, 2021.$950,024.
Depreciation expense for the six and three months ended SeptemberJune 30, 2022 and 2021 was $84,561 and 2020 was $346 and $172, and $341 and $171,$164,975, respectively.
29
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
NOTE 7: INTANGIBLE ASSETS AND GOODWILL
Intangible assets consisted of the following as of SeptemberJune 30, 20212022 and March 31, 2021: 2022:
| September 30, 2021 | March 31, 2021 | June 30, 2022 | March 31, 2022 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Patents | $ | 1,013 | $ | 1,013 | $ | 1,012,672 | $ | 1,012,672 | ||||||||
| Customer relationships | 2,100 | 2,100 | 2,100,000 | 2,100,000 | ||||||||||||
| Non-compete agreements – Banner Midstream | 250 | 250 | 250,000 | 250,000 | ||||||||||||
| Outsourced vendor relationships | 1,017 | 1,017 | 1,016,736 | 1,016,736 | ||||||||||||
| Non-compete agreements – Zest Labs | 340 | 340 | 340,215 | 340,215 | ||||||||||||
| Total intangible assets | 4,720 | 4,720 | 4,719,623 | 4,719,623 | ||||||||||||
| Accumulated amortization and impairment | (2,829 | ) | (2,655 | ) | (3,067,535 | ) | (3,003,292 | ) | ||||||||
| Intangible assets, net | $ | 1,891 | $ | 2,065 | $ | 1,652,088 | $ | 1,716,331 | ||||||||
In the acquisition of Banner Midstream, the Company acquired the customer relationships and non-compete agreements valued at $2,350. The estimated useful lives of the customer relationships is ten years based on the estimated cash flows from those customer contracts, and the estimated useful lives of the non-compete agreement is five years amortized over a straight-line method.
Amortization expense for the six and three months ended SeptemberJune 30, 2022 and 2021 was $64,243 and 2020 was $174 and $87, and $142 and $71,$87,204, respectively.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
The following is the future amortization of the intangibles as of SeptemberJune 30:
| 2022 | $ | 303 | ||||||
| 2023 | 261 | $ | 259,103 | |||||
| 2024 | 264 | 264,512 | ||||||
| 2025 | 241 | 251,129 | ||||||
| 2026 | 210 | 214,923 | ||||||
| 2027 | 201,111 | |||||||
| Thereafter | 612 | 461,310 | ||||||
| $ | 1,891 | $ | 1,652,088 | |||||
In addition to the statutory based intangible assets noted above, the Company recorded a total of $10,225$7,001,247 of goodwill in connection with the purchase of TrendBanner Midstream. Of this amount, $2,100,374 is included in assets held for sale as it relates to the oil and Banner Midstream.gas production business.
Accordingly, goodwill was as follows as of September 30, 2021:
| Acquisition – Trend Discovery | $ | 3,223 | ||
| Acquisition – Banner Midstream | 7,002 | |||
| Goodwill – September 30, 2021 | $ | 10,225 |
The Company assessed the criteria for impairment, and there were no indicators of impairment present as of September 30, 2021,March 31, 2022, and therefore no impairment is necessary. There have been no indicators of impairment present in the three months ended June 30, 2022.
The goodwill from the Trend acquisition of $3,222,799 had been reclassified to non-current assets held for sale as of March 31, 2022. With the June 2022 sale of Trend, this amount was written down and included in gain from disposal in the three months ended June 30, 2022.
30
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
NOTE 8: POWER DEVELOPMENT COST
Agora has paid $1,000,000 each under two separate agreements for two different land sites to a non-related third party for a total of $2,000,000 in connection with the commencement of Bitstream’s Bitcoin mining operations. The payments represent the fee for securing 48 MW 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.
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.
The Company has classified these payments as “Power Development Costs” as a noncurrent asset on the Consolidated Balance Sheets.
NOTE 8:9: ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| September 30, 2021 | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Professional fees and consulting costs | $ | 57 | $ | 801 | ||||
| Vacation and paid time off | 120 | 107 | ||||||
| Legal fees | 182 | 86 | ||||||
| Compensation | 134 | 734 | ||||||
| Interest | - | 65 | ||||||
| Insurance | 1,430 | 1,013 | ||||||
| Other | 443 | 785 | ||||||
| Total | $ | 2,366 | $ | 3,591 | ||||
| June 30, 2022 | March 31, 2022 | |||||||
| (unaudited) | ||||||||
| Professional fees and consulting costs | $ | 553,995 | $ | 394,660 | ||||
| Vacation and paid time off | 111,088 | 101,954 | ||||||
| Legal fees | 342,363 | 68,723 | ||||||
| Compensation | 302,128 | 245,179 | ||||||
| Interest | 28,087 | 2,223 | ||||||
| Insurance | 1,973,224 | 384,394 | ||||||
| Dividend | 43,151 | - | ||||||
| Other | 431,417 | 532,291 | ||||||
| Total | $ | 3,785,453 | $ | 1,729,424 | ||||
During the year ended March 31, 2021, the Company converted $1,228 of amounts due to prior owners into shares of common stock which resulted in a loss on conversion of $1,248, and $814 was paid in cash in the year ended March 31, 2021.
31
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
NOTE 9:10: WARRANT DERIVATIVE LIABILITIES
The Company issued common stock and warrants in several private placements and 2two 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 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 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.
On November 14, 2020, the Company granted 6060,000 two-year 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 $3,666 as of June 30, 2022.
On December 30, 2020, the Company granted 888,889 two-year warrants, with a strike price of $7.75 per share with a term of two-years.$10.00, in the registered direct offering. The fair value of those warrants was estimated to be $251$4,655,299 at inception, and $108 as of September 30, 2021.
On December 30, 2020, the Company granted 889 warrants, in the direct registered offering under the effective Form S-3, with a strike price of $10.00 with a term of two-years (maturity January 2, 2023). The fair value of those warrants was estimated to be $4,655 at inception and $4,653 as of December 31, 2020.inception. During the three months ended March 31, 2021, 176176,000 warrants were exercised for $1,760,$1,760,000, and no shares were exercised during the sixyear ended March 31, 2022 and three months ended SeptemberJune 30, 2021.2022. The fair value of the remaining warrants at SeptemberJune 30, 20212022 is $1,141.$44,726.
On December 30, 2020, the Company granted 6262,222 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 for a term of two-years (expiring January 2, 2023).share. The fair value of those warrants was estimated to be $308$308,205 at inception and $90$2,849 as of SeptemberJune 30, 2021. 2022.
The fair value of the 200 warrants that remain outstanding from the 250 warrants granted on September 24, 2020 as of September 30, 2021 is $270.
32
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
The fair value of the 200,000 warrants that remain outstanding from the 250,000 warrants granted on September 24, 2020 as of June 30, 2022 is $1,127.
On June 30, 2021, the Company granted 200200,000 two-year warrants subjectwith a strike price of $10.00 per share, pursuant to a purchase agreement entered into the same day with the warrant holder, with a strike price of $10.00 per share with a term of two-years.holder. The fair value of those warrants was estimated to be $545$545,125 at inception, on June 30, 2021 and $415$54,291 as of SeptemberJune 30, 2021.2022.
On August 6, 2021, the Company closed a $20,000$20,000,000 registered direct offering in which H.C. Wainwright & Co., LLC acted as the exclusive placement agent.offering. The Company sold 3,4783,478,261 shares of common stock and 3,4783,478,261 warrants at $5.75 per share. The warrants are exercisable for a three- and one-half-year period beginning when the Company increases its authorized common stock to 40,000 shares, which occurred on Octoberthrough April 8, 2021.2025. The Company also issued the placement agent 243243,478 warrants exercisable at $7.1875 per share over the same period as the investor warrants but expiring on the earlier of the three- and one-half year anniversary of the date the placement agent warrants first become exercisable and August 4, 2026.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 $11,203$11,201,869 at inception and $12,533$4,331,296 as of SeptemberJune 30, 2021.2022. The fair value of the placement agent warrants was estimated to be $744$744,530 at inception and $832$274,207 as of SeptemberJune 30, 2021.2022.
The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of SeptemberJune 30, 20212022 and March 31, 2021. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate.
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 SeptemberJune 30, 2021 and2022, March 31, 20212022 and at inception:
| Year Ended March 31, | Inception | ||||||||||||||
| Expected term | 5.00 years | ||||||||||||||
| Expected volatility | % | 110 – 113 | 91% – 107 | % | |||||||||||
| Expected dividend yield | - | - | - | ||||||||||||
| Risk-free interest rate | % | 0.25 – 0.42 | 1.50% – 2.77 | % | |||||||||||
| Market price | $ | $ | $5.89 | ||||||||||||
33
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
The Company’s remaining derivative liabilities as of SeptemberJune 30, 20212022 and March 31, 20212022 associated with warrant offerings are as follows. All fully extinguished warrants liabilities are not included in the chart below.
| September 30, 2021 | March 31, 2021 | Inception | ||||||||||
| Fair value of 200 (originally 250) September 24, 2020 warrants | $ | 270 | $ | 1,349 | $ | 1,265 | ||||||
| Fair value of 60 November 14, 2020 warrants | 108 | 458 | 251 | |||||||||
| Fair value of 889 December 31, 2020 warrants | 1,141 | 4,993 | 4,655 | |||||||||
| Fair value of 62 December 31, 2020 warrants | 90 | 413 | 308 | |||||||||
| Fair value of 200 June 30, 2021 warrants | 415 | - | 545 | |||||||||
| Fair value of 3,478 August 6, 2021 warrants | 12,533 | - | 11,203 | |||||||||
| Fair value of 243 August 6, 2021 warrants | 832 | - | 744 | |||||||||
| $ | 15,389 | $ | 7,213 | |||||||||
| June 30, 2022 (unaudited) | March 31, 2022 | Inception | ||||||||||
| Fair value of 200,000 (originally 250,000) September 24, 2020 warrants | $ | 1,127 | $ | 8,354 | $ | 1,265,271 | ||||||
| Fair value of 60,000 November 14, 2020 warrants | 3,666 | 7,695 | 251,497 | |||||||||
| Fair value of 888,889 December 31, 2020 warrants | 44,726 | 82,436 | 4,655,299 | |||||||||
| Fair value of 62,222 December 31, 2020 warrants | 2,849 | 5,741 | 308,205 | |||||||||
| Fair value of 200,000 June 30, 2021 warrants | 54,291 | 60,866 | 545,125 | |||||||||
| Fair value of 3,478,261 August 6, 2021 warrants | 4,331,296 | 3,904,575 | 11,201,869 | |||||||||
| Fair value of 243,478 August 6, 2021 warrants | 274,207 | 248,963 | 744,530 | |||||||||
| $ | 4,712,162 | $ | 4,318,630 | |||||||||
During the six and three months ended SeptemberJune 30, 20212022 and 20202021 the Company recognized changes in the fair value of the derivative liabilities of $4,316$(393,532) and $(629), and $(16,382) and $1,011,$4,945,819, respectively. In addition, the Company recognized $1,289$0 and $744$545,125 in expenses related to the warrants granted for the six and three months ended SeptemberJune 30, 2022 and 2021.
Activity related to the warrant derivative liabilities for the sixthree months ended SeptemberJune 30, 20212022 is as follows:
| Beginning balance as of March 31, 2021 | $ | 7,213 | ||
| Issuances of warrants – derivative liabilities | 12,492 | |||
| Warrants exchanged for common stock | (- | ) | ||
| Change in fair value of warrant derivative liabilities | (4,316 | ) | ||
| Ending balance as of September 30, 2021 | $ | 15,389 |
| 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 | 393,532 | |||
| Ending balance as of June 30, 2022 | $ | 4,712,162 |
Activity related to the warrant derivative liabilities for the yearthree months ended March 31,June 30, 2021 is as follows:
| Beginning balance as of March 31, 2020 | $ | 2,775 | ||
| Issuances of warrants – derivative liabilities | 13,118 | |||
| Warrants exchanged for common stock | (27,198 | ) | ||
| Change in fair value of warrant derivative liabilities | 18,518 | |||
| Ending balance as of March 31, 2021 | $ | 7,213 |
NOTE 10: CAPITALIZED DRILLING COSTS AND OIL AND GAS PROPERTIES
| Beginning balance as of March 31, 2021 | $ | 7,213,407 | ||
| Issuances of warrants – derivative liabilities | 545,125 | |||
| Warrants exchanged for common stock | - | |||
| Change in fair value of warrant derivative liabilities | (4,945,819 | ) | ||
| Ending balance as of June 30, 2021 | $ | 2,812,713 |
Capitalized Drilling Costs
In January 2021, the Company commenced a drilling program on their Deshotel 24H well included in their proved reserves. The Company incurred $6,084 in costs related to this program of which $3,387 was expensed directly as drilling costs. The Company, pursuant to ASC 932 will amortize the remaining $2,697 of these costs, under the full-cost method based on the units of production method. Depletion expense for the six and three months ended September 30, 2021 for the capitalized drilling costs was $419 and $144, respectively. As of September 30, 2021, the capitalized drilling costs were $2,148. There were no such costs for the six and three months ended September 30, 2020.
Oil and Gas Properties
The Company’s holdings in oil and gas mineral lease (“OGML”) properties as of September 30, 2021 and March 31, 2021 are as follows:
Trend Exploration was assigned an 80% working interest in fourteen wells from the Assignors on July 1, 2021.
| September 30, 2021 | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Total OGML Properties Acquired | $ | 11,940 | $ | 12,352 | ||||
34
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
The Company acquired the following from Banner Midstream on March 27, 2020:
Cherry et al OGML including shallow drilling rights was acquired by Shamrock from Hartoil Company on July 1, 2018.
O’Neal Family OGML and Weyerhaeuser OGML including shallow drilling rights were acquired by White River on July 1, 2019 from Livland, LLC and Hi-Tech Onshore Exploration, LLC respectively in exchange for a $125 drilling credit to be applied by Livland, LLC on subsequent drilling operations.
Taliaferro Family OGML including shallow drilling rights was acquired by White River on June 10, 2019 from Lagniappe Operating, LLC.
Kingrey Family OGML including both shallow and deep drilling rights was entered into by White River and the Kingrey Family on April 3, 2019.
Peabody Family OGML including both shallow and deep drilling rights was acquired by White River on June 18, 2019 from SR Acquisition I, LLC, a subsidiary of Sanchez Energy Corporation, for a 1% royalty retained interest in conjunction with White River executing a lease saving operation in June 2019.
As discussed in Note 16, the Company acquired certain leases on June 11, 2020 and June 18, 2020 in Mississippi and Louisiana valued at $2. These assets were paid entirely in cash. In addition, the Company impaired $83 of property as it let certain leases lapse.
As discussed in Note 16, on August 14, 2020, the Company entered into an Asset Purchase Agreement with Rabb Resources, LTD which included the acquisition of real property. The purchase price for this acquisition was $3,500. Of this amount, $3,224, is reflected as Oil and Gas Properties.
As discussed in Note 16, on September 4, 2020, the Company entered into a Lease Assignment agreement. The purchase price for this acquisition was $1,500. Of this amount, $1,500, is reflected as Oil and Gas Properties.
As discussed in Note 16, on September 30, 2020, the Company entered into three Asset Purchase Agreements. The purchase prices for these acquisitions were $750. Of this amount, $760, is reflected as Oil and Gas Properties.
As discussed in Note 16, on October 1, 2020, the Company entered into three Asset Purchase Agreements. The purchase price for these acquisitions were $22. Of this amount, $22, is reflected as Oil and Gas Properties.
As discussed in Note 16, on October 9, 2020, the Company entered into three Asset Purchase Agreements. The purchase price for these acquisitions were $615. Of this amount, $615, is reflected as Oil and Gas Properties.
In February and March 2021, the Company acquired additional leases for $916 under the Blackbrush/Deshotel lease related to the Participation Agreement.
On May 13, 2021, the Company’s subsidiaries White River Energy LLC and White River Operating LLC entered into a Letter Agreement for a .60 of 8/8th Earned Working Interest with TSEA Partners LLC (“TSEA”) for their Harry O’Neal 20-10 lease in Holmes County, MS (“Letter Agreement”). Under the terms of the Letter Agreement, TSEA paid $600 to the Company to transfer the working interest to TSEA and TSEA received a $300 drilling or workover credit to use towards any authority for expenditure at Horseshoe Field. There were no amounts valued as oil and gas properties for this particular property, and as a result, the entire $600 is reflected as a gain on sale of property as well as the removal of the asset retirement obligation of $1 which brought the total gain to $601.
Effective on July 1, 2021, the Company’s subsidiary White River SPV 2, LLC closed on the sale of the Weyerhauser OGML Lease. The Company did not record a value for the property as it was acquired in a group of properties on June 11, 2021 as the entire group of properties were purchased for $1. As a result, the entire sales price of $112, which includes the sale of the existing inventory and related expenses of $12 on this well and removal of the accumulated depletion, asset retirement obligation brought the total gain to $121.
The Company had an analysis completed by an independent petroleum consulting company in March 2021 to complete the acquisition analysis within the required one-year period. There were no adjustments required from the original asset allocation on March 27, 2020.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
The following table summarizes the Company’s oil and gas activities by classification for the six months ended September 30, 2021 and year ended March 31, 2021.
| Activity Category | March 31, 2021 | Adjustments (1) | September 30, 2021 | |||||||||
| Proved Developed Producing Oil and Gas Properties | ||||||||||||
| Cost | $ | 7,223 | $ | - | $ | 7,223 | ||||||
| Accumulated depreciation, depletion and amortization | (739 | ) | (716 | ) | (1,455 | ) | ||||||
| Changes in estimates | - | - | - | |||||||||
| Total | $ | 6,484 | $ | (716 | ) | $ | 5,768 | |||||
| Undeveloped and Non-Producing Oil and Gas Properties | ||||||||||||
| Cost | $ | 5,868 | $ | 304 | $ | 6,172 | ||||||
| Changes in estimates | (- | ) | (- | ) | (- | ) | ||||||
| Total | $ | 5,868 | $ | 304 | $ | 6,172 | ||||||
| Grand Total | $ | 12,352 | $ | (412 | ) | $ | 11,940 | |||||
| Activity Category | March 31, 2020 | Adjustments (1) | March 31, 2021 | |||||||||
| Proved Developed Producing Oil and Gas Properties | ||||||||||||
| Cost | $ | 167 | $ | 737 | $ | 904 | ||||||
| Accumulated depreciation, depletion and amortization | - | (739 | ) | (739 | ) | |||||||
| Changes in estimates | - | 6,319 | 6,319 | |||||||||
| Total | $ | 167 | $ | 6,317 | $ | 6,484 | ||||||
| Undeveloped and Non-Producing Oil and Gas Properties | ||||||||||||
| Cost | $ | 5,968 | $ | 6,219 | $ | 12,187 | ||||||
| Changes in estimates | - | (6,319 | ) | (6,319 | ) | |||||||
| Total | $ | 5,968 | $ | (100 | ) | $ | 5,868 | |||||
| Grand Total | $ | 6,135 | $ | 6,217 | $ | 12,352 | ||||||
|
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
NOTE 11: LONG-TERM DEBT
Long-term debt consisted of the following as of SeptemberJune 30, 20212022 and March 31, 2021.2022. All debt instruments repaid during the year ended March 31, 20212022 are not included in the below chart and the chart only reflects those instruments that had a balance owed as of these dates.
| September 30, 2021 | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Note payable – Alliance Bank (a) | $ | 368 | $ | 1,033 | ||||
| Commercial loan – Firstar Bank (b) | 465 | 626 | ||||||
| Auto loan 1 – Firstar Bank (c) | 23 | 29 | ||||||
| Auto loan 2 – Firstar Bank (d) | - | 38 | ||||||
| Auto loan 3 – Ally Bank (e) | 30 | 34 | ||||||
| Auto loan 4 – Ally Bank (f) | 31 | 35 | ||||||
| Auto loan 7 – Ally Bank (g) | 50 | 69 | ||||||
| Tractor loan 6 – Tab Bank (h) | 149 | 180 | ||||||
| Ecoark – PPP Loan (i) | - | 24 | ||||||
| Total long-term debt | 1,116 | 2,068 | ||||||
| Less: current portion | (879 | ) | (1,056 | ) | ||||
| Long-term debt, net of current portion | $ | 237 | $ | 1,012 | ||||
| June 30, 2022 | March 31, 2022 | |||||||
| (unaudited) | ||||||||
| Credit facility -Trend Discovery SPV 1, LLC (a) | $ | 516,036 | $ | 595,855 | ||||
| Note payable – Alliance Bank (b) | 169,341 | 236,755 | ||||||
| Commercial loan – Firstar Bank (c) | - | 245,217 | ||||||
| Auto loan 1 – Firstar Bank (d) | 13,792 | 16,839 | ||||||
| Auto loan 4 – Ally Bank (e) | 20,615 | 23,012 | ||||||
| Tractor loan 6 – Tab Bank (f) | - | 118,332 | ||||||
| Auto loan – Ford (g) | 76,555 | 80,325 | ||||||
| Total long-term debt | 796,339 | 1,316,335 | ||||||
| Less: current portion | (719,911 | ) | (1,181,021 | ) | ||||
| Long-term debt, net of current portion | $ | 76,428 | $ | 135,314 | ||||
| (a) | 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. The Company is required to pay interest biannually on the outstanding principal amount of each loan calculated at an annual rate of 12%. The loans are evidenced by demand notes executed by the Company. The Company is able to request draws from the lender up to $1,000,000 with a cap of $10,000,000. In the year ended March 31, 2022, the Company borrowed $595,855, which includes $25,855 in commitment fees, with the balance of $575,000 being deposited directly into the Company. In the three months ended June 30, 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 $585,000 in the three months ended June 30, 2022. Interest incurred for the three months ended June 30, 2022 was $25,864, and accrued as of June 30, 2022 was $28,087. There were no advances in the three months ended June 30, 2021. |
| (b) | Original loan date of June 14, 2019 with an original maturity date of April 14, 2020. The Company extended this loan for |
35
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
| Original loan date of February 28, 2018, due December 31, |
| On July 20, 2018, entered into a long-term secured note payable for |
| (e) |
| On July 26, 2018, entered into a long-term secured note payable for |
| On November 7, 2018, entered into a long-term secured note payable for |
| (g) | On February 16, 2022, entered into long-term secured note payable for $80,325 for a service truck maturing February 13, 2028. The note is secured by the collateral purchased and accrued interest annually at 5.79% with principal and interest payments due monthly. There is no accrued interest as of |
The following is a list of maturities as of June 30:
| 2023 | $ | 719,911 | ||
| 2024 | 24,083 | |||
| 2025 | 13,195 | |||
| 2026 | 13,980 | |||
| 2027 | 14,811 | |||
| Thereafter | 10,359 | |||
| $ | 796,339 |
During the three months ended June 30, 2022, the Company received proceeds of $487,500, repaid $1,029,848, secured notes payable for trucks valued at $149,937, and incurred $17,681 in commitment fees added to the credit facility with Trend Discovery SPV 1, LLC.
During the three months ended June 30, 2021, the Company repaid $213,957.
Interest expense on long-term debt during the three months ended June 30, 2022 and 2021 are $38,018 and $22,860, respectively.
36
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
The following is a list of maturities as of September 30:
| 2022 | $ | 879 | ||
| 2023 | 203 | |||
| 2024 | 34 | |||
| $ | 1,116 |
During the six months ended September 30, 2021, the Company repaid $928 in long-term debt.
During the year ended March 31, 2021, the Company received proceeds of $1,869 in new long-term debt, repaid $4,100 in existing long-term debt, converted $830 in existing long-term debt that resulted in a loss on conversion of $1,337, and had $1,850 forgiven in long-term debt and accrued interest. In addition, the Company converted $65 of accrued interest and paid $361 in accrued interest during this period. The Company recognized a loss of $146 on conversion of the accrued interest to common stock in the year ended March 31, 2021.
Interest expense on long-term debt during the six and three months ended September 30, 2021 and 2020 are $47 and $22 and $249 and $180, respectively.
NOTE 12: NOTES PAYABLE - RELATED PARTIES
Notes payable to related parties consisted of the following as of September 30, 2021 and March 31, 2022 and 2021. All notes payable to related parties instruments repaid during the year ended March 31, 20212022 are not included in the below chart and the chart only reflects those instruments that had a balance owed as of these dates.
| September 30, 2021 | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Ecoark Holdings Board Member (a) | $ | - | $ | 578 | ||||
| Total Notes Payable – Related Parties | - | 578 | ||||||
| Less: Current Portion of Notes Payable – Related Parties | (- | ) | (578 | ) | ||||
| Long-term debt, net of current portion | $ | - | $ | - | ||||
A Board member advanced $577,500 to the Company through August 8, 2021, under 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 three months ended June 30, 2021 was $17,514.
An officer of the Company advanced $45$116,000 and was repaid this amount during the six monthsyear ended September 30, 2021.
DuringMarch 31, 2022, and $25,000 was advanced and repaid during the year ended March 31, 2021,2022 from an officer of Agora. In the Company received proceedsthree months ended June 30, 2022, the Company’s Chief Executive Officer and Chief Financial Officer advanced a total of $954$591,000 which was fully repaid in notes payable – related parties,the same period; and an officer of Agora advanced $25,000 which was fully repaid $1,973 in existing notes payable – related parties,the same period. These were short-term advances and converted $575 in existing notes payable – related parties that resulted inno interest was charged as the amounts were outstanding for just a loss on conversion of $1,239. In addition, the Company converted $15 of accrued interest during this period.few weeks.
37
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
NOTE 13: STOCKHOLDERS’MEZZANINE EQUITY (DEFICIT)
On June 8, 2022, the Company entered into a Securities Purchase Agreement (the “Agreement”) with 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 “Ecoark Series A”), 102,881 shares of common stock (the “Commitment Shares”) and a warrant to purchase shares of common stock (the “Warrant,” and together with the Ecoark Series A and the Commitment Shares, the “Securities”) for a total purchase price of $12,000,000. The Purchaser is a subsidiary of BitNile Holdings, Inc. [NYSE American: NILE]. The Company determined that the classification of the Ecoark Series A is Mezzanine Equity as the option to convert the shares belongs to the Purchaser. A description of the material transaction components are as follows:
Ecoark Series A
Conversion Rights
Each share of Ecoark Series A has a stated value of $10,000 and is convertible into shares of common stock at a conversion price of $2.10 per share, subject to certain adjustment provisions. The holder’s conversion of the Ecoark Series A is subject to a beneficial ownership limitation of 19.9% of the issued and outstanding common stock as of any conversion date of the Ecoark 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. 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. The shares of Ecoark 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.
Voting Rights
The Ecoark Series A is entitled to vote with the common stock as a single class on an as-converted basis, subject to applicable law and the Nasdaq Rules. In addition, as long as the holder continues to hold at least 25% of the shares of Ecoark Series A issued to it on the issuance date, the holder is entitled to elect a number of directors to the Company’s Board equal to a percentage determined by (i) the number of Ecoark Series A beneficially owned by the holder, calculated on an “as converted” basis, (ii) divided by the sum of the number of shares of common stock outstanding plus the number of Ecoark Series A outstanding on an “as converted” basis; and such director(s) so elected may only be removed without cause by the affirmative vote of the holder. Initially, the Purchaser may designate one director.
The holders of record of the shares of common stock and of any other class or series of voting stock (including the Ecoark Series A), exclusively and voting together as a single class, are entitled to elect the balance of the total number of directors of the Company. The Purchaser is not eligible to vote at the shareholders meeting on the proposal to approve the issuance of more than 19.9% of shares outstanding on June 8, 2022.
Dividend Rights
The holder of shares of the Ecoark Series A is entitled to receive cumulative cash dividends at an annual rate of 12.6% of the stated value, which is equivalent to $1,260 per year per share, payable monthly beginning on the issuance date and continuing until the earlier of (a) June 8, 2024, and (b) the date on which the holder no longer holds any shares of Ecoark Series A.
38
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
If the Company fails to make one or more dividend payments, whether or not consecutive, a default dividend rate of 18% per annum will apply until all accumulated dividend payments have been made.
Liquidation Rights
The shares of Ecoark Series A have a liquidation preference over the common stock and any subsequent series of junior preferred stock of $1,200 per share of Ecoark Series A, plus accrued but unpaid dividends.
Redemption
At any time beginning on or after June 8, 2024, the holder of Ecoark Series A may cause the Company to redeem some or all of the shares of Ecoark Series A it holds at a redemption price of $1,200 per share, plus any accumulated and unpaid dividends thereon.
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 Ecoark 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 Ecoark Series A shares issued on the closing date under the 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 Ecoark 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;
39
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
(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.
Warrant
The Warrant, as amended and filed on July 15, 2022, provides 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 $0.001 per share, including the Commitment Shares and Conversion Shares unless sold. Subject to shareholder approval, the Warrant shall vest and becomes exercisable into shares of the Company’s stock if as of June 8, 2024: (i) the Company has 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 may be exercised on a cashless basis and expires on June 8, 2027. In the event that the Company or its transfer agent fails to issue the shares of common stock within three business days following delivery of a notice of exercise, the Warrant provides that the Company must pay the Holder a fee of $2.4 million. The Warrant shall not be exercisable prior to vesting.
Based upon the terms of the Warrant, the Company has concluded the Warrant is classified as a liability pursuant to ASC 480. However, since the vesting and exercise of the Warrant is subject to shareholder approval, which is outside the control of the Company, the Company has concluded that, when and if the Warrant vests, the Company will account for the Warrant as a liability pursuant to ASC 480.
Registration Rights
Pursuant to the Agreement, the Company has agreed to register the sale by the Purchaser of up to 5,246,456 shares of common stock, representing the Commitment Shares issued at the closing plus 5,143,575 of the shares of common stock issuable upon conversion of the Ecoark 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.
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 as of June 30, 2022.
40
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
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 Warrant and the Second Amendment to the Ecoark Series A Certificate.
NOTE 14: STOCKHOLDERS’ EQUITY (DEFICIT)
Ecoark Holdings Preferred Stock
On March 18, 2016, the Company created 5,0005,000,000 shares of “blank check” preferred stock, par value $0.001. The Company has designated Series B and C out of the total Preferred Shares authorized.
The Company has entered into agreements to issue preferred stock over the past several years. Currently asAs of September 30, 2021 and March 31, 2021,2022, there arewere no shares of any series of preferred stock issued and outstanding. The remainingOn June 8, 2022, as noted in Note 13, “Mezzanine Equity”, the Company issued 1,200 Series A Preferred shares, and as of June 30, 2022, there are 1,200 shares of preferred shares were converted during the year ended March 31, 2021.stock issued and outstanding.
Ecoark Holdings Common Stock
The Company is authorized to issue 40,00040,000,000 shares of common stock, par value $0.001. 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. Effective December 29, 2020, the Company amended its articles of incorporation to reduce its authorized common stock from 40,00040,000,000 shares to 30,00030,000,000 shares. On August 6, 2021, the Company’s board of directors approved the increase of the authorized common shares to 40,000.40,000,000. The increase became effective on October 8, 2021, following the approval in a Special Meeting of Ecoark’sEcoark Holdings’ Stockholders.
In the three months ended June 30, 2020, the Company issued 308 shares of common stock in April and May 2020 to convert the remaining shares of Series B Preferred Stock and Series C Preferred Stock; 1,531 shares of common stock in the exercise of warrants; 89 shares in the exercise of stock options; 93 shares of common stock in the conversion of accounts payable and accrued expenses; and 524 shares of common stock in the conversion of long-term debt, notes payable – related parties and accrued interest.
In the three months ended September 30, 2020, the Company issued 1,088 shares of common stock in the exercise of warrants; one share in the exercise of stock options; 31 shares of common stock for services rendered; 171 shares of common stock to acquire assets; and 192 shares of common stock in the conversion of long-term debt, notes payable – related parties and accrued interest.
In the three months ended December 31, 2020, the Company issued 376 shares of common stock in the exercise of warrants.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
On December 31, 2020, the Company completed a registered direct offering of common stock and warrants, whereby the Company issued 889 shares of common stock and 889 accompanying warrants to purchase common stock to one institutional investor under the effective Form S-3 at $9.00 per share and accompanying warrant for a total of $8,000 in gross proceeds, before placement agent fees and other offering expenses. The warrants are exercisable for a two-year term at a strike price of $10.00 per share. The Company granted 62 warrants to the placement agent as compensation in addition to the $560 cash commission received by the placement agent. The placement agent warrants are exercisable at $11.25 per share and expire on January 2, 2023.
In the three months ended March 31, 2021, the Company issued 176 shares of common stock in the exercise of warrants for $1,760, and 59 shares for the exercise of stock options for $153.
In the three months ended June 30, 2021, the Company issued 115114,796 shares of common stock valued at $675 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 2020,265 shares of common stock infor the exercise of stock options for cash ($28) and in a cashless exercise.options.
41
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
In the three months ended SeptemberJune 30, 2021,2022, the Company issued 3,478102,881 shares of common stock which were the commitment shares in a registered direct offering for $20,000, and 45the BitNile transaction as discussed in Note 13.
As of June 30, 2022, 26,466,980 shares of common stock for services rendered valued at $241. A portionwere issued and 26,349,865 shares of the shares ($149) issued are for future services and will be expensed upon completioncommon stock were outstanding, net of these services.117,115 treasury shares.
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.
Of the 4,600,000 restricted shares of common stock — 2,433,336 shares of restricted stock are considered service grants and 2,166,664 are considered performance grants. The service grants vest over three years as follows: 1,550,010 restricted common shares in one year; 466,665 restricted common shares in two years and 416,661 restricted common shares in three years. On April 12, 2022, Agora upon board of director approval accelerated 250,000 restricted shares that were service based grants with Agora’s former Chief Financial Officer. Only awards granted to management directly related to the Bitcoin mining operation have awards that contain both service and performance conditions. The remaining awards granted, contain only service-based conditions.
42
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
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 March 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 $5,215,287 in stock-based compensation for the three months ended June 30, 2022, which represented $2,090,287 in service grants related, 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 June 30, 2022 is $8,333,320 in performance based grants and $4,767,637 in service based grants for a total of $13,100,957.
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 expense of $1,218 and $1,150 and $819 and $36, respectivelyfor employees is included in selling, generalsalaries and administrative expensesalary related costs and directors and services are included in professional fees and consulting in the condensed consolidated statementsstatement of operations for the six and three months ended SeptemberJune 30, 2022 and 2021.
Share-based compensation for the three months ended June 30, 2022 and 2021 for stock options and 2020, respectively forRSUs granted under the 2013 Incentive Stock Plan and 2017 Omnibus Incentive Stock Plan and for the Company’s Non-Qualified Stock Options. Therenon-qualified stock options were no expenses related to warrant grants in these periods. $182,561 and $399,173, respectively.
There is $182,561 in share-based compensation expense for the three months ended June 30, 2022, and $129,620 in share-based compensation is accrued as of June 30, 2022.
43
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
In order to have sufficient authorized capital to raise the $20,000,$20,000,000, on August 4, 2021, ana 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 272272,252 RSUs that vest over 12 quarterly increments, in exchange for cancelling 672672,499 stock options. In addition, upon shareholder approval of an amendment to the Ecoark Holdings, Inc. 2017 Omnibus Incentive Plan, which occurred on October 6, 2021, this officer and director will receive 64received 63,998 additional RSUs. The expense related to the modification of these grants is included in the share-based compensation expense forin the three monthsyear ended September 30, 2021.
As of September 30, 2021, 26,364 shares of common stock were issued and 26,247 shares of common stock were outstanding, net of 117 treasury shares.
Agora Common StockMarch 31, 2022.
Agora is authorized to issue 250,000 shares of common stock, par value $0.001. On September 22, 2021, the Company purchased one hundred shares of Agora for ten dollars. Those shares are the only shares issued and outstanding as of September 30, 2021.
On October 1, 2021, the Company purchased 41,671 shares of Agora common stock for $4,167 which Agora used to purchase equipment to commence the Bitstream operations.
In addition, between October 7 and November 1, 2021, Agora issued 4,350 shares to its management team and directors. After issuance of these shares, Ecoark controls approximately 91% of Agora, and will recognize a non-controlling interest moving forward.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
NOTE 14:15: 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.
| ● | On August 1, 2018, Ecoark Holdings On May 21, 2021, Walmart |
44
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
Walmart also filed a motion seeking post-trial discovery of plaintiff’s privileged work-product materials. The Court granted Walmart’s motion and in its June 15 Order the Court required the plaintiffs to produce 52 documents which the plaintiffs contend include privileged material, including mental impressions and opinions of its counsel. Because the June 15 Order denied plaintiffs motion for leave to file an interlocutory appeal on this discovery issue, plaintiffs on June 21, 2022, filed a petition in the United States Court of Appeals for the Eighth Circuit for a writ of mandamus.
| ● | On September 21, 2021, Ecoark Holdings |
| ● | On April 22, 2022, BitStream Mining and Ecoark Holdings had a petition filed in Travis County District Court (Docket #79176-0002) by Print Crypto Inc. in the amount of $256,733.28 for failure to pay for equipment purchased to operate the Company’s Bitcoin mining operation. The Company intends to vigorously defend themselves and has 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. The Company has accrued the full amount of the claim in their consolidated financial statements as of March 31, 2022. |
On July 15, 2021, the Company and its directors entered into a Settlement and Mutual Release resolving the legal fees it agreed to pay when it settled a class action that was settled without any financial consequences other than paying agreed upon legal fees. The Company paid $50 to the Plaintiff’s attorneys.
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.
Joint Participation Agreement
On October 9, 2020, the Company and White River SPV, entered into a Participation Agreement (the “Participation Agreement”) by and among the Company, White River SPV, BlackBrush Oil & Gas, L.P. (“BlackBrush”) and GeoTerre, LLC, an unrelated privately-held limited liability company (the “Assignor”), to conduct drilling of wells in the Austin Chalk formation.45
Pursuant to the Participation Agreement, the Company and White River SPV funded 100% of the cost, approximately $5,800, associated with the drilling and completion of an initial deep horizontal well in the Austin Chalk formation. The Participation Agreement required the drilling costs that were paid into a designated escrow account at the commencement of the drilling in January 2021, which it was. BlackBrush agreed to assign to the other parties to the Participation Agreement, subject to certain exceptions and limitations specified therein, specified portions of its leasehold working interest in certain Austin Chalk formation units. The Participation Agreement provides for an initial allocation of the working interests and net revenue interests among the assignor, BlackBrush and the Company and then a re-allocation upon payout or payment of drilling and completion costs for each well drilled. Prior to payout, the Company will own 90% of the working interest and 67.5% of the net revenue interest in each well. Following payout, the Company will own 70% of working interest and 52.5% net revenue interest in each well.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
The Parties to the Participation Agreement, except for the Company, had previously entered into a Joint Operating Agreement, dated September 4, 2020 (the “Operating Agreement”) establishing an area of mutual interest, including the Austin Chalk formation, and governing the parties’ rights and obligations with respect to drilling, completion and operation of wells therein. The Participation Agreement and the Operating Agreement require, among other things, that White River SPV and the Company drill and complete at least one horizontal Austin Chalk well with a certain minimum lateral each calendar year and/or maintain leasehold by paying its proportionate share of any rental payments.
Bitstream Commitments on Purchase Obligations
As discussed in the overview of Bitstream in Note 1, Bitstream has entered into a number of agreements where they are obligated to purchase equipment necessary to run their business.for the procurement of land, electricity and equipment. Bitstream has estimated this commitment to be approximately $12-$14 million over the next three months inclusive of what has been spent to date.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
NOTE 15:16: CONCENTRATIONS
Customer Concentration. FourTwo and threetwo customers, all in the commodity segment accounted for more than 10% of the accounts receivable balance at SeptemberJune 30, 20212022 and March 31, 20212022 for a total of 65%100% and 76%88% of accounts receivable, respectively. In addition, two and one customers represent approximately 76% and 65% of total revenues for the Company for the six months ended September 30, 2021 and 2020, respectively. In addition, onethree and two customers represent approximately 68%72% and 77%96% of total revenues for the Company for the three months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively.
Supplier Concentration. Certain of the raw materials, components and equipment used by the Company in the manufacture of its products are available from single-sourced vendors. Shortages could occur in these essential materials and components due to an interruption of supply or increased demand in the industry. If the Company were unable to procure certain materials, components or equipment at acceptable prices, it would be required to reduce its manufacturing operations, which could have a material adverse effect on its results of operations. In addition, the Company may make prepayments to certain suppliers or enter into minimum volume commitment agreements. Should these suppliers be unable to deliver on their obligations or experience financial difficulty, the Company may not be able to recover these prepayments.
The Company occasionally maintains cash balances in excess of the FDIC insured limit. The Company does not consider this risk to be material.
Commodity price risk
WeIncluded in discontinued operations, we are exposed to fluctuations in commodity prices for oil and natural gas. Commodity prices are affected by many factors, including but not limited to, supply and demand.
NOTE 16: ACQUISITIONS
The following represent acquisitions for the six months ended September 30, 2021 and year ended March 31, 2021.
Energy Assets
On June 11, 2020, the Company acquired certain energy assets from SR Acquisition I, LLC for $1 as part of the ongoing bankruptcy reorganization of Sanchez Energy Corporation. The transaction includes the transfer of 262 total wells in Mississippi and Louisiana, approximately 9,000 acres of active mineral leases, and drilling production materials and equipment. The 262 total wells include 57 active producing wells, 19 active disposal wells, 136 shut-in with future utility wells, and 50 shut-in pending plugging wells. Included in the assignment are 4 wells in the Tuscaloosa Marine Shale formation.
On June 18, 2020, the Company acquired certain energy assets from SN TMS, LLC for $1 as part of the ongoing bankruptcy reorganization of Sanchez Energy Corporation. The transaction includes the transfer of wells, active mineral leases, and drilling production materials and equipment.
The Company accounted for these acquisitions as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the Rabb Resources, LTD. historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.
46
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
Rabb Resources
On August 14, 2020, the Company entered into an Asset Purchase Agreement by and among the Company, White River E&P LLC, a Texas Limited Liability Company and a wholly-owned subsidiary of the Company Rabb Resources, LTD. and Claude Rabb, the sole owner of Rabb Resources, LTD. Pursuant to the Asset Purchase Agreement, the Company completed the acquisition of certain assets of Rabb Resources, LTD. The acquired assets consisted of certain real property and working interests in oil and gas mineral leases. The Company in June 2020 previously provided for bridge financing to Rabb Resources, LTD under the $225 Senior Secured Convertible Promissory Note. As consideration for entering into the Asset Purchase Agreement, the Company agreed to pay Rabb Resources, LTD. A total of $3,500 consisting of (i) $1,500 in cash, net of $304 in outstanding amounts related to the note receivable and accrued interest receivable, and (ii) $2,000 payable in common stock of the Company, which based on the closing price of the common stock as of the date of the Asset Purchase Agreement equaled 103 shares. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the Rabb Resources, LTD. historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.
| Building | $ | 236 | ||
| Land | 140 | |||
| Oil and Gas Properties | 3,224 | |||
| Asset retirement obligation | (100 | ) | ||
| $ | 3,500 |
Unrelated Third Party
On September 4, 2020, White River SPV 3, LLC, a wholly-owned subsidiary of Banner Midstream entered into an Agreement and Assignment of Oil, Gas and Mineral Lease with GeoTerre Operating, LLC, a privately held limited liability company (the “Assignor”). Under the Lease Assignment, the Assignor assigned a 100% working interest (75% net revenue interest) in a certain oil and gas lease covering in excess of 1,600 acres (the “Lease”), and White River paid $1,500 in cash to the Assignor. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.
O’Neal Family
On September 30, 2020, the Company and White River Energy, LLC entered into three asset purchase agreements (the “Asset Purchase Agreements”) with privately-held limited liability companies to acquire working interests in the Harry O’Neal oil and gas mineral lease (the “O’Neal OGML”), the related well bore, crude oil inventory and equipment. Immediately prior to the acquisition, White River Energy owned an approximately 61% working interest in the O’Neal OGML oil well and a 100% working interest in any future wells.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
The purchase prices of these leases were $126, $312 and $312, respectively, totaling $750. The consideration paid to the Sellers was in the form of 68 shares of common stock. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.
| Oil and Gas Properties | $ | 760 | ||
| Asset retirement obligation | (10 | ) | ||
| $ | 750 |
Luling Prospect
On August 16, 2021 the Company and Shamrock Upstream Energy, LLC, a wholly-owned subsidiary of the Company entered into an agreement with a privately-held limited liability company to acquire working interests in the Luling Prospect for $250. No other assets were acquired in this, nor was there any recognized ARO for this working interest. The manager of the privately held limited liability company is related through marriage to the Chairman and CEO of the Company, however the acquisition was determined to be at arms’ length. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.
| Oil and gas properties | $ | 250 | ||
| $ | 250 |
Concordia Leases
On September 1, 2021 the Company and White River Energy, LLC, a wholly-owned subsidiary of the Company entered into an agreement with several individuals to acquire working interests in the various leases in Concordia, LA for $54. No other assets were acquired in this, nor was there any recognized ARO for this working interest. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.
| Working interest in oil and gas wells | $ | 54 | ||
| $ | 54 |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
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, accounts receivable and 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 sixthree months ended SeptemberJune 30, 20212022 and 2020.2021. 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, 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) | Level 1 | Level 2 | Level 3 | Total Gains and (Losses) | |||||||||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||||||||||
| June 30, 2022 | ||||||||||||||||||||||||||||||||
| Warrant derivative liabilities | - | - | $ | 15,389 | $ | 4,316 | $ | - | $ | - | $ | 4,712,162 | $ | (393,532 | ) | |||||||||||||||||
| Bitcoin | 10,145 | - | - | (9,122 | ) | |||||||||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||
| Warrant derivative liabilities | - | - | $ | 7,213 | $ | (18,518 | ) | $ | - | $ | - | $ | 4,318,630 | $ | 15,386,301 | |||||||||||||||||
| Bitcoin | 19,267 | - | - | (7,228 | ) | |||||||||||||||||||||||||||
47
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
NOTE 18: SEGMENT INFORMATION
The Company follows the provisions of ASC 280-10 Disclosures about Segments of an Enterprise and Related InformationSegment Reporting. . This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. The Company and its chief operating decision makers determined that the Company’s operations effective with the May 31, 2019, acquisition of Trend Holdings and the March 27, 2020 acquisition of Banner Midstream consisted of 3 segments, Financial, Commodities and Technology. Effective July 1, 2021, the Company’s chief operating decision makers in discussion with the finance team determined that the Company willwould add a fourth reporting segment to account for their Digital AssetBitcoin mining business. Additionally, on July 1, 2021 the Company will reportnow reports its home office costs into the Commodity segment, chargeand charged its Technology segment a monthly overhead fee, and has recorded typical overhead expenses in their Finance and Digital AssetBitcoin Mining segments to account for this home office allocation. The Company classified their 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 three months ended June 30, 2021. Effective April 1, 2022, the Company has classified their segments in the Commodity Segment, Technology Segment and Bitcoin Mining Segment. They now charge 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).
| Six Months Ended September 30, 2021 | Digital Assets | Commodities | Financial | Technology | Total | |||||||||||||||
| Segmented operating revenues | $ | - | $ | 12,642 | $ | 348 | $ | - | $ | 12,990 | ||||||||||
| Cost of revenues | - | 7,166 | - | - | 7,166 | |||||||||||||||
| Gross profit | - | 5,476 | 348 | - | 5,824 | |||||||||||||||
| Total operating expenses net of depreciation, amortization, depletion and accretion | 408 | 9,530 | 271 | 1,593 | 11,802 | |||||||||||||||
| Depreciation, amortization, depletion and accretion | - | 1,627 | - | 111 | 1,738 | |||||||||||||||
| Other (income) expense | - | (3,101 | ) | (220 | ) | (1,099 | ) | (4,420 | ) | |||||||||||
| Income (loss) from continuing operations | $ | (408 | ) | $ | (2,580 | ) | $ | 297 | $ | (605 | ) | $ | (3,296 | ) | ||||||
On July 25, 2022, the Company sold its oil and gas production business (White River) which was part of the Commodities segment. The Company determined that pursuant to ASC 205-20-45-1E that the operations related to the oil and gas production business would be reclassified as held for sale as those criteria identified in the pronouncement had been satisfied as of July 25, 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 three months ended June 30, 2022.
| Three Months Ended September 30, 2021 | Digital Assets | Commodities | Financial | Technology | Total | |||||||||||||||
| Segmented operating revenues | $ | - | $ | 5,911 | $ | 200 | $ | - | $ | 6,111 | ||||||||||
| Cost of revenues | - | 3,224 | - | - | 3,224 | |||||||||||||||
| Gross profit | - | 2,687 | 200 | - | 2,887 | |||||||||||||||
| Total operating expenses net of depreciation, amortization, and impairment | 408 | 6,016 | 117 | 939 | 7,480 | |||||||||||||||
| Depreciation and amortization | - | 667 | - | 55 | 722 | |||||||||||||||
| Other expense | - | 540 | - | - | 540 | |||||||||||||||
| Loss from continuing operations | $ | (408 | ) | $ | (4,536 | ) | $ | 83 | $ | (994 | ) | $ | (5,855 | ) | ||||||
| Segmented assets as of September 30, 2021 | ||||||||||||||||||||
| Property and equipment, net | $ | 4,247 | $ | 3,360 | $ | - | $ | 181 | $ | 7,788 | ||||||||||
| Oil and Gas Properties/Capitalized drilling costs | $ | - | $ | 14,088 | $ | - | $ | - | $ | 14,088 | ||||||||||
| Intangible assets, net | $ | - | $ | 1,891 | $ | - | $ | - | $ | 1,891 | ||||||||||
| Goodwill | $ | - | $ | 7,002 | $ | 3,223 | $ | - | $ | 10,225 | ||||||||||
| Capital expenditures | $ | 4,247 | $ | - | $ | - | $ | - | $ | 4,247 | ||||||||||
48
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
| Six Months Ended September 30, 2020 | Commodities | Financial | Technology | Total | ||||||||||||
| Segmented operating revenues | $ | 5,397 | $ | 194 | $ | - | $ | 5,591 | ||||||||
| Cost of revenues | 3,426 | - | - | 3,426 | ||||||||||||
| Gross profit | 1,971 | 194 | - | 2,165 | ||||||||||||
| Total operating expenses net of depreciation, amortization, depletion and accretion | 5,951 | 194 | 1,481 | 7,626 | ||||||||||||
| Depreciation, amortization, depletion and accretion | 498 | - | 126 | 624 | ||||||||||||
| Other (income) expense | 5,270 | 140 | 701 | 6,111 | ||||||||||||
| Loss from continuing operations | $ | (9,748 | ) | $ | (140 | ) | $ | (2,308 | ) | $ | (12,196 | ) | ||||
| Three Months Ended September 30, 2020 | Commodities | Financial | Technology | Total | ||||||||||||
| Segmented operating revenues | $ | 3,174 | $ | 104 | $ | - | $ | 3,278 | ||||||||
| Cost of revenues | 2,333 | - | - | 2,333 | ||||||||||||
| Gross profit | 841 | 104 | - | 945 | ||||||||||||
| Total operating expenses net of depreciation, amortization, depletion and accretion | 3,884 | 65 | 562 | 4,511 | ||||||||||||
| Depreciation, amortization, depletion and accretion | 260 | - | 63 | 323 | ||||||||||||
| Other (income) expense | (8,467 | ) | (735 | ) | (3,672 | ) | (12,874 | ) | ||||||||
| Income from continuing operations | $ | 5,164 | $ | 774 | $ | 3,047 | $ | 8,985 | ||||||||
| Segmented assets as of September 30, 2020 | ||||||||||||||||
| Property and equipment, net | $ | 3,677 | $ | - | $ | 416 | $ | 4,093 | ||||||||
| Oil and Gas Properties | $ | 11,412 | $ | - | $ | - | $ | 11,412 | ||||||||
| Intangible assets, net | $ | 2,208 | $ | - | $ | - | $ | 2,208 | ||||||||
| Goodwill | $ | 7,002 | $ | 3,223 | $ | - | $ | 10,225 | ||||||||
| Capital expenditures | $ | 617 | $ | - | $ | - | $ | 617 | ||||||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
The charts below represent the continuing operations of the Company before the non-controlling interest, provision for income taxes and preferred stock dividends.
| Three Months Ended June 30, 2022 | Bitcoin Mining | Commodities | Technology | Total | ||||||||||||
| Segmented operating revenues | $ | - | $ | 5,418,655 | $ | - | $ | 5,418,655 | ||||||||
| Cost of revenues | 93,861 | 4,514,011 | - | 4,607,872 | ||||||||||||
| Gross profit (loss) | (93,861 | ) | 904,644 | - | 810,783 | |||||||||||
| Total operating expenses net of depreciation, amortization, and impairment | 6,312,064 | 2,292,264 | 454,573 | 9,058,901 | ||||||||||||
| Depreciation, amortization, and impairment | 45,097 | 112,830 | - | 157,927 | ||||||||||||
| Other (income) expense | 121,134 | 1,266,528 | - | 1,387,662 | ||||||||||||
| Loss from continuing operations | $ | (6,572,156 | ) | $ | (2,766,978 | ) | $ | (454,573 | ) | $ | (9,793,707 | ) | ||||
| Segmented assets as of June 30, 2022 | ||||||||||||||||
| Property and equipment, net | $ | 7,190,396 | $ | 928,127 | $ | - | $ | 8,118,523 | ||||||||
| Intangible assets, net | $ | 10,145 | $ | 1,652,088 | $ | - | $ | 1,662,233 | ||||||||
| Goodwill | $ | - | $ | 4,900,873 | $ | - | $ | 4,900,873 | ||||||||
| Three Months Ended June 30, 2021 | Commodities | Technology | Total | |||||||||
| Segmented operating revenues | $ | 5,156,213 | $ | - | $ | 5,156,213 | ||||||
| Cost of revenues | 3,597,941 | - | 3,597,941 | |||||||||
| Gross profit | 1,558,272 | - | 1,558,272 | |||||||||
| Total operating expenses net of depreciation, amortization, and impairment | 3,021,721 | 251,626 | 3,273,347 | |||||||||
| Depreciation, amortization, and impairment | 196,263 | 55,916 | 252,179 | |||||||||
| Other (income) expense | (4,360,320 | ) | - | (4,360,320 | ) | |||||||
| Income (loss) from continuing operations | $ | 2,700,608 | $ | (307,542 | ) | $ | 2,393,066 | |||||
49
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
NOTE 19: LEASES
The Company has adopted ASU No. 2016-02, Leases (Topic 842), as of April 1, 2019 and will account for their 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 of $731 and $732, respectively on March 27, 2020. The Company recorded these amounts at present value, in accordance with the standard, using discount rates ranging between 2.5% and 11.36%. 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 42 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. This lease will be treated as an operating lease under the new standard. In addition, the Company entered into a new 39 month operating lease for office space in September 2020, a new 36 month operating lease in March 2021, as well as two new 36 month operating leases in June 2021 which are all included in the right of use asset and lease liabilities.
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.
The Company’s portfolio of leases contains both finance and operating leases that relate primarily to the commodity segment.and Bitcoin mining segments. As of SeptemberJune 30, 2021,2022, the value of the unamortized lease right of use asset is $782,$744,619, of which $373$264,535 is from financing leases (through maturity at June 30, 2024) and $409$480,084 is from operating leases (through maturity in Mayat October 31, 2024)2026). As of SeptemberJune 30, 2021,2022, the Company’s lease liability was $809,$744,631, of which $366$259,170 is from financing leases and $443$485,461 is from operating leases.
| Maturity of lease liability for the operating leases for the period ended September 30, | ||||||||
| 2022 | $ | 228 | ||||||
| Maturity of lease liability for the operating leases for the period ended June 30, | ||||||||
| 2023 | $ | 183 | $ | 175,701 | ||||
| 2024 | $ | 43 | $ | 130,966 | ||||
| 2025 | $ | - | $ | 96,157 | ||||
| 2026 | $ | 99,042 | ||||||
| 2027 | $ | 33,337 | ||||||
| Imputed interest | $ | (11 | ) | $ | (49,742 | ) | ||
| Total lease liability | $ | 443 | $ | 485,461 | ||||
| Disclosed as: | ||||||||
| Current portion | $ | 221 | $ | 153,330 | ||||
| Non-current portion | $ | 222 | $ | 332,131 | ||||
| Maturity of lease liability for the financing leases for the period ended September 30, | ||||||||
| 2022 | $ | 151 | ||||||
| Maturity of lease liability for the financing leases for the period ended June 30, | ||||||||
| 2023 | $ | 143 | $ | 146,982 | ||||
| 2024 | $ | 85 | $ | 118,677 | ||||
| 2025 | $ | - | ||||||
| Imputed interest | $ | (13 | ) | $ | (6,489 | ) | ||
| Total lease liability | $ | 366 | $ | 259,170 | ||||
| Disclosed as: | ||||
| Current portion | $ | 143 | ||
| Non-current portion | $ | 223 | ||
| Amortization of the right of use asset for the period ended September 30, | ||||
| 2022 | $ | 349 | ||
| 2023 | $ | 308 | ||
| 2024 | $ | 126 | ||
| Total | $ | 783 | ||
| Disclosed as: | ||||
| Current portion | $ | 141,934 | ||
| Non-current portion | $ | 117,236 | ||
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
| Amortization of the right of use asset for the period ended June 30, | ||||
| 2023 | $ | 301,289 | ||
| 2024 | $ | 236,557 | ||
| 2025 | $ | 85,565 | ||
| 2026 | $ | 90,101 | ||
| 2027 | $ | 31,107 | ||
| Total | $ | 744,619 | ||
Total Lease Cost
Total Lease Cost
Individual components of the total lease cost incurred by the Company is as follows:
| Three months ended September 30, 2021 | Six months ended September 30, 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease expense | $ | 53 | $ | 106 | ||||
| Finance lease expense | ||||||||
| Depreciation of capitalized finance lease assets | 35 | 70 | ||||||
| Interest expense on finance lease liabilities | 3 | 6 | ||||||
| Total lease cost | $ | 91 | $ | 182 | ||||
| Three months ended September 30, 2020 | Six months ended September 30, 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease expense | $ | 32 | $ | 52 | ||||
| Finance lease expense | ||||||||
| Depreciation of capitalized finance lease assets | 34 | 69 | ||||||
| Interest expense on finance lease liabilities | 4 | 8 | ||||||
| Total lease cost | $ | 70 | $ | 129 | ||||
| Three months ended June 30, 2022 | Three months ended June 30, 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease expense | $ | 52,140 | $ | 19,942 | ||||
| Finance lease expense | ||||||||
| Depreciation of capitalized finance lease assets | 56,576 | 34,838 | ||||||
| Interest expense on finance lease liabilities | 1,934 | 2,984 | ||||||
| Total lease cost | $ | 110,650 | $ | 57,764 | ||||
NOTE 20: ASSET RETIREMENT OBLIGATIONS
In conjunction with the approval permitting the Company to resume drilling in the existing fields, the Company has recorded an asset retirement obligation (“ARO”) based upon the plan submitted in connection with the permit. The ARO results from the Company’s responsibility to abandon and reclaim their net share of all working interest properties and facilities.
The following table summarizes activity in the Company’s ARO for the six months ended September 30, 2021 and year ended March 31, 2021:
| September 30, 2021 | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Balance, beginning of period | $ | 1,532 | $ | 295 | ||||
| Accretion expense | 78 | 64 | ||||||
| Reclamation obligations settled | - | - | ||||||
| Disposition due to sale of property | (23 | ) | - | |||||
| Additions | - | 111 | ||||||
| Changes in estimates | - | 1,062 | ||||||
| Balance, end of period | $ | 1,587 | $ | 1,532 | ||||
Total ARO at September 30, 2021 and March 31, 2021 shown in the table above consists of amounts for future plugging and abandonment liabilities on our wellbores and facilities based on third-party estimates of such costs, adjusted for inflation for the periods ended September 30, 2021 and March 31, 2021, respectively. These values are discounted to present value at 10% per annum for the periods ended September 30, 2021 and March 31, 2021. The Company disposed of a portion of their properties and wrote off the balance of ARO associated with that disposal of $23 in sales of some of the Company’s properties.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2021
NOTE 21:20: RELATED PARTY TRANSACTIONS
On May 31, 2019Trend Capital Management was founded in 2011 and through June 30, 2021, was Trend Holding’s primary asset. Trend Capital Management is not the Company acquiredinvestment manager of these entities, nor the beneficial owner of Ecoark securities held by Trend Holdings. PursuantDiscovery 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 merger,Company. Trend Capital Management does not have the one thousand issued and outstanding shares of common stock of Trend Holdings were converted into 1,100 sharesobligation to absorb losses or the right to receive benefits that could be significant as a result of the Company’s Common Stockentities’ 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 an approximate dollar value of $3,237 basedTrend Capital Management is not required. Trend Capital Management provides services and collects fees from entities which include Trend LP and Trend SPV.
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2022
Trend Discovery which held Barrier Crest and Trend Capital Management was sold on the closing price per share of Common Stock on the closing date of the merger. William B. Hoagland,June 17, 2022.
Jay Puchir, the Company’s Chief Financial Officer, was PresidentSecretary and a principal stockholder of Trend Holdings and received 550 shares of Common Stock, pursuant to the merger.
Jay Puchir, the Company’s Treasurer, served as a consultant to the Company from May 2019 to March 2020 and was paid solely in stock options totaling 4040,000 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 $578$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.
On March 27, 2020, the Company issued 1,789 shares of its common stock to Banner Energy Services, Inc. (“Banner Energy”) and assumed approximately $11,774 in debt and lease liabilities of Banner Midstream. The Company’s Chief Executive Officer and another director, John Cahill, recused themselves from all board discussions on the acquisition of Banner Midstream as they were stockholders and/or noteholders of Banner Midstream. The transaction was approved by all of the disinterested members of the Board. The Chairman and CEO of Banner Energy is the Treasurer of the Company and Chief Executive Officer and President of Banner Midstream. Included in the shares issued in this transaction, John Cahill received 164 shares of common stock and Jay Puchir received 548 shares of common stock. At the time of this transaction, Mr. Cahill and his brother were also members of Shamrock Upstream Energy LLC, a subsidiary of Banner Midstream.
In the Banner Midstream acquisition, Randy S. May, Chief Executive Officer and Chairman, was the holder of approximately $1,242$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$2,000,000 in principal and accrued interest, which was converted into 2,7402,740,000 shares of Common Stockcommon stock (on a pre-reverse stock split basis) as a result of the transaction. Neither of these amounts remain outstanding.
On September 22, 2021, Agora became the sole owner of Trend Discovery. Trend Discovery is the sole owner of TCM, which is the general partner of Trend Discovery LP, a limited partnership, and the manager of Trend Discovery SPV I, a limited liability company. On August 31, 2021, William B. Hoagland, the then Chief Financial Officer of the Company, and now Chief Executive Officer of Agora, transferred 550550,000 shares of Ecoark Holdings common stock to Trend LP, of which Mr. Hoagland owns an approximately 25-30% partnership interest. Following the transfer,25% of Trend LP owns 713 shares of Ecoark common stock.LP. Additionally, Trend SPV holds 344344,000 shares of Ecoark Holdings common stock and 460460,000 warrants to purchase Ecoark Holdings common stock. However, the investment and voting power over the Ecoark common stock held by Trend SPV and Trend LP has been granted to a third party not affiliated with Agora or Ecoark.
The manager of the privately held limited liability company that the Company purchased an interest in for the Luling Prospect is related through marriage to the Chairman and CEO of the Company. The acquisition was determined to be at arms’ length.
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 September 30, 2022. As of June 30, 2022, Agora owed principal of $5,614,367 and interest of $273,537 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.
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ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30,
SEPTEMBER20212022
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.
Between February 1 and March 1, 2022, Trend Exploration assigned several working interests to Sky3D, LLC, a limited liability company controlled by Randy May, our Chief Executive Officer, in connection with non-interest bearing loans made by Mr. May to us in the amount of $727,737. These loans included $227,737 paid to drill an oil well on a 9,615 acre lease on which the Company is required to drill a well every 270 days and working capital loans. In exchange, Sky3D, LLC assigned the Company a 2.5% working interest in an oil well owned Sky3D, LLC and the loans were cancelled. This transaction occurred because both Agora and Trend Exploration lacked the capital to pay for required drilling by the due date. In exchange, Trend Exploration assigned a small percentage of the ORRI interest to a White River entity. The Company has a $96,000 net receivable due from Sky3D, LLC for expenses incurred on the wells assigned to them.
On April 1, 2022, White River assigned several wells to Third Arm, LLC, a related party. The Company received $999,999 in cash in this transaction. The assignment resulted in a loss of $159,961 which is included in loss from discontinued operations.
NOTE 22:21: SUBSEQUENT EVENTS
Subsequent to SeptemberJune 30, 2021,2022, the Company had the following transactions:
On July 26, 2022, the Company filed a Definitive Proxy Statement with respect to its 2022 Annual Meeting of the Shareholders, being held virtually at t 1:00 p.m., Eastern Time, on September 9, 2022, at which the shareholders of the Company are being asked to approve the following proposals:
| (1) | Approve for purposes of complying with Listing Rule 5635 of the Nasdaq Stock Market, the issuance by the Company of shares of the Company’s Common Stock pursuant to the terms of the private placement financing transaction pursuant to the Securities Purchase Agreement dated June 8, 2022 between the Company and Digital Power Lending, LLC, a California limited liability company, without giving effect to any beneficial ownership limitations contained therein; | |
| (2) | Approve an amendment to the Company’s Articles of Incorporation to increase the number of shares of Common Stock the Company is authorized to issue from 40,000,000 shares to 100,000,000 shares; |
| (3) | Elect four members to the Company’s Board of Directors for a one-year term expiring at the next annual meeting of stockholders; |
| (4) | Ratify the selection of RBSM LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2023; and |
| (5) | Approve the adjournment of the Annual Meeting to a later date or time, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the Annual Meeting, there are not sufficient votes to approve any of the other proposals before the Annual Meeting. |
On July 25, 2022, the Company entered into a Share Exchange Agreement pursuant to which that day it sold to Fortium its oil and gas production business (White River) which is part of the Commodities segment. The Company determined that pursuant to ASC 205-20-45-1E that the operations related to the oil and gas production business would be reclassified as held for sale as those criteria identified in the pronouncement had been satisfied as of July 25, 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 three months ended June 30, 2022. The Company will receive 1,200 of Fortium’s Series A Convertible Preferred Stock, which becomes convertible into 42,253,521 shares of Fortium common stock upon such time as (A) Fortium has filed a Form S-1 or Form 10, or other applicable form, with the SEC and such Form S-1 or other registration statement has been declared effective, or such Form 10 or other applicable form is no longer subject to comments from the Staff of the SEC, and (B) Ecoark elects to distribute shares of its common stock to its shareholders. The transaction was previously disclosed in the Company’s Current Report on Form 8-K filed on July 29, 2022.
On October 6, 2021,August 11, 2022 the Company heldexecuted a Special Meetingdefinitive agreement with HUMBL, Inc. (“HUMBL”) (OTC: HMBL) to transfer up to 100% of Stockholders,the issued and approved (a) an amendmentoutstanding common stock of its majority owned subsidiary Agora Digital Holdings, Inc. (“Agora Digital”) to HUMBL in exchange for up to 6,000 shares of Series C preferred stock valued at $10,000 per share which will be filed prior to closing. The definitive agreement has certain closing conditions which have yet to be fulfilled at the time of this filing including a closing condition whereby the Company is required to source a minimum of $10,000,000 in capital for HUMBL prior to the Articlestransfer of Incorporationownership of Agora Digital to increase the numberHUMBL. The definitive agreement contemplates that some or all of common shares authorizedAgora’s minority shareholders, which consists of Agora’s directors, officers and consultants (some of whom are also directors and officers of the Company from 30,000 sharesincluding our Chief Executive Officer and Chief Financial Officer) owning a total of up to 40,000 shares; (b) an amendment to5,000,000 of the Ecoark Holdings, Inc. 2017 Omnibus Incentive Plan to increase the number ofoutstanding shares of Agora common stock, authorized for issuance under this plan from 800 shares to 1,300 shares;may also execute the agreement and (c) the issuance of 272 restricted stock units and an additional 64 restricted stock units to the President and director of the Company under this plan, in exchange for the cancellation of 672 previously issued stock options. The Company filed a Certificate of Amendment to its Articles of Incorporation increasing its authorized common stock to 40,000 shares effective October 8, 2021.
On October 1, 2021, the Company purchased 41,671their shares of Agora common stock for $4,167 which Agora used to purchase equipment to commence the Bitstream operations.
In addition, between October 7 and November 1, 2021, Agora issued 4,350 shares to its management team and directors. After issuance of these shares, Ecoark controls approximately 91% of Agora, andHUMBL Series C. Additional details will recognize a non-controlling interest moving forward.
In October 2021 Bitstream secured an additional 30 MWs of electrical capacitybe provided at a different West Texas location. This supplements the Company’s prior agreementfuture date via a Form 8-K to secure 12 MWs and as a resultbe filed by the Company will have a total of 42 MWs of electric power for immediate use and benefit to the Company. Bitstream also plans to participate in the ERCOT responsive reserve market by relinquishing its power back to the Texas grid as power stabilization events are needed. Additionally, Bitstream has procured mining infrastructure to power the 42 MWs and expects the equipment and infrastructure to be delivered over the next 120 days. This mining infrastructure includes twenty-one 2,600 kilo-volt amp (KVA) or similar transformers and the Company’s first shipment of Bitcoin mining application-specific integrated circuits (“ASIC”). The Company has agreed to pay a total $3,375 for the new equipment and infrastructure as follows: (i) $506 upon the order which has been paid, (ii) $506 by November 11, 2021, and (iii) the remaining $2,362 by December 15, 2021.
In connection with the increase in electrical capacity, Bitstream entered into a second binding letter of intent with the power management company pursuant to which the Company has paid a total of $2,954, consisting of a $2,628 development feedefinitive agreement and a $326 reimbursement for payments made by the power management company to the electric utility to secure the power. In addition, the Company agreed to pay a total of $450 upon the power management company signing a binding agreement to acquire or lease 20 or more acres of usable land.other transaction documents.
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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 reportReport 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, 2021.2022.
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.
Dollar amounts and number of shares in this Item 2 are expressed in thousands, except per share amounts and per barrel amounts.when separately disclosed, or where the context indicates otherwise.
OVERVIEWOverview
Ecoark Holdings, Inc. (“Ecoark,” “Ecoark Holdings,” or the “Company”) is a diversified holding company incorporated in the state of Nevada on November 19, 2007. Through Ecoark Holdings whollywhich, through wholly-owned or majority owned subsidiaries the Company has operationsoperates in three areas: (i) oil and gas including exploration, productiontransportation and drilling operations on over 20,000 cumulative acreslogistics services focused in the Southern states in the U.S., (ii) development and maintenance of active mineral leases in Texas, Louisiana, and Mississippi and transportation services, (ii) post-harvest shelf-life and freshness food management technology and related intellectual property, and (iii) financial services including investingAgora Digital Holdings, Inc. (“Agora”) which was engaged in a select number of early stage startups, and (iv) a recently launched cryptocurrencythe Bitcoin mining business until late in the fiscal year ended March 31, 2022. Agora’s business is also designed to assist with electric power opportunities in a deregulated market which exists in Texas.
The Company also previously operated a financial services segment through Trend Holdings until June 17, 2022 when (i) Trend Holdings assigned Bitstream Mining LLC (“Bitstream”) to Agora and Trend Exploration to Ecoark Holdings, and (ii) following those transactions, Agora, the Company’s approximately 90% owned subsidiary, sold Trend Holdings to a third party in exchange for a $4.25 million secured promissory loan secured by the assets of the purchaser and guaranteed by the subsidiaries include Banner Midstream Corp. (“Banner Midstream”),that were sold. As a result of the transaction, Agora’s sole operating subsidiary is Bitstream through which it mines Bitcoin.
Following the period covered by this Report, on July 25, 2022 the Company sold White River Holdings Corp. (“White River”), Shamrock Upstream Energyits indirect wholly-owned subsidiary, and with it its oil and gas production business to Fortium Holdings Corp. (“Fortium”) in exchange for 1,200 shares of Fortium’s non-voting Series A Convertible Preferred Stock (the “Fortium Series A”). Subject to certain terms and conditions set forth in the Certificate of Designation of the Fortium Series A, the Fortium Series A will become convertible into 42,253,521 shares of Fortium’s common stock upon such time as (A) Fortium has filed a Form S-1 or Form 10, or other applicable form, with the Securities and Exchange Commission (the “SEC”) and such Form S-1 or other registration statement has been declared effective, or such Form 10 or other applicable form is no longer subject to comments from the Staff of the SEC, and (B) Ecoark elects to distribute shares of its common stock to its shareholders. Fortium is a holding company which following the transaction now operates primarily in oil and gas drilling through White River, and is also in the early stages of operations in the online sporting goods space through Norr LLC, and is developing a business plan for the commencement of operations as a retail distributor of cannabis products in California through Elysian Premium Corp. The cannabis operations are subject to full payment of and receipt of regulatory for the Company’s purchase of two cannabis licenses in California under an agreement entered into in October 2021.
54
The Company’s goal is to spin-off all of its active subsidiaries and Fortium to the Company’s shareholders by December 31, 2022, although because of regulatory delays we may not meet that deadline. At the same time, we expect to acquire another business so we do not become a shell corporation. This will result in a change of control and may or may not be subject to shareholder approval. As of the date of this Report, we have not had any discussions about any such acquisition.
June 2022 Private Placement
On June 8, 2022 the Company entered into a Securities Purchase Agreement with Digital Power Lending, LLC (“Shamrock”DPL”), pursuant to which the Company sold DPL 1,200 shares of Series A Convertible Redeemable Preferred Stock (the “Ecoark Series A”) , 102,881 Commitment Shares, and a warrant to purchase shares of common stock (the “Warrant”) in exchange for $12,000,000. DPL is a subsidiary of BitNile Holdings, Inc. (NYSE American: NILE]) (“BitNile”).
Each share of Ecoark Series A has a stated value of $10,000 and is convertible into shares of common stock at a conversion price of $2.10 per share, subject to certain adjustment provisions. The holder’s conversion of the Series A is subject to a beneficial ownership limitation of 19.9% of the issued and outstanding common stock as of any conversion date of the Ecoark Series A, unless the Company obtains shareholder and Nasdaq approval for the conversion of more than that amount, in order to comply with Nasdaq Rules. In addition, the conversion rights in general did not become effective until July 23, 2022, the first day after the record date for the shareholders meeting seeking such shareholder approval. There are also standard 4.99% and 9.9% beneficial ownership limitations. The Ecoark Series A is entitled to vote with the common stock as a single class on an as-converted basis, subject to certain limitations. Initially, the holder may designate one director.
The holder of shares of the Ecoark Series A is entitled to receive cumulative cash dividends at an annual rate of 12.6% of the stated value, which is equivalent to $1,260 per year per share, payable monthly beginning on the issuance date and continuing until the earlier of (a) June 8, 2024, and (b) the date on which the holder no longer holds any shares of Ecoark Series A. If the Company fails to make one or more dividend payments, whether or not consecutive, a default dividend rate of 18% per annum will apply until all accumulated dividend payments have been made. Additionally, at any time beginning on or after June 8, 2024, the holder of Ecoark Series A may cause the Company to redeem some or all of the shares of Ecoark Series A it holds at a redemption price of $1,200 per share, plus any accumulated and unpaid dividends thereon.
55
The Ecoark Series A Certificate of Designation (the “Series A 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 Ecoark Series A for as long as the holder(s) continue to hold at least 25% (or such higher percentage as set forth in the Series A Certificate) of the Ecoark Series A shares issued on the closing date of the financing. 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 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; |
| (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.
The Warrant issued to DPL is structured as a poison pill in order to insure the Company will spin-off its subsidiaries and favorably consider a proposed business combination. The Amended Warrant provides the Purchaser or its assignees (together, 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 our common stock (the “Warrant Shares”) calculated on a fully diluted basis at an exercise price of $0.001 per share, including the Commitment Shares and Conversion Shares unless sold. Subject to shareholder approval, the Amended Warrant will vest and become exercisable if on June 8, 2024: (i) the Holder (together with its affiliates) beneficially owns less than 50% of our outstanding common stock (on a fully diluted basis) and (ii) the Company has failed to complete the Distributions. Provided, we must retain 20% of our common stock of Agora. The Amended Warrant may be exercised on a cashless basis and expires on June 8, 2027. In the event that the Company or its transfer agent fails to issue the shares of common stock within three business days following delivery of a notice of exercise, the Amended Warrant provides that the Company must pay the Holder a fee of $2.4 million.
Future Spin-Offs
As described in this Report, Ecoark’s goal is to spin-off all of its active subsidiaries and acquire an operating business. The first spin-off is expected to be of the Fortium common stock underlying the Fortium Series A. Ecoark plans to also distribute its ownership of Banner, Zest and Agora shares to Ecoark’s security holders either directly or through a business combination with a third party. To that end, on August 11, 2022 Ecoark executed a definitive agreement with HUMBL, Inc. to transfer up to 100% of the issued and outstanding common stock of its majority owned subsidiary Agora to HUMBL in exchange for up to 6,000 shares of Series C preferred stock valued at $10,000 per share which will be filed prior to closing. The definitive agreement has certain closing conditions which have yet to be fulfilled at the time of this filing including a closing condition whereby Ecoark is required to source a minimum of $10,000,000 in capital for HUMBL prior to the transfer of ownership of Agora to HUMBL. Furthermore, on August 11, 2022, the Company entered into a non-binding letter of intent to divest Banner, in an all-stock transaction to a public company also engaged in oilfield services, although there can be no assurances the letter of intent will result in the execution of a definitive agreement or the closing of a business combination. Upon the successful closing of all business combinations or stock dividends of the subsidiaries described above, Ecoark plans to move forward with the acquiring companies to have registration statements filed with the SEC to register the shares of capital stock for each such entity and then execute a stock dividend to distribute 100% of such capital stock to Ecoark’s shareholders of record as of one or more future to be determined record dates.
At some point, Ecoark expects that BitNile or an affiliate will present a reverse merger candidate to it which will prevent Ecoark from becoming a shell or losing its Nasdaq listing. However, the parties have only engaged in very preliminary discussions. What the acquisition target will be and what the consideration will be has not been discussed. The Ecoark Board of Directors intends to obtain a valuation from a nationally recognized valuation firm and advice from investment bankers consistent with the exercise of their fiduciary duty.
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To date, discussions between BitNile have centered upon Ecoark being able to spin-off to its shareholders each of our subsidiaries, either directly or through the business combinations. Our current plans are to expedite the spin-offs and complete them by December 31, 2022, although we may not reach our goal by then. In order to avoid the harsh terms of the Warrant issued to the BitNile subsidiary, we expect that the spin-offs will occur on or before June 7, 2024. BitNile files reports with the SEC which investors are encouraged to review at www.SEC.gov/EDGAR, which reports are not incorporated herein by reference.
Following the above transactions, the Company’s active subsidiaries include Banner Midstream Corp. (“Banner” or “Banner Midstream”), Pinnacle Frac Transport LLC (“Pinnacle Frac”), Capstone Equipment Leasing LLC (“Capstone”), Zest Labs, Inc. (“Zest Labs”), and Agora Digital Holdings, Inc., a Nevada corporation (“Agora”) who was assigned the membership interest in Trend Discovery Holdings LLC, a Delaware limited liability corporation as well as all of Agora’s recently formed subsidiaries as discussed herein (all references to “Trend Holdings” or “Trend” are now synonymous with Agora) from the Company on September 17, 2021 upon its formation.
On August 4, 2021,The following is an overview of our operating subsidiaries as of June 30, 2022:
Banner Midstream Corp
The Company entered the oil and gas industry following the previously disclosed acquisition of Banner in March 2020. Below are descriptions of the Company’s common stock commenced trading on the Nasdaq Capital Market.subsidiaries and operations through Banner.
Pinnacle Frac
Through Pinnacle Frac, the Company provides transportation of frac sand and logistics services to major hydraulic fracturing and drilling operations. Capstone procuresOur transportation services entail using third party drivers who assist in transporting sand and finances equipmentrelated materials to oilfieldcustomers’ locations for the customers’ hydraulic fracturing, or fracking. The logistics services Pinnacle Frac provides for its customers’ fracking and drilling enterprises, include the operation of a 24/7 dispatch service center based in Texas through which we dispatch the trucks for hauling frac sand and related equipment. Pinnacle Frac uses independent third party owner-operators of trucks to service its customers in their fracking operations by transporting materials, mainly frac sand. Our transportation and logistics services operations are primarily centered in the Southern United States, although we also occasionally service contractors.fracking operations in the Northeastern United States.
White River and Shamrock
Through White River, and Shamrock, we arewere engaged in oil and gas exploration, production, and drilling operations on over 20,00030,000 cumulative acres of active mineral leases in Texas, Louisiana, and Mississippi. As described above, White River and our oil and gas exploration, production and drilling operations were sold in July 2022. Shamrock Upstream Energy LLC (“Shamrock”) is a Banner Midstream subsidiary which previously was engaged in oil drilling. We have sold all of its properties and it is now inactive.
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Zest Labs
Through its wholly-owned subsidiary Zest Labs’ goal is toLabs, the Company has developed intellectual property that can offer freshness management solutions for fresh food growers, suppliers, processors, distributors, grocers and restaurants. Our efforts with respect to the freshness food management solution have to a considerable degree been focused on preparing for trial and appeals in our previously disclosed lawsuit against Walmart, Inc. and Deloitte Consulting.
Agora Digital Holdings, Inc.
Through Agora we provide financial services and collect fees from entities which invest in securities, and also plans to operate as a digital asset mining company as described in more detail below.
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 one hundred shares for ten dollars. On October 1, 2021, the Company purchased 41,671 shares of Agora common stock for $4,167 which Agora used to purchase equipment to commence the Bitstream operations.
Trend Holdings formed four subsidiaries, Bitstream Mining, LLC, a Texas Limited Liability Company (“Bitstream”) on May 16, 2021, REStream Processing LLC, a Texas Limited Liability Corp (“REStream”). on May 16, 2021, Trend Discovery Exploration LLC, a Texas Limited Liability Corp. (“Trend Exploration”) on May 27, 2021, and OTZI, LLC, a Delaware Limited Liability Corp. (“OTZI”) on September 2, 2021, in addition to Barrier Crest, LLC (“Barrier Crest”) that was acquired along with Trend Capital Management, Inc. (“TCM”) that was acquired by Ecoark on May 31, 2019.
Agora was organized by Ecoark to enter the digital asset mining business. Because of regulatory uncertainty over digital assets being deemed to be securities, Agora’s initial focus is on mining Bitcoin which the SEC administratively determined is not a security. Because of regulatory concerns and the changing regulatory environment, Agora intends to seek opportunities to engage with cryptocurrencies that do not involve the offer or sale of any securities.
The Company intends to issue a stock dividend through a pro rata distribution of Agora’s common stock to Ecoark’s common shareholders and holders of common stock equivalents. Ecoark plans to distribute 80% of the Agora common stock it holds to its shareholders as of a future record date to be determined upon completion of regulatory compliance. Ecoark plans to retain the remaining 20% ownership in Agora on its balance sheet. As a result of the approval by the board of directors of the Company to divest Agora, the Company, has accounted for this as a disposal other than by sale. Assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of. Upon disposal, the Company must assess whether the disposed of assets qualify for discontinued operations reporting. If so, the Company will apply the presentation and disclosure requirements of ASC 205-20, and if not, the Company will apply the presentation and disclosure requirements of ASC 360-10.
Overview of Agora Digital Holdings, Inc.
The followingFollowing the Company’s sale of Trend Holdings sale, Agora’s only operating subsidiary, Bitstream, engaged in the mining of Bitcoin. For this reason, and because of the substantial investments the Company has made in Bitstream (and Trend Holdings prior to the sale) through loans to Agora totaling $4,760,759 which are outstanding and mature in March 2023, set forth below is a briefan overview of each ofBitstream’s developments, planned operations and the principal subsidiaries that the Company operates through Agora, the Company’s newly formed, majority-owned subsidiary.Bitcoin assets and industry in which it operates.
Bitstream
Bitstream was organized to be our principal cryptocurrencyBitcoin mining subsidiary. Bitstream has entered into a series of agreements including procuring land to install Bitcoin mining equipment, arranging for a reliable and economical electric power source needed to efficiently mine Bitcoin, ordering miners, housing infrastructure and other infrastructure to mine Bitcoin and locating a third-party hosting service to operate the miners and the service’s more advanced miners. Agora has spent (and agreed to spend) between $12-$14$12 - $14 million in connection with these agreements, not including future revenue sharing. Agora anticipatesbrought online entry level miners that the initial miners will beginbegan operating in early November and by late December or January 2022, the2021, with plans to obtain more productive Bitmain S19 Pro miners supplied byfrom the hosting service will be operational. As of October 25, 2021, Bitstream had paid unaffiliated third parties a total of $4,755 and was obligated to pay certain of these third parties an additional $8,686.
Bitstream anticipates that they will deploy and operate modularized data centers (facilities) with the sole purpose of mining digital assets, with Bitcoin initially as the focus. Agora anticipates powering these data centers by acquiring a long-term power contract to purchase electric power from the electric grid in Texas. Once the business is operational, Bitstream intends to continuously add data center facilities by reinvesting their revenues. All data centers will be remotely managed with onsite personnel for servicing and troubleshooting any operational issues. Bitstream plans to utilize the energy to power its energy intensive operations of digital asset mining. Additionally, if Texas experiences another power shortage during the winter or summer months from extreme weather conditions, Bitstream would be able to arbitrage power at favorable margins. Bitstream will do this by temporarily shutting down their cryptocurrency mining operations and sell their purchased power back to the grid at favorable margins. Last winter, during the blackout, the price per kWh exceeded $10 at its peak imbalance, whereas Bitstream’s power cost is expected to be $0.023 per kWh.
Bitstream is expected to be the focal point of the Company’s Agora operations during the next 12 months. For this reason, set forth below is a more detailed overview of Bitstream’s developments, planned operations and the cryptocurrency assets and industry in which it will operate.
Trend Exploration
On July 1, 2021, Trend Exploration acquired oil and gas leases with producing oil wells in Louisiana. Trend Exploration was formed to provide an environmental, social and governance (“ESG”) solution to Bitstream’s need for affordable electric power does not intend to be an oil and gas exploration company. Trend Exploration was assigned an 80% working interest in fourteen wells from White River SPV 2, LLC and White River E&P LLC (“Assignors”) on July 1, 2021. In accordance with ASC 205-20, there is a scope exception for oil and gas properties that use the full-cost method of accounting. Under the full-cost method of accounting, all costs associated with property acquisition, exploration, and development activities are capitalized to cost centers, which are established on a country-by-country basis. The definition of discontinued operations, however, applies to disposals of components of an entity, which is defined as the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. As a result, the definition of discontinued operations will not be operable under the full-cost method of accounting because of differencesprovider in the trackingyear ending March 31, 2023 if Agora can obtain the necessary capital and allocation of costs, which is atsubject to a much higher level. The Company as a result has not reflected the working interest on the fourteen wells in discontinued operations. The Trend Exploration business is identical to the business noted herein for Banner Midstream.
Trend Capital Management
Trend Capital Management was founded in 2011. Trend Capital Management provides services to and collects fees from entities including Trend Discovery LP (“Trend LP”) and Trend Discovery SPV I, LLC (“Trend SPV”), both of which invest in securities. Trend SPV’s only assets are shares of Ecoark. Trend Capital Management neither invests in securities nor have any role in Trend LP and Trend SPV’s purchase of securities. The investment capital in Trend LP and Trend SPV is from individual investors in those firms, and not from Agora.
Barrier Crest
Barrier Crest provides fund administration and fund formation services to institutional investors. Barrier Crest provides fund administration services to Trend LP and Trend SPV. Barrier Crest, provides fund administration and related services for small hedge funds. Trend Discovery Holdings LLC (“Trend Discovery”) owns an entity which is the general partner but not the investment manager of two investment funds. These investment funds own shares of Ecoark and one also owns warrants of Ecoark.
Part of the financial services strategy envisions the acquisition of a broker-dealer to engagematerial increase in the digital assets markets. Asmarket price of the date of this Report, we are not negotiating any potential acquisition. We plan to focusBitcoin. Bitstream temporarily ceased mining on a target as soon as we can.
March 3, 2022.
Cryptocurrency Mining Overview
Distributed blockchain technology is a decentralized or distributed and encrypted ledger that is designed to offer a secure, efficient, verifiable, and permanent way of storing records and other information without the need for intermediaries. Cryptocurrencies serve multiple purposes. They can serve as a medium of exchange, store of value or unit of account. Examples of cryptocurrencies include Bitcoin, Bitcoin Cash, and Litecoin.
Bitcoin was first introduced in 2008 and was first introduced as a means of exchange in 2009. Bitcoin is a consensus network that enables a new payment system and a completely new form of digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitstream believes Bitcoin can be viewed as cash for the Internet. The Bitcoin network shares a public ledger called the “blockchain.” This ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins currency rewards from their own bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in Bitcoins for this service. This process is often called “mining.”
Bitstream plans to mine Bitcoin, and may choose to mine other cryptocurrencies, by acquiring miners to solve complex cryptographic algorithms to support the Bitcoin blockchain (in a process known as “solving a block”). In return for solving a block, Bitstream would receive a Bitcoin.
Bitstream will mine Bitcoin using specialized computer equipment referred to as “miners.” Miners measure their capability in terms of processing power, which is known as in the industry as “hashing” power. Hashing power is measured in terms of the number of hashing algorithms solved (or “hashes”) per second, which is the miner’s “hash rate.” Generally speaking, miners with greater hashing power and in turn a higher hash rate relative to other miners attempting to solve a block have a higher chance of solving the block and receiving a cryptocurrency award. However, although newer generations of miners advertise improved energy efficiency, increasing hash rate generally requires greater electrical power, which increases the cost of solving a block and, therefore, the relative cost of mining a cryptocurrency. As additional miners competed for the limited supply of blocks, individuals found that they were working for months without finding a block and receiving any reward for their mining efforts. To address this variance, miners started organizing into pools to share mining rewards more evenly on a pro rata basis based on total hashing capacity contributed to the mining pool. Bitstream will be participating in a mining pool. As of the date of this report, Bitstream is in the process of paying for and receiving delivery of the necessary infrastructure and equipment to commence mining operations using a total of 42 megawatts (“MW”) of electricity, which through conditional and unconditional rights to two sites in West Texas may be increased to up to 372 MW assuming this can be done so on acceptable terms.
Transportation Services Segment
Mining Equipment. In September 2021 Bitstream ordered 5,000 used Canaan Avalon 841 13 TH/s miners for $1,350. Delivery of 2,000 of these miners occurred in October 2021. Bitstream’s plan is to use trailer or shipping container-like units as housing infrastructure to house our miners. Bitstream will either build their own or partner with another third-party vendor to build entry level housing infrastructure to deploy the initial mining equipment in November. In August 2021, Bitstream entered into an agreement with a third party which will supply Bitstream with more advanced housing infrastructure in exchange for approximately $375. Delivery of these enhanced housing infrastructure is expected in late 2021 or early 2022.
In September 2021, Bitstream entered into a binding agreement referred to as a Memorandum of Understanding with Elite Mining Inc. (the “Hosting Company”) that will supply high speed miners, host the Company’s data center and operate the miners it installs. In Phase 1 which is a beta test phase, Bitstream paid $600 to the Hosting Company which will also supply 6 MW capacity’s worth of very high speed and efficient miners by mid-January 2022. Bitstream has an option to purchase these high-speed miners at replacement cost (which may be higher than current cost). The Hosting Company may provide hosting for third parties during Phase 1 which reduces the cash flow for Bitstream. This agreement will also allow Bitstream to utilize a minimum of 25 MW of electricity under the initial power purchase agreement in Phase 2. Bitstream can terminate the hosting agreement as soon as Bitstream has secured sufficient capital to replace the hosted Bitmain S19 Pros with their own. Once Bitstream purchases the high-efficiency miners, the Hosting Company cannot host third parties.
Phase 2 is planned to begin in May 2022 which is subject to Bitstream agreeing to proceed. If Bitstream elects to enter Phase 2, it will be required to loan the Hosting Company the funds to develop a production facility in Texas on terms to be negotiated. Bitstream will have certain rights to the production facility capacity from Phase 2 and will pay the Hosting Company for its services.
In October 2021 Bitstream secured an additional 30 MWs of electrical capacity at a different West Texas location. This supplements the Company’s prior agreement to secure 12 MWs and as a result the Company will have a total of 42 MWs of electric power for immediate use and benefit to Bitstream. Bitstream also plans to participate in the Electric Reliability Council of Texas’ (“ERCOT”) responsive reserve market by relinquishing its power back to the Texas grid as power stabilization events are needed. Additionally, Bitstream has procured mining infrastructure to power the 42 MWs and expects the equipment and infrastructure to be delivered over the next 120 days. This mining infrastructure includes twenty-one 2,600 kilo-volt amp (KVA) or similar transformers and the Company’s first shipment of Bitcoin mining application-specific integrated circuits (“ASIC”). The Company has agreed to pay a total $3,376 for the new equipment and infrastructure as follows: (i) $506 upon the order which has been paid, (ii) $506 by November 11, 2021, and (iii) the remaining $2,364 by December 15, 2021.
In connection with the increase in electrical capacity, Bitstream entered into a second binding letter of intent with the power management company pursuant to which the Company has paid a total of $2,955, consisting of a $2,628 development fee and a $327 reimbursement for payments made by the power management company to the electric utility to secure the power. In addition, the Company agreed to pay a total of $450 upon the power management company signing a binding agreement to acquire or lease 20 or more acres of usable land. Bitstream is currently negotiating an agreement for this but as of the date of this Report, no agreement has been executed.
Once the business is operational, Bitstream intends to continuously add data center platforms by reinvesting cash and potentially utilizing leverage to scale operations. All data centers will be remotely managed with onsite personnel for servicing and troubleshooting any operational issues.
Commodities Segment
For the six and three months ended SeptemberJune 30, 2021,2022, the Company’s consolidated revenues from continuing operations consisted almost exclusively of the revenues from, and most of our expenses were related to, the CommoditiesTransportation services segment. In our CommoditiesTransportation services segment, our activities are primarilyalmost exclusively directed at our frac sand logistics business, Pinnacle Frac, and we expect a majority of our revenues to be derived from that business for the conventional enhancement and development of all productive formations throughout our Louisiana and Mississippi leasehold positions of over 20,000 acres. We intend to continue to enhance and develop our reserves and increase production through exploration activities on our prolific inventory of potential drilling locations.near future.
Key Terms and Metrics
In connection with the management of our businesses, we identify, measure and assess a variety of operating metrics. In the Commodities segment, the principal metrics we use in managing our businesses are set forth below:
“Bbl” – Bbl means barrel of crude oil. Metric used by management to specify the unit of measure (“in barrels”) from which the Company’s midstream customers use to incrementally purchase oil from the Company. Barrels are used as a unit of measure universally across the oil industry so the Company’s adoption of barrels to measure units of oil is a standard practice.
“Mbbl” – Mbbl means a thousand barrels of oil. See comments on “Bbl” metric. “Mbbl” is a standard for measuring larger quantities of barrels of oil in thousands of units.
“Production (Gross)” – Production (Gross) is defined as barrels of oil produced before accounting for working interests from non-mineral owning parties. Metric used by management to specify the total number of barrels of oil produced from a given oil well. Gross production includes both the barrels owned by the oil and gas mineral owners as well as the drilling and investing group who funded and drilled the well which are considered the working interest owners. Gross production is a standard term used universally across the oil industry, so the Company’s adoption of this term is a standard practice.
“Production (Net)” – Production (Net) is defined as the net barrels of oil produced after deducting the ownership portion owned by the mineral owning parties. Unless otherwise specified, management assumes that the mineral ownership portion of a well is 25%, so a 100% working interest would result in a 75% Net Production or Net Revenue interest after accounting for the ownership portion of oil production owned by the mineral owners.
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Segment Reporting for the Six and Three Months Ended SeptemberJune 30, 20212022 and 2020:2021:
Prior to August 26, 2021, the Company operated in three segments. The segments are Financial Services (Trend Holdings), Technology (Zest Labs), and CommoditiesTransportation Services (Banner Midstream). Effective July 1, 2021, the Company’s chief operating decision makers in discussion with the finance team determined that the Company willwould add a fourth reporting segment to account for their Digital Asset mining business. Additionally, beginning on July 1, 2021 the Company began reporting its home office costs into the Commodity segment, charging its Technology segment a monthly overhead fee, and has recorded typical overhead expenses in their Finance and Digital Asset segments to account for this home office allocation.
| Six Months Ended September 30, 2021 | Digital Assets | Commodities | Financial | Technology | Total | |||||||||||||||
| Segmented operating revenues | $ | - | $ | 12,642 | $ | 348 | $ | - | $ | 12,990 | ||||||||||
| Cost of revenues | - | 7,166 | - | - | 7,166 | |||||||||||||||
| Gross profit | - | 5,476 | 348 | - | 5,824 | |||||||||||||||
| Total operating expenses net of depreciation, amortization, depletion and accretion | 408 | 9,530 | 271 | 1,593 | 11,802 | |||||||||||||||
| Depreciation, amortization, depletion and accretion | - | 1,627 | - | 111 | 1,738 | |||||||||||||||
| Other (income) expense | - | (3,101 | ) | (220 | ) | (1,099 | ) | (4,420 | ) | |||||||||||
| Income (loss) from continuing operations | $ | (408 | ) | $ | (2,580 | ) | $ | 297 | $ | (605 | ) | $ | (3,296 | ) | ||||||
| Three Months Ended June 30, 2022 | Bitcoin Mining | Commodities | Technology | Total | ||||||||||||
| Segmented operating revenues | $ | - | $ | 5,418,655 | $ | - | $ | 5,418,655 | ||||||||
| Cost of revenues | 93,861 | 4,514,011 | - | 4,607,872 | ||||||||||||
| Gross profit (loss) | (93,861 | ) | 904,644 | - | 810,783 | |||||||||||
| Total operating expenses net of depreciation, amortization, and impairment | 6,312,064 | 2,292,264 | 454,573 | 9,058,901 | ||||||||||||
| Depreciation, amortization, and impairment | 45,097 | 112,830 | - | 157,927 | ||||||||||||
| Other (income) expense | 121,134- | 1,266,528 | - | 1,387,662 | ||||||||||||
| Loss from continuing operations | $ | (6,572,156 | ) | $ | (2,766,978 | ) | $ | (454,573 | ) | $ | (9,793,707 | ) | ||||
| Segmented assets as of June 30, 2022 | ||||||||||||||||
| Property and equipment, net | $ | 7,190,396 | $ | 928,127 | $ | - | $ | 8,118,523 | ||||||||
| Intangible assets, net | $ | 10,145 | $ | 1,652,088 | $ | - | $ | 1,662,233 | ||||||||
| Goodwill | $ | - | $ | 4,900,873 | $ | - | $ | 4,900,873 | ||||||||
| Three Months Ended September 30, 2021 | Digital Assets | Commodities | Financial | Technology | Total | |||||||||||||||
| Segmented operating revenues | $ | - | $ | 5,911 | $ | 200 | $ | - | $ | 6,111 | ||||||||||
| Cost of revenues | - | 3,224 | - | - | 3,224 | |||||||||||||||
| Gross profit | - | 2,687 | 200 | - | 2,887 | |||||||||||||||
| Total operating expenses net of depreciation, amortization, and impairment | 408 | 6,016 | 117 | 939 | 7,480 | |||||||||||||||
| Depreciation and amortization | - | 667 | - | 55 | 722 | |||||||||||||||
| Other expense | - | 540 | - | - | 540 | |||||||||||||||
| Loss from continuing operations | $ | (408 | ) | $ | (4,536 | ) | $ | 83 | $ | (994 | ) | $ | (5,855 | ) | ||||||
| Segmented assets as of September 30, 2021 | ||||||||||||||||||||
| Property and equipment, net | $ | 4,247 | $ | 3,360 | $ | - | $ | 181 | $ | 7,788 | ||||||||||
| Oil and Gas Properties/Capitalized drilling costs | $ | - | $ | 14,088 | $ | - | $ | - | $ | 14,088 | ||||||||||
| Intangible assets, net | $ | - | $ | 1,891 | $ | - | $ | - | $ | 1,891 | ||||||||||
| Goodwill | $ | - | $ | 7,002 | $ | 3,223 | $ | - | $ | 10,225 | ||||||||||
| Capital expenditures | $ | 4,247 | $ | - | $ | - | $ | - | $ | 4,247 | ||||||||||
| Six Months Ended September 30, 2020 | Commodities | Financial | Technology | Total | ||||||||||||
| Segmented operating revenues | $ | 5,397 | $ | 194 | $ | - | $ | 5,591 | ||||||||
| Cost of revenues | 3,426 | - | - | 3,426 | ||||||||||||
| Gross profit | 1,971 | 194 | - | 2,165 | ||||||||||||
| Total operating expenses net of depreciation, amortization, depletion and accretion | 5,951 | 194 | 1,481 | 7,626 | ||||||||||||
| Depreciation, amortization, depletion and accretion | 498 | - | 126 | 624 | ||||||||||||
| Other (income) expense | 5,270 | 140 | 701 | 6,111 | ||||||||||||
| Loss from continuing operations | $ | (9,748 | ) | $ | (140 | ) | $ | (2,308 | ) | $ | (12,196 | ) | ||||
| Three Months Ended June 30, 2021 | Commodities | Technology | Total | |||||||||
| Segmented operating revenues | $ | 5,156,213 | $ | - | $ | 5,156,213 | ||||||
| Cost of revenues | 3,597,941 | - | 3,597,941 | |||||||||
| Gross profit | 1,558,272 | - | 1,558,272 | |||||||||
| Total operating expenses net of depreciation, amortization, and impairment | 3,021,721 | 251,626 | 3,273,347 | |||||||||
| Depreciation, amortization, and impairment | 196,263 | 55,916 | 252,179 | |||||||||
| Other (income) expense | (4,360,320 | ) | - | (4,360,320 | ) | |||||||
| Income (loss) from continuing operations | $ | 2,700,608 | $ | (307,542 | ) | $ | 2,393,066 | |||||
| Three Months Ended September 30, 2020 | Commodities | Financial | Technology | Total | ||||||||||||
| Segmented operating revenues | $ | 3,174 | $ | 104 | $ | - | $ | 3,278 | ||||||||
| Cost of revenues | 2,333 | - | - | 2,333 | ||||||||||||
| Gross profit | 841 | 104 | - | 945 | ||||||||||||
| Total operating expenses net of depreciation, amortization, depletion and accretion | 3,884 | 65 | 562 | 4,511 | ||||||||||||
| Depreciation, amortization, depletion and accretion | 260 | - | 63 | 323 | ||||||||||||
| Other (income) expense | (8,467 | ) | (735 | ) | (3,672 | ) | (12,874 | ) | ||||||||
| Income from continuing operations | $ | 5,164 | $ | 774 | $ | 3,047 | $ | 8,985 | ||||||||
| Segmented assets as of September 30, 2020 | ||||||||||||||||
| Property and equipment, net | $ | 3,677 | $ | - | $ | 416 | $ | 4,093 | ||||||||
| Oil and Gas Properties | $ | 11,412 | $ | - | $ | - | $ | 11,412 | ||||||||
| Intangible assets, net | $ | 2,208 | $ | - | $ | - | $ | 2,208 | ||||||||
| Goodwill | $ | 7,002 | $ | 3,223 | $ | - | $ | 10,225 | ||||||||
| Capital expenditures | $ | 617 | $ | - | $ | - | $ | 617 | ||||||||
Second Quarter 2021 Operating Highlights
First Quarter 2023 Highlights
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Key Trends
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Commodity PricesKey Trends
Impact of Inflation
In early March 2020,2022, data indicates a sharp rise in inflation in the U.S. and globally. In the U.S., inflation has been triggered by constrained supplies and increasing demand of certain goods and services as recovery from the COVID-19 pandemic continues. The Company’s revenues, capital and operating costs are influenced to a larger extent by specific price changes in the oil and natural gas industry and allied industries rather than by changes in general inflation. Crude oil prices dropped sharplygenerally reflect the balance between supply and continueddemand, with crude oil prices being particularly sensitive to decline, briefly reaching negativeOPEC production levels, as a resultthe Biden Administration’s efforts to reduce drilling and transition away from fossil fuels and/or attitudes of multiple factors affecting thetraders concerning supply and demand in globalthe future. Prices for oil and gas related services such as those we supply though Pinnacle Frac and truck drivers we procure to assist in those efforts are also affected by the worldwide prices for crude oil. As a result of increasing prices for oil and natural gas, markets, including (i) actions taken by OPEC membersin 2021 and thus far in 2022, higher costs for goods and services in the oil and gas industry are being observed.
In response to recent inflationary pressures in the U.S., the Federal Reserve commenced interest rate hikes in calendar year 2022 in an effort to combat inflation. Because of these and other exporting nations impacting commodity pricedevelopments, a recession is expected in the coming months by many economic analysts, which may, among other things, reduce demand for our products and production levels and (ii) a significant decrease in demand dueservices as well as increase operating costs to the ongoing COVID-19 pandemic. However, certain restrictions on conducting business that were implemented in responseextent we are unable to the COVID-19 pandemic have been lifted as improved treatments and vaccinations for COVID-19 have been rolled-out globally since late 2020. procure required resources to continue our operations.
As a result oil and natural gas market prices have improved in response to the increase in demand and global and United States reductions in drilling. However, as of the dateoverall volatility of this report oil and natural gas prices, have experienced increased volatility dueit is not possible to predict the uncertainty related to the Delta variantCompany’s future cost of the virus.oil it produces or services it uses or provides.
During 2020 and 2021, the posted NYMEX WTI price for crude oil ranged from $(37.63) to $76.25 per Bbl. On September 30, 2021, the NYMEX WTI price for crude oil was $75.03 per Bbl. Commodity prices have historically been volatile and we cannot predict events which may lead to future fluctuations in these prices.
Impact of COVID-19
The COVID-19 pandemic previously had a profound effect on the U.S. and global economy and may continue to affect the economy and the industries in which we operate, 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 2021quarter ended June 30, 2022 included in this Form 10-Q in contrast to the material impact it had in the prior fiscal year.
Because of the federal governmentpossibility of new variants of the virus and some state and local authorities are reacting to the current Delta variant of COVID-19, itany governmental or economic reactions that may result, there is creatinginherent uncertainty on whether these actionsany such developments could disrupt the operation of the Company’s business and have an adverse effect on the Company. For example, outbreaks in early calendar year 2022 arising from the more contagious Omicron variant resulted in labor shortages including with respect to truck drivers. Additionally, the pandemic has been a contributing factor in supply shortages which have been pervasive in many industries. The extent to which the 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, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.
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Results of Operations For Continuing Operations For the Three Months Ended June 30, 2022 and 2021
Revenues
The following table shows revenues for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue from continuing operations: | ||||||||
| Bitcoin mining | $ | - | $ | - | ||||
| Transportation Services | 5,348,225 | 5,037,994 | ||||||
| Fuel Rebate | 63,095 | 92,406 | ||||||
| Equipment Rental and Other | 7,335 | 25,813 | ||||||
| Total | $ | 5,418,655 | $ | 5,156,213 | ||||
Revenues for the fiscal quarter ended June 30, 2022 (“Q1 2023”) were $5,418,655 as compared to $5,156,213 for the fiscal quarter ended June 30, 2021 (“Q1 2022”).
Revenues were comprised of $5,348,225 in the transportation services segment, with no revenue from the Bitcoin mining segment for Q1 2023 and Q1 2022, respectively. Additionally, revenue from fuel rebates were $63,095 and $92,406, and revenue from equipment rental and other sources were $7,335 and $25,813 for Q1 2023 and Q1 2022, respectively. There were no revenues from our technology segment during Q1 2023 or Q1 2022.
Due to the sale of Trend and White River, which together constituted all of the Company’s revenue generating oil and gas production activities, as of July 25, 2022, the Company’s former oil and gas exploration, production and drilling operations are now treated as discontinued operations, and therefore are not included in the revenue from continuing operations for Q1 2023 and Q1 2022.
The Company’s Bitcoin operations began in the fiscal year ended March 31, 2022 and temporarily 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. Therefore no amounts are reflected for that segment for the quarters ended June 30, 2022 and 2012.
Cost of Revenues and Gross Profit
The following table shows costs of revenues for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Total | $ | 4,607,872 | $ | 3,597,941 | ||||
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Cost of revenues for Q1 2023 was $4,607,872 as compared to $3,597,941 for Q1 2022, primarily because of higher costs related to independent third party owner-operator trucks and higher fuel costs. The decrease in gross profit margins to 14.9% in Q1 2023 compared to 30.2% in Q1 2022 was primarily due to costs related to independent third party owner-operator costs and costs related to Bitcoin mining segment. .. Cost of revenues was comprised of $4,514,010 and $3,597,941 in the transportation services segment and $93,861 and $0 in the Bitcoin mining segment for Q1 2023 and Q1 2022, respectively. There were no cost of revenues in the technology segment for Q1 2023 and Q1 2022.
Operating Expenses
The following table shows operating expenses by segment for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Segment | ||||||||
| Transportation Services segment | $ | 2,405,094 | $ | 3,217,984 | ||||
| Technology segment | 454,573 | 307,542 | ||||||
| Bitcoin segment | 6,357,161 | - | ||||||
| Total | $ | 9,216,828 | $ | 3,525,526 | ||||
The following table shows operating expenses for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating Expenses | ||||||||
| Salaries and salaries related costs | $ | 6,273,380 | $ | 1,286,711 | ||||
| Professional and consulting fees | 253,476 | 130,486 | ||||||
| Selling, general and administrative costs | 2,532,045 | 1,856,150 | ||||||
| Depreciation, amortization, depletion, and accretion | 148,805 | 252,179 | ||||||
| Cryptocurrency impairment cost | 9,122 | - | ||||||
| $ | 9,216,828 | $ | 3,525,526 | |||||
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Selling, General and Administrative
The following table shows selling, general and administrative expenses for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Selling, General and Administrative Costs | ||||||||
| Capital Raising Costs | $ | 25,000 | $ | 275,000 | ||||
| Insurance | 559,007 | 672,281 | ||||||
| Legal/Audit/Accounting | 662,822 | 259,812 | ||||||
| Factoring Expense | 96,401 | 120,291 | ||||||
| Equipment Rental | 116,566 | 116,741 | ||||||
| Development Costs | 391,103 | - | ||||||
| Other | 681,146 | 412,025 | ||||||
| $ | 2,532,045 | $ | 1,856,150 | |||||
Depreciation and Amortization
The following table shows depreciation and amortization expenses for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Depreciation of sand frac transportation equipment | $ | 48,587 | $ | 109,059 | ||||
| Depreciation of technology segment assets | - | 55,916 | ||||||
| Depreciation of Bitstream mining assets | 35,975 | - | ||||||
| Amortization of intangible assets | 64,243 | 87,204 | ||||||
| Depreciation and amortization expense | $ | 148,805 | $ | 252,179 | ||||
Total depreciation and amortization expense was $148,805 in Q1 2023, compared to $252,179 in Q1 2022. The change was primarily due to the sale of several trucks and trailers in our sand frac transportation business in Q1 2023, assets being fully depreciated in Q1 2023 compared to Q1 2022 in the technology segment, and depreciation in Bitstream mining in Q1 2023 compared to none in Q1 2022.
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Other Income (Expense)
The following table shows other income (expense) for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Change in fair value of derivative liabilities | $ | (393,532 | ) | $ | 4,945,819 | |||
| Gain (loss) on disposal of fixed assets | (950,024 | ) | - | |||||
| Interest expense, net of interest income | (44,106 | ) | (585,499 | ) | ||||
| Other income (expense) | $ | (1,387,662 | ) | $ | 4,360,320 | |||
Total other (expense) was $(1,387,662) in Q1 2023, compared to total other income of $4,360,320 in Q1 2022. Change in fair value of derivative liabilities for Q1 2023 was a non-cash loss of $(393,532) as compared to a non-cash gain of $4,945,819 for Q1 2022.
There was a (loss) on disposal of fixed assets of $(950,024) as a result of sale of multiple company owned tractors and trailers. Proceeds from sale were $580,000. Many of the trucks/trailers were non-operating. There was no corresponding gain or loss in Q1 2022.
Interest expense, net of interest income, for Q1 2023 was $(44,106) as compared to $(585,499) for Q1 2022. The decrease in interest expense was the result of the value related to the granting of warrants for interest of $545,125 in Q1 2022.
Net Income (loss)
The following table shows net income (loss) from continuing operations for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Transportation Services Segment | $ | (2,766,978 | ) | $ | 2,700,608 | |||
| Bitcoin Segment | (6,572,156 | ) | - | |||||
| Technology Segment | (454,573 | ) | (307,542 | ) | ||||
| Net Income (loss) | $ | (9,793,707 | ) | $ | 2,393,066 | |||
Net (loss) from continuing operations for Q1 2023 was $(9,793,707) as compared to net income from continuing operations of $2,393,066 for Q1 2022. The decrease was primarily due to an increase in salaries and salaries related costs arising from compensation of Agora employees and consultants in connection with the development of our Bitcoin mining operations. The decrease was also due to a net expense of $393,532 in the change in fair value of derivative liabilities in Q1 2023 compared to $4,945,819 income in Q1 2022.
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.
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Net cash used in operating activities for continuing operations was $(3,749,215) for the quarter ended June 30, 2022, as compared to $(751,258) for the same quarter of 2021. Cash used in operating activities for the quarter ended June 30, 2022 was primarily caused by the $10,196,534 net loss from continuing operations including $6,572,156 related to Agora’s operations offset by $5,215,287 in non cash compensation related to the issuances Agora restricted common stock for services.
Net cash provided by investing activities was $974,399 for the quarter ended June 30, 2022, compared to $2,500 for the quarter ended June 30, 2021. Net cash used in investing activities in the quarter ended June 30, 2022 were comprised of proceeds received from the sale of equipment.
Net cash provided by financing activities for the quarter ended June 30, 2022 was $11,577,814 which comprised net proceeds from our June 2022 sale of the Ecoark Series A, Commitment Shares and the Warrant as more particularly described below under “June 2022 Private Placement.” This compared with the quarter ended June 30, 2021 net cash used in financing activities of $217,514.
As of August 8, 2022, the Company has $2,660,651 in cash and cash equivalents. The Company believes this cash plus revenue from operations from our transportation services business is sufficient to meet our cash needs for the 12 months following the filing of this Report.
To date we have financed our operations through sales of common stock, convertible preferred stock and other derivative securities and the issuance of debt.
Agora Line of Credit
As of August 2, 2022, the Company has advanced a total of $5,889,057 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.
Trend Ventures Note
The secured note from the sale of Trend is due June 16, 2025 and bears interest at a rate of 5% per year, subject to increase to 10% while an event of default has occurred and is continuing. The purchaser’s obligations under the note are secured by a first lien secured interest in the assets of the purchaser, and are also guaranteed by the Purchaser’s newly acquired subsidiaries.
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. The Company is required to pay interest biannually on the outstanding principal amount of each loan calculated at an annual rate of 12%. The loans are evidenced by demand notes executed by the Company. The Company is able to request draws from the lender up to $1,000,000 with a cap of $10,000,000. In the year ended March 31, 2022, the Company borrowed $595,855, which includes $25,855 in commitment fees, with the balance of $575,000 being deposited directly into the Company. In the three months ended June 30, 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 $585,000 in the three months ended June 30, 2022. Interest incurred for the three months ended June 30, 2022 was $25,864, and accrued as of June 30, 2022 was $28,086. There were no advances in the three months ended June 30, 2021. With the sale of Trend Holdings, we no longer can access this line of credit.
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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 the potential terms, timing and success of the closings of the various transactions and the planned spin-offs by us to our security holders of certain subsidiaries or other entity’s capital stock (either directly or through one or more business combinations) and plans to file registration statements in connection therewith, including with respect to a definitive agreement with HUMBL and Agora, a non-binding letter of intent with Banner and an undisclosed public company and the planned spin-off of Fortium common stock underlying the Fortium Series A, the expected revenues of our transportation services business, future operating results following our discontinued oil and gas drilling business as a result of the sale of White River to Fortium, anticipated or potential transactions with BitNile and/or its affiliates, expected substantial investments to fund our business and support growth, our Bitcoin mining operations through Agora and Agora’s initial public offering which may be abandoned particularly if the HUMBL transaction closes, expected use of proceeds of our recent financing with DPL and cash generated from our, our expectations with respect to future developments in our ongoing litigation, and future liquidity. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, 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 CARES Act includes, amongresults 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 the ability to complete and timelines of business combinations with and our planned spin-offs of the capital stock of our subsidiaries and certain other things, provisionsentities and any regulatory, registration or other delays or obstacles that may arise with respect thereto, including delays or challenges in obtaining the requisite approvals, any inability to close the Agora or Banner business combinations, including the requirement under the HUMBL agreement that we secure at least $10 million in financing for HUMBL which we may be unable to accomplish due to a recessionary environment, inflation, the declined price of Bitcoin, or other factors beyond our control, risks and uncertainties relating to payroll tax creditsundisclosed liabilities or the integration of such entities with the acquiring entity if any such transaction closes, a possible drop in value of stock prices prior to any planned distribution to our shareholders, failure to meet Nasdaq continued listing requirements, the impact of future strains of COVID-19, the Russian invasion of the Ukraine, inflation 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 business are eligibleFederal Reserve interest rate increases in response thereto on the economy including the potential for a loanrecession which may result, supply chain shortages, the future prices of, and demand for, oil and gas and Bitcoin, future adverse regulatory changes with respect to fund payroll expenses, rentthe oil and related costs. Wegas industry we serve, Bitcoin, and classification of independent contractors as employees, any issues which could result in unfavorable outcomes of one or both of our ongoing lawsuits, continued service of key management and employees, and the availability of capital on acceptable terms when needed or at all, including as the result of the recent climate change initiatives and economic volatility. In addition, with respect to the Agora transaction and planned spin-off, Agora had received funding undersubstantial difficulty clearing accounting comments with the PPP,SEC Staff and never heard back from the office of chief accountant after several weeks. There can be no assurance that a majorityregistration statement by Ecoark or HUMBL will be declared effective or clear comments, as the case may be, without which the spin-off of thatAgora or HUMBL stock cannot occur. Further, it is unclear when Ecoark shareholder approval will be required or if it will be obtained, and further Nasdaq may delist us as indicateda result of our planned spin offs or acquisition activities. Further information on the risks and uncertainties affecting our business is contained in our Consolidated StatementAnnual Report on Form 10-K for the fiscal year ended March 31, 2022 under Part I. Item 1A. – Risk Factors. Further, with respect to Agora and its operations, Agora’s registration statement on Form S-1 (File No. 333-261246), as amended, sets forth additional risks and uncertainties specific to its business. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of Operations has been forgiven.new information, future events or otherwise.
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Critical Accounting Policies, Estimates and Assumptions
The critical accounting policies listed below are those the Company deems most important to their 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.
The estimates of proved, probable and possible oil and gas reserves are used as significant inputs in determining the depletion of oil and gas properties and the impairment of proved and unproved oil and gas properties. There are numerous uncertainties inherent in the estimation of quantities of proven, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves and commodity price outlooks. Actual results could differ from the estimates and assumptions utilized.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:
| ● | Step 1: Identify the contract with the customer |
| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
| ● | Step 5: Recognize revenue when the Company satisfies a performance obligation |
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OilIn 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 Gas Propertiesidentify 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).
The Company usesIf a good or service is not distinct, the full cost methodgood or service is combined with other promised goods or services until a bundle of accounting for its investment in oil and natural gas properties. Under the full cost method of accounting, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs are capitalized. General and administrative costs related to production and general overhead are expensed as incurred.goods or services is identified that is distinct.
All capitalized costsThe transaction price is the amount of oil and gas properties, includingconsideration 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 estimated future coststransaction price, an entity must consider the effects of all of the following:
| ● | Variable consideration |
| ● | Constraining estimates of variable consideration |
| ● | The existence of a significant financing component in the contract |
| ● | Noncash consideration |
| ● | Consideration payable to a customer |
Variable consideration is included in the transaction price only to develop proved reserves, are amortized on the unitextent that it is probable that a significant reversal in the amount of production method using estimates of proved reserves. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or losscumulative revenue recognized unless such adjustment would significantly alterwill not occur when the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in operations. Unproved properties and development projects are not amortized until proved reservesuncertainty associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the loss from operations before income taxes and the adjusted carrying amount of the unproved propertiesvariable consideration is amortized on the unit-of-production method.subsequently resolved.
LimitationThe transaction price is allocated to each performance obligation on Capitalized Costs
Undera relative standalone selling price basis. The standalone selling price is the full-cost method of accounting, we are required,price at which the end of each reporting period,Company would sell a promised service separately to perform a test to determine the limit on the book value of our oil and gas properties (the “Ceiling” test). If the capitalized costs of our oil and natural gas properties, net of accumulated amortization and related deferred income taxes, exceed the Ceiling, the excess or impairment is charged to expense.customer. The expense may not be reversed in future periods, even though higher oil and gas prices may subsequently increase the Ceiling. The Ceiling is defined as the sum of: (a) the present value, discounted at 10% and assuming continuation of existing economic conditions, of (1) estimated future gross revenues from proved reserves, which is computed using oil and gas prices determined as the unweighted arithmetic average of the first-day-of-the-monthrelative selling price for each month withinperformance obligation is estimated using observable objective evidence if it is available. If observable objective evidence is not available, the 12-month hedging arrangements pursuant to Staff Accounting Bulletin (“SAB”) 103, less (2) estimated future expenditures (based on current costs) to be incurred in developingCompany 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 producingobjectives, and the proved reserves; plus, (b) theunderlying cost of properties being amortized; plus, (c)delivering the lower of costperformance obligation. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or estimated fair value of unproven properties included in the costs being amortized; net of (d) the related tax effects related to the difference between the book and tax basis of our oil and natural gas properties.over time as appropriate.
Oil and Gas Reserves
Reserve engineering is a subjective process that is dependent upon the quality of available data and interpretation thereof, including evaluations and extrapolations of well flow rates and reservoir pressure. Estimates by different engineers often vary sometimes significantly. In addition, physical factors such as results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using recent prices of the evaluation, estimated reserve quantities can be significantly impacted by changes in product prices.
Inventories
Crude oil, products and merchandise inventories are carried at the lower of cost (last-in-first-out (LIFO)) or net realizable value. Inventory costs include expenditures and other charges directly and indirectly incurred in bringing the inventory to its existing condition and location.
Accounting for Asset Retirement Obligation
Asset retirement obligations (“ARO”) primarily represent the estimated present value of the amount the Company will incur to plug, abandon and remediate its producing properties at the projected end of their productive lives, in accordance with applicable federal, state and local laws. The Company determined its ARO by calculating the present value of the estimated cash flows related to the obligation. The retirement obligation is recorded as a liability at its estimated present value as of the obligation’s inception, with an offsetting increase to proved properties or to exploration costs in cost of revenues.
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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. The Company recognizes revenue upon satisfaction of its performance obligation at either a point in time in accordance with ASC 606-10-25-30 for its contracts in its Oil and Gas and Financial Services segments or 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.
Bitcoin Mining
For purposes of the following discussion of Bitcoin mining accounting policies, reference to “the Company” refers to Agora. As stated earlier, Agora temporarily ceased Bitcoin mining on March 3, 2022 and does not expect to resume its mining operations until the price of Bitcoin rebounds and Agora has sufficient capital to purchase state of the art miners. Currently, Agora management continues discussions with third party miners about some joint venture using Agora’s access to less expensive power.
As consideration for providing computing power, the Company receives Bitcoin from the mining pool in which it participates. Income from Bitcoin mining (mining earnings are made up of the baseline block reward and transaction fees, defined as “rewards”) which is measured based on the fair value of the Bitcoin received.
Providing computing power in Bitcoin transaction verification services (known as “mining”) 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. The Company will recognize income from Bitcoin mining for the provision of computing power upon satisfaction of its performance obligation. As consideration for the provision of computing power, the Company is entitled to payment in Bitcoin, which is a form of noncash consideration. Noncash consideration is measured at fair value at contract inception. Fair value of the Bitcoin consideration is determined using the quoted price on the Company’s primary trading platform of the Bitcoin at the beginning of the contract period, which is considered to be the beginning of each twenty-four-hour period (at contract inception). Specifically, fair value at contract inception is based on the market price at the beginning of the contract term, at the single Bitcoin level (one Bitcoin). This amount is recognized in revenue over the contract term as hash rate is provided. Changes in the fair value of the noncash consideration due to form of the consideration (changes in the market price of Bitcoin) are not included in the transaction price and hence are not included in revenue. Changes in fair value of the noncash consideration post-contract inception that are due to reasons other than form of consideration (other than changes in the market value of bitcoin) are measured based on the guidance on variable consideration, including the constraint on estimates of variable consideration.
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Because the consideration to which the Company expects to be entitled for providing computing power is entirely variable, as well as being noncash consideration, the Company assesses the estimated amount of the variable noncash consideration to which it expects to be entitled for providing computing power at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved (the “constraint”). Only when significant revenue reversal is concluded probable of not occurring can estimated variable consideration be included in revenue. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the estimated variable noncash consideration is constrained from inclusion in revenue until the end of the contract term, when the underlying uncertainties have been resolved and number of Bitcoin to which the Company is entitled becomes known.
Bitcoins are recorded on the consolidated balance sheet, as intangible asset — Bitcoin.
The Company has entered into a Bitcoin mining pool with the mining pool operator F2Pool, to provide computing power to the mining pool. The arrangement is terminable at any time by either party and the Company’s enforceable right to Bitcoin compensation only begins when the Company provides computing power to the mining pool operator.
The Company’s performance obligation extends over the contract term given the Company’s continuous provision of hash rate. This period of time corresponds with the period of service for which the mining pool operator determines compensation due the Company. Given cancelation terms of the contracts, all contracts effectively provide the Company with the option to renew for successive contract terms of twenty-four hours. The options to renew are not material rights because they are offered at the standalone selling price of computing power. In exchange for providing computing power, the Company is entitled to consideration equal to a fractional share of the fixed Bitcoin reward the mining pool operator receives (referred to as a “block reward”) after such amount has been reduced by a digital asset transaction fee retained by the mining pool operator, and potentially network transaction fees. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm, over the contract term. The Company is entitled to compensation for providing computing power to a mining pool even if a block is not successfully placed. The block reward provides an incentive for Bitcoin miners to process transactions made with the cryptocurrency. Creating an immutable record of these transactions is vital for the cryptocurrency to work as intended. The blockchain is like a decentralized bank ledger, one that cannot be altered after being created. The miners are needed to verify the transactions and keep this ledger up to date. Block rewards, and to a lesser extent, network transaction fees, are their payment for doing so.
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Revenue RecognitionThe terms of the agreement with the mining pool operator provide that neither party can dispute settlement terms after thirty-five days following settlement.
TheFor the mining pool in which the Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.participates, the Company is entitled to a transaction price calculated by the Company’s mining pool operator. Specifically, the mining pool operator determines the amount of block rewards to which the Company is entitled by using the Pay-Per-Shares-Plus (PPS+) payment method, retaining 2.5% to cover costs of operating the pool (the “digital asset transaction fee”), and includes network transaction fees as applicable. When the Company’s number of Bitcoin reaches the minimum threshold of 0.005 Bitcoin, the Company receives a payout and the pool transfers the cryptocurrency consideration to the Company’s designated wallet within 8 hours, between 00:00 and 08:00 UTC.
The Company accountsPPS+ payment method pays miners for a contract when it has been approved and committedthe number of shares they contribute to each party’s rights regarding the goods or servicespool (effectively, the amount of computing power provided to be transferred have been identified, the payment terms have been identified, the contract has commercial substance, and collectability is probable. Revenue is generally recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elementspool) plus network transaction fees. Shares can be accounted fordescribed as separate unitsdiscrete amounts of accounting,valid work each miner or mining farm contributes to the pool. The value of each share contributed is determined by the Bitcoin’s current network difficulty and the number of total shares contributed from miners and mining farms. Bitcoin rewards are received regardless if so,a pool successfully finds a block because the fair value for each ofmining pool operator understands that, probabilistically, blocks will be successfully found in a statistically predictable manner by the elements.
Revenue from software license agreements of Zest Labs is recognized over time or at a point in timepool depending on the evaluationtotal amount of whenhashing power (shares) contributed by the customer obtains control ofminers and mining farms and therefore, pays out as if a block was found. This is a strategy that provides regular payments to miners and allows consistent payouts.
Network transaction fees, however, are paid out based on blocks actually found and solved and therefore the promised goods or services over the term of the agreement. For agreements where the software requires continuous updates to provide the intended functionality,network transaction fee revenue is recognized overnot consistently paid out. We expect that network transaction fees will be a very small contributor to total miner Bitcoin rewards.
The Company’s cost of Bitcoin revenue consists primarily of direct costs of earning the term of the agreement. For software as a service (“SaaS”) contracts that include multiple performance obligations,Bitcoins related to mining operations, namely electric power costs, other utilities, labor, insurance whether incurred directly from self-mining operations or reimbursed, including hardware, perpetual software licenses, subscriptions, term licenses, maintenanceany revenue sharing arrangements under hosting agreements, but excluding depreciation and other services, the Company allocates revenue to each performance obligation based on estimates of the price that would be charged to the customer for each promised product or service if it were sold on a standalone basis. For contracts for new products and services where standalone pricing has not been established, the Company allocates revenue to each performance obligation based on estimates using the adjusted market assessment approach, the expected cost plus a margin approach or the residual approach as appropriate under the circumstances. Contractsamortization, which are typically on thirty-day payment terms from when the Company satisfies the performance obligationseparately stated in the contract.Company’s Consolidated Statement of Operations.
Revenue under master service agreements is recorded upon the performance obligation being satisfied. Typically, the satisfaction of the performance obligation occurs upon the frac sand load being delivered to the customer site and this load being successfully invoiced and accepted by the Company’s factoring agent.Commodities
The Company recognizes revenue for their proportionate share of revenue under ASC 606 when: (i) the Company receives notification of the successful sale of a load of crude oil to a buyer; (ii) the buyer will provide a price based on the average monthly price of crude oil in the most recent month; and (iii) cash is received the following month from the crude oil buyer. As stated earlier, with the sale of White River, the Company no longer has any oil wells.
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The Company will recognize income from digital currency mining from the provision of transaction services within digital currency networks, commonly termed “cryptocurrency mining”. As consideration for those services, the Company will receive digital currency from each specific network in which it participates (“coins”). Income from digital currency mining is measured based on the fair value of the coins received. The fair value is determined using the spot price of the coin on the date of receipt. The coins are recorded on the consolidated balance sheet, as intangible asset – digital currency, at their fair value less costs to sell and re-measured each reporting date, if not sooner. Revaluation gains or losses on the sale of coins for traditional (fiat) currencies will be included in the consolidated statements of operations in accordance with the Company’s treatment of its digital currencies as a traded commodity.
The Company accounts for contract costs in accordance with ASC Topic 340-40, Contracts with Customers. The Company recognizes the cost of sales of a contract as expense when incurred or at the time a performance obligation is satisfied. The Company recognizes an asset from the costs to fulfil 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 incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained.
Cost of sales for Pinnacle Frac includes all direct expenses incurred to produce the revenue for the period. This includes, but is not limited to, direct employee labor, direct contract labor and fuel.
Revenue under master service agreements is recorded upon the performance obligation being satisfied. Typically, the satisfaction of the performance obligation occurs upon the frac sand load being delivered to the customer site and this load being successfully invoiced and accepted by the Company’s factoring agent.
Fair Value Measurements
Bitcoin
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.
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.
Level 3 inputs: Instruments with primarily unobservable value drivers.
Digital currencies will consist of cryptocurrency denominated assets and will be included in current assets. Digital currencies will be carried at their fair value determined by the spot rate less costs to sell. The digital currency marketBitcoin is still a new market and is highly volatile; historical prices are not necessarily indicative of future value; a significant change in the market prices for digital currencies would have a significant impact on the Company’s earnings and financial position. Fair value will be determined by taking the price of the coins from the exchanges which the Company most frequently uses.
Digital Currencies
Digital currencies will be included in current assets in the consolidated balance sheets as intangible assets with indefinite useful lives. Digital currencies areBitcoin is recorded at cost less impairment.
The Company accounts for its Bitcoins as indefinite-lived intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured usingvalue. The Company determines the quoted price of the digital currency at the time its fair value is being measured. In testing for impairment,of its Bitcoins on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active trading platform that the Company has determined is its principal market for Bitcoin (Level 1 inputs). The Company performs an analysis each day, comparing the option to first performcarrying amount of the Company’s Bitcoin with their fair value based on the lowest market price that day at the single Bitcoin level (one bitcoin). The excess, if any, represents a qualitative assessment to determine whether it is more likely than not that anrecognized impairment exists. If it is determined that it is not more likely than not that anloss. Impairment losses are recorded in the line item “Bitcoin impairment exists, a quantitative impairment test is not necessary. Iflosses” in the Company concludes otherwise, it is required to perform a quantitative impairment test. Company’s Consolidated Statements of Operations.
To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. Bitcoin awarded to the Company through its mining activities are included as an adjustment to reconcile net loss to cash provided by (or used in) operating activities on the accompanying Consolidated Statements of Cash Flows. The sales (if any) of Bitcoin are included within investing activities in the accompanying Consolidated Statements of Cash Flows and any realized gains or losses (if any) from such sales are included in operating income in the Company’s Consolidated Statement of Operations. The Company accounts for sales of Bitcoins in accordance with the first in first out (FIFO) method of accounting.
Impairment of Long-lived Assetslosses related to Bitcoin is included in the Bitcoin Mining segment.
Management reviews long-lived assets
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Fair Value Measurements
ASC 820 Fair Value Measurements defines fair value, establishes a framework for impairment whenever eventsmeasuring 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.
Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or changessimilar instruments in circumstances indicatemarkets that theare not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 inputs: Instruments with primarily unobservable value drivers.
The carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparisonvalues of the carrying amount of an asset to undiscounted futureCompany’s financial instruments such as 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 amountaccounts payable, and accrued expenses approximate their respective fair values because of the short-term nature of those financial instruments.
Bitcoin will consist of Bitcoin assets exceedsand will be presented in current assets. Fair value will be determined by taking the fair valueprice of the assets.coins from the trading platforms which Agora will most frequently use.
Segment Information
The Company follows the provisions of ASC 280-10 Segment Reporting. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. The Company and its chief operating decision makers determined that the Company’s operations effective with the May 31, 2019, acquisition of Trend Holdings and the March 27, 2020 acquisition of Banner Midstream now consistconsisted of three segments, Agora (Finance), Banner Midstream (Commodities)Financial, Commodities and Zest Labs (Technology).Technology. Effective July 1, 2021, the Company’s chief operating decision makers in discussion with the finance team determined that the Company willwould add a fourth reporting segment to account for their Digital AssetBitcoin mining business. Additionally, effective on July 1, 2021 the Company will reportnow reports its home office costs into the Commodity segment, chargeand charged its Technology segment a monthly overhead fee, and has recorded typical overhead expenses in their Finance and Digital AssetBitcoin Mining segments to account for this home office allocation. The Company classified their 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 three months ended June 30, 2021. Effective April 1, 2022, the Company has classified their segments in the Commodity Segment, Technology Segment and Bitcoin Mining Segment. They now charge 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 entered into an agreement to sell their oil and gas production business (White River) which is part of the Commodities segment. The Company determined that pursuant to ASC 205-20-45-1E that the operations related to the oil and gas production business would be reclassified as held for sale as those criteria identified in the pronouncement had been satisfied as of July 22, 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 three months ended June 30, 2022.
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Derivative Financial Instruments
The Company does not currently use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.risks, but may explore hedging oil prices in the current fiscal year. 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-measuredremeasured 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 is currently evaluating the impact thatdoes not believe this new guidance will have a material impact on its consolidated financial statements.
In May 2021, the FASBFinancial 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 is currently evaluating thedoes not believe this new guidance will have a material impact of this standard 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.
Production Data – Six and Three Months Ended September 30, 2021
The following tables set forth our production data for the six months ended September 30, 2021 and 2020:
| Six Months Ended September 30, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Bbls | Bbls | |||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||
| Production Data: | ||||||||||||||||
| By State/County | ||||||||||||||||
| Mississippi | ||||||||||||||||
| Holmes Cty | 139 | 104 | — | — | ||||||||||||
| Amite | 6,183 | 4,927 | 5,952 | 4,750 | ||||||||||||
| Wilkinson | 7,490 | 5,805 | 4,855 | 3,877 | ||||||||||||
| Pike | 759 | 585 | 113 | 92 | ||||||||||||
| 14,570 | 11,420 | 10,920 | 8,718 | |||||||||||||
| Louisiana | ||||||||||||||||
| Catahoula | 3,244 | 2,210 | 1,488 | 1,204 | ||||||||||||
| Concordia | 3,419 | 1,660 | 2,522- | 1,118 | ||||||||||||
| Tensas | 1,687 | 1,265 | 1,159 | 861 | ||||||||||||
| Lasalle | 609 | 330 | 572 | 310 | ||||||||||||
| Avoyelles | 30,707 | 20,878 | 1,503 | 1,137 | ||||||||||||
| 39,667 | 26,343 | 7,243 | 4,631 | |||||||||||||
| Total | 54,237 | 37,763 | 18,163 | 13,349 | ||||||||||||
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The following tables set forth our production data for the three months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Bbls | Bbls | |||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||
| Production Data: | ||||||||||||||||
| By State/County | ||||||||||||||||
| Mississippi | ||||||||||||||||
| Holmes Cty | 131 | 98 | ||||||||||||||
| Amite | 2,671 | 2,132 | 4,627 | 3,694 | ||||||||||||
| Wilkinson | 3,871 | 2,997 | 3,994 | 3,1988 | ||||||||||||
| Pike | 464 | 364 | 111 | 90 | ||||||||||||
| 7,137 | 5,591 | 8,7328 | 6,982 | |||||||||||||
| Louisiana | ||||||||||||||||
| Catahoula | 1,410 | 1,311 | 1,188 | 953 | ||||||||||||
| Concordia | 2,360 | 1,041 | 2,522 | 1,118 | ||||||||||||
| Tensas | 660 | 495 | 1,087 | 808 | ||||||||||||
| Lasalle | 136 | 74 | 429 | 232 | ||||||||||||
| Avoyelles | 10,863 | 7,407 | 1,124 | 850 | ||||||||||||
| 15,429 | 10,328 | 6,349 | 3,962 | |||||||||||||
| Total | 22,567 | 15,919 | 15,081 | 10,944 | ||||||||||||
RESULTS OF OPERATIONS FOR CONTINUING OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
Revenues
The following table shows revenues for the six months ended September 30, 2021 and 2020:
| Six Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Oil and Gas Operations | $ | 2,837 | $ | 676 | ||||
| Transportation Services and Other Revenue | 9,805 | 4,721 | ||||||
| Financial Segment | 348 | 194 | ||||||
| Technology Segment | — | — | ||||||
| Total | $ | 12,990 | $ | 5,591 | ||||
Oil, Natural Gas and Natural Gas Liquids Revenues. Our revenues are a function of oil production volumes sold and average sales prices received for those volumes.
| Six Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Oil and natural gas sales, net of taxes | $ | 2,809 | $ | 676 | ||||
| Other | 28 | — | ||||||
| Total revenues | $ | 2,837 | $ | 676 | ||||
Our oil revenues for the six months ended September 30, 2021 increased by $2,161, or 319%, to $2,809 from $676 during the six months ended September 30, 2020. There was a slight decrease in revenue for the three months ended September 30, 2021 versus the three months ended June 30, 2021 due to the sales of certain leases in the three months ended September 30, 2021 as well as slower production in our main producing well.
The increase in oil production during the six months ended September 30, 2021 as compared to the same period in 2020 resulted in $1,291 of the total increase due to more wells operational in 2021 versus 2020. The remaining revenue increase of $870 was due to an increase in oil prices during the six months ended September 30, 2021 as compared to the same period in 2020.
Average daily production sold increased by 99 barrels of oil per day (“BOPD”) to 219 BOPD during the six months ended September 30, 2021 from 120 BOPD during the six months ended September 30, 2020.
Cost of Revenues and Gross Profit
The following table shows costs of revenues for the six months ended September 30, 2021 and 2020:
| Six Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Total | $ | 7,166 | $ | 3,426 | ||||
The increase in cost of revenue was primarily due to increased owner operator and fuel expenses of $6,727 for the six months ended September 30, 2021 compared to $3,132 for the six months ended September 30, 2020.
Operating Expenses
The following table shows operating expenses by segment for the six months ended September 30, 2021 and 2020:
| Six Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Segment | ||||||||
| Commodity segment | $ | 11,157 | $ | 6,449 | ||||
| Technology segment | 1,704 | 1,607 | ||||||
| Digital Assets Segment | 408 | 0 | ||||||
| Financial Segment | 271 | 194 | ||||||
| Total | $ | 13,540 | $ | 8,250 | ||||
The following table shows operating expenses for the six months ended September 30, 2021 and 2020:
| Six Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating Expenses | ||||||||
| Salaries and salaries related costs | $ | 3,838 | $ | 3,617 | ||||
| Professional and consulting fees | 382 | 498 | ||||||
| Oilfield supplies and repairs | 1,200 | 874 | ||||||
| Selling, general and administrative costs | 6,382 | 2,271 | ||||||
| Depreciation, amortization, depletion, and accretion | 1,738 | 624 | ||||||
| Research and development | - | 366 | ||||||
| $ | 13,540 | $ | 8,250 | |||||
Selling, General and Administrative
The following table shows selling, general and administrative expenses for the six months ended September 30, 2021 and 2020:
| Six Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Selling, general and administrative costs | ||||||||
| Capital Raising Costs | $ | 2,126 | $ | - | ||||
| Insurance | 1,526 | 287 | ||||||
| Legal/Audit/Accounting expenses | 647 | 709 | ||||||
| Factoring expenses | 221 | 79 | ||||||
| Equipment Rental | 159 | 34 | ||||||
| Other | 1,703 | 1,162 | ||||||
| $ | 6,382 | $ | 2,271 | |||||
Insurance expense for six months ended September 30, 2020 included a one-time adjustment in commodity segment.
Depreciation, Amortization, Depletion and Accretion
The following table shows depreciation, amortization, depletion and accretion expenses for the six months ended September 30, 2021 and 2020:
| Six Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Depletion of proved oil and natural gas properties | $ | 722 | $ | 125 | ||||
| Depletion of drilled wells | 418 | - | ||||||
| Depreciation of sand frac transportation equipment | 227 | 214 | ||||||
| Depreciation of midstream assets | 8 | 1 | ||||||
| Depreciation of technology segment assets | 111 | 126 | ||||||
| Amortization of intangible assets | 174 | 142 | ||||||
| Asset retirement obligation accretion | 78 | 16 | ||||||
| Depreciation, depletion and amortization expense | $ | 1,738 | $ | 624 | ||||
The increase in depletion of proved oil and natural gas properties of $597 for the six months ended September 30, 2021 as compared to the six months ended September 30, 2020 is primarily due to full six months of operations in 2021 compared to less than four months in 2020. Increase in depletion of drilled wells due to completion of Deshotel #24 well in March 2021.
Research and Development
Research and development expense decreased from $366 in the six months ended September 30, 2020 to zero in the six months ended September 30, 2021. The $366 reduction in costs is due to the completion of the development of the Zest Labs freshness solutions.
Other Income (Expense)
The following table shows other income (expense) for the six months ended September 30, 2021 and 2020:
| Six Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Change in fair value of derivative liabilities | $ | 4,316 | $ | (16,382 | ) | |||
| Gain (loss) on exchange of warrants for common stock | - | 16,583 | ||||||
| Loss on conversion of long-term debt and accrued expenses | - | (3,969 | ) | |||||
| Gain (loss) on disposal of fixed assets | - | (105 | ) | |||||
| Loss on abandonment of oil and gas property | - | (83 | ) | |||||
| Gain on disposal of ARO related to sale of oil and gas property | 8 | - | ||||||
| Gain on sale of oil and gas property | 713 | - | ||||||
| Interest expense, net of interest income | (617 | ) | (2,155 | ) | ||||
| Other income (expense) | $ | 4,420 | $ | (6,111 | ) | |||
Change in fair value of derivative liabilities for the six months ended September 30, 2021 was a non-cash gain as compared to a non-cash loss for the six months ended September 30, 2020. The $20,698 increase was a result of the fluctuation in the stock price at September 30, 2021 compared to September 30, 2020.
There was a gain in the period ended September 30, 2020 from the extinguishment of the derivative liabilities that when converted to shares of common stock of $16,583. In addition, in the period ended September 30, 2020, there was a loss on the conversion of debt and other liabilities to shares of common stock of $3,969.
Interest expense, net of interest income, for the six months ended September 30, 2020 was the result of the interest incurred on the debt assumed in the Banner Midstream acquisition, the amortization of debt discount of $149 as well as the value related to the granting of warrants for interest of $1,265. For the six months ended September 30, 2021, value related to the granting of warrants for interest was $545.
Oil, Natural Gas and Natural Gas Liquids Costs and Expenses
| Six Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Costs and expenses (income): | ||||||||
| Production | $ | 279 | $ | 164 | ||||
| Exploration, abandonment, and impairment | 397 | - | ||||||
| Oilfield supplies and repairs | 767 | 793 | ||||||
| Oil & Gas production taxes | 79 | 59 | ||||||
| General and administrative | 928 | 2,146 | ||||||
| Depreciation and amortization | 16 | 5 | ||||||
| Depletion | 1,140 | 126 | ||||||
| Accretion | 78 | 16 | ||||||
| Gain on sale of oil and gas property | (721 | ) | - | |||||
| Loss on abandonment of oil and gas property | - | 82 | ||||||
Net Income (loss)
The following table shows net income (loss) for the six months ended September 30, 2021 and 2020:
| Six Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Commodities Segment | $ | (2,580 | ) | $ | (9,748 | ) | ||
| Financial Segment | 297 | (140 | ) | |||||
| Digital Assets Segment | (408 | ) | - | |||||
| Technology Segment | (605 | ) | (2,308 | ) | ||||
| Net Income (loss) | $ | (3,296 | ) | $ | (12,196 | ) | ||
Net income from continuing operations for the six months ended September 30, 2021 increased primarily due to the non-cash changes in the fair value of the derivative liability of $20,698 and the non-cash losses incurred on the conversion of debt and expense to equity in the six months ended September 30, 2020 of $3,969, offset by the non-cash gain on the exchange of warrants for common stock in the six months ended September 30, 2020 of $16,583.
RESULTS OF OPERATIONS FOR CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
Revenues
The following table shows revenues for the three months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Oil and Gas Operations | $ | 1,269 | $ | 525 | ||||
| Transportation Services and Other Revenue | 4,642 | 2,649 | ||||||
| Financial Segment | 200 | 104 | ||||||
| Technology Segment | - | - | ||||||
| Total | $ | 6,111 | $ | 3,278 | ||||
Oil, Natural Gas and Natural Gas Liquids Revenues. Our revenues are a function of oil production volumes sold and average sales prices received for those volumes.
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Oil and natural gas sales, net of taxes | $ | 1,259 | $ | 525 | ||||
| Other | 10 | - | ||||||
| Total revenues | $ | 1,269 | $ | 525 | ||||
Our oil revenues for the three months ended September 30, 2021 increased by $734, or 139%, to $1,259 from $525 during the three months ended September 30, 2020. The increase in oil production during the three months ended September 30, 2021 as compared to the same period in 2020 resulted in $403 of the total increase due to more wells operational in 2021 versus 2020. The remaining revenue increase of $331 was due to an increase in oil prices during the three months ended September 30, 2021 as compared to the same period in 2020.
Average daily production sold increased by 56 barrels of oil per day (“BOPD”) to 171 BOPD during the three months ended September 30, 2021 from 115 BOPD during the three months ended September 30, 2020.
Cost of Revenues and Gross Profit
The following table shows costs of revenues for the three months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Total | $ | 3,224 | $ | 2,333 | ||||
The increase in cost of revenue was primarily due to increased owner operator and fuel expenses of $3,166 for the three months ended September 30, 2021 compared to $1,816 for the three months ended September 30, 2020.
Operating Expenses
The following table shows operating expenses by segment for the three months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Segment | ||||||||
| Commodity segment | $ | 6,683 | $ | 4,144 | ||||
| Technology segment | 994 | 625 | ||||||
| Digital Assets segment | 408 | - | ||||||
| Financial segment | 117 | 65 | ||||||
| Total | $ | 8,202 | $ | 4,834 | ||||
The following table shows operating expenses for the three months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating Expenses | ||||||||
| Salaries and salaries related costs | $ | 2,269 | $ | 1,605 | ||||
| Professional and consulting fees | 245 | 236 | ||||||
| Oilfield supplies and repairs | 856 | 869 | ||||||
| Selling, general and administrative costs | 4,110 | 1,665 | ||||||
| Depreciation, amortization, depletion, and accretion | 722 | 323 | ||||||
| Research and development | - | 136 | ||||||
| $ | 8,202 | $ | 4,834 | |||||
Selling, General and Administrative
The following table shows selling, general and administrative expenses for the three months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Selling, general and administrative costs | ||||||||
| Capital Raising Costs | $ | 2,126 | $ | - | ||||
| Insurance | 854 | 547 | ||||||
| Legal/Audit/Accounting expenses | 373 | 400 | ||||||
| Factoring expenses | 101 | 43 | ||||||
| Equipment Rental | 42 | 21 | ||||||
| Other | 614 | 654 | ||||||
| $ | 4,110 | $ | 1,665 | |||||
Depreciation, Amortization, Depletion and Accretion
The following table shows depreciation, amortization, depletion and accretion expenses for the three months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Depletion of proved oil and natural gas properties | $ | 278 | $ | 71 | ||||
| Depletion of drilled wells | 144 | - | ||||||
| Depreciation of sand frac transportation equipment | 118 | 109 | ||||||
| Depreciation of technology segment assets | 55 | 63 | ||||||
| Amortization of intangible assets | 87 | 71 | ||||||
| Asset retirement obligation accretion | 40 | 9 | ||||||
| Depreciation, depletion and amortization expense | $ | 722 | $ | 323 | ||||
The increase in depletion of proved oil and natural gas properties of $207 for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 is primarily due to additional wells being depleted. Increase in depletion of drilled wells due to completion of Deshotel #24 well in March 2021.
Research and Development
Research and development expense decreased from $136 in the three months ended September 30, 2020 to zero in the three months ended September 30, 2021. The $136 reduction in costs is due to the completion of the development of the Zest Labs freshness solutions.
Other Income (Expense)
The following table shows other income (expense) for the three months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Change in fair value of derivative liabilities | $ | (629 | ) | $ | 1,011 | |||
| Gain (loss) on exchange of warrants for common stock | - | 14,952 | ||||||
| Loss on conversion of long-term debt and accrued expenses | - | (1,775 | ) | |||||
| Gain on disposal of ARO related to sale of oil and gas property | 1 | - | ||||||
| Gain on sale of oil and gas property | 121 | - | ||||||
| Interest expense, net of interest income | (33 | ) | (1,314 | ) | ||||
| Other income (expense) | $ | (540 | ) | $ | 12,874 | |||
Change in fair value of derivative liabilities for the three months ended September 30, 2021 was a non-cash loss as compared to a non-cash gain for the three months ended September 30, 2020. The $1,640 decrease was a result of the fluctuation in the stock price at September 30, 2021 compared to September 30, 2020.
There was a gain in the period ended September 30, 2020 from the extinguishment of the derivative liabilities that when converted to shares of common stock of $14,952. In addition, in the period ended September 30, 2020, there was a loss on the conversion of debt and other liabilities to shares of common stock of $1,775.
Interest expense, net of interest income, for the three months ended September 30, 2020 was the result of the interest incurred on the debt assumed in the Banner Midstream acquisition, the amortization of debt discount of $149 as well as the value related to the granting of warrants for interest of $1,265. For the three months ended September 30, 2021, value related to the granting of warrants for interest was $0.
Oil, Natural Gas and Natural Gas Liquids Costs and Expenses
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Costs and expenses (income): | ||||||||
| Production | $ | (16 | ) | $ | 409 | |||
| Exploration, abandonment, and impairment | 172 | - | ||||||
| Oilfield supplies and repairs | 668 | 793 | ||||||
| Oil & Gas production taxes | 35 | 49 | ||||||
| General and administrative | 508 | 2,146 | ||||||
| Depreciation and amortization | 8 | 4 | ||||||
| Depletion | 422 | 73 | ||||||
| Accretion | 40 | 9 | ||||||
| Gain on sale of oil and gas property | (121 | ) | - | |||||
| Loss on abandonment of oil and gas property | - | - | ||||||
Net Income (loss)
The following table shows net income (loss) for the three months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Commodities Segment | $ | (4,536 | ) | $ | 5,164 | |||
| Financial Segment | 83 | 774 | ||||||
| Digital Assets Segment | (408 | ) | - | |||||
| Technology Segment | (994 | ) | 3,047 | |||||
| Net Income (loss) | $ | (5,855 | ) | $ | 8,985 | |||
Net income from continuing operations for the three months ended September 30, 2021 decreased primarily due to the non-cash changes in the fair value of the derivative liability of $1,640 and the non-cash losses incurred on the conversion of debt and expense to equity in the three months ended September 30, 2020, offset by the non-cash gain on the exchange of warrants for common stock in the three months ended September 30, 2020.
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 funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
Net cash used in operating activities was ($6,536) for the six months ended September 30, 2021, as compared to net cash used in operating activities of ($5,111) for the six months ended September 30, 2020. Cash used in operating activities is related to the Company’s net income (loss) partially offset by non-cash expenses, including share-based compensation and the change in the fair value of the derivative liability and net losses incurred in the conversion of debt and liabilities to shares of common stock as well as losses on the sale of fixed assets and abandonment of oil and gas properties.
Net cash provided by (used in) investing activities was $(4,549) for the six months ended September 30, 2021, as compared to ($3,171) net cash used in investing activities for the six months ended September 30, 2020. Net cash used in investing activities in 2021 related to the purchase of fixed assets of ($4,247) and oil and gas properties of $(304), offset by sale of fixed assets of $2. For the six months ended September 30, 2020, the cash used in investing activities related to advancement of a note receivable of $275, and the net purchases of fixed assets and oil and gas properties including drilling costs of $2,896.
Net cash provided (used) in financing activities for the six months ended September 30, 2021 was $17,664 that included $19,230 of proceeds from issuance of common stock and warrants, net of fees, and $28 in proceeds received from the exercise of stock options, offset by $1,530 in repayments of debt. This compared with the cash provided by financing activities in the six months ended September 30, 2020 of $9,540 that included $12,253 from the exercise of warrants, $349 from the exercise of stock options, $2,428 from proceeds received from debt form related and non-related parties offset by $5,114 from payments on debt to both related and non-related parties and $316 in payments to prior owners.
On August 6, 2021, the Company closed a registered direct offering (the “Offering”) of 3,478 shares of the Company’s common stock and warrants to purchase 3,478 shares of common stock (the “Warrants”) to institutional investors at a purchase price per share and accompanying Warrant of $5.75 and received net proceeds of approximately $18,249 after deducting fees payable to the placement agent and offering expenses payable by the Company. We have spent and will continue to spend a majority of the net proceeds from this offering to pay the expenses and equipment related to our digital asset mining operation and a portion of the proceeds will continue to be spent on new drilling projects as previously announced. Additionally, approximately $1,000 will be used to fund new intellectual property litigation legal fees and filings.
The Warrants have an exercise price equal to $5.75 per share and will expire April 8, 2025.
At September 30, 2021 we had cash (including restricted cash) of $7,895 and $6,007 as of October 28, 2021 from continuing operations. We had a working capital deficit of $8,733 and $11,845 as of September 30, 2021 and March 31, 2021, respectively. The decrease in the working capital deficit is the result of the non-cash change in the fair value of the derivative liabilities and repayments of long-term debt offset by the net changes in accounts payable and accrued expenses.
The Company has adequate capital resources to meet its cash requirements during the next 12 months.
We expect that in the long term the revenue generating operations in our Commodities segment will continue to improve the liquidity of the Company moving forward. The Company’s capital program for production enhancement and development is expected to be significantly focused on exploiting legacy acreage positions that are economically viable at today’s oil prices. We anticipate that management’s focus on legacy acreage enhancement and development will positively benefit the balance sheet by producing hydrocarbons during a time of increasing demand after the negative impacts of COVID-19.
The amount and timing of our capital expenditures are largely discretionary and within our control. We could choose to defer a portion of these planned capital expenditures depending on a variety of factors, including but not limited to the success of our drilling activities, prevailing and anticipated prices for oil, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners. We currently continue to execute on our strategy to reinvest cash flow from operations to enhance, develop and increase oil production, strengthening our balance sheet. We intend to continue monitoring commodity prices and overall market conditions and can adjust capital deployment in response to changes in commodity prices and overall market conditions.
We monitor and adjust our projected capital expenditures for our operations in response to the results of our drilling activities, changes in prices, availability of financing, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs, contractual obligations, internally generated cash flow and other factors both within and outside our control. If we require additional capital, we may seek such capital through traditional reserve base borrowings, joint venture partnerships, production payment financing, asset sales, offerings of debt and/or equity securities or other means. There is no assurance that the needed capital will be available on acceptable terms or at all. If we are unable to obtain funds when needed or on acceptable terms, we may be required to curtail our drilling programs, which could result in a loss of acreage through lease expirations. In addition, we may not be able to complete acquisitions that may be favorable to us or finance the capital.
Bitstream Expenditures
As of October 25, 2021, the Company has paid unaffiliated third parties a total of $4,755 and is obligated to pay certain of these third parties an additional $8,686 in connection with Bitstream and the establishment of its cryptocurrency mining facilities and operations. Depending upon the availability of capital, Bitstream may spend material additional sums.
Contractual Obligations
Our contractual obligations are included in our Notes to the Unaudited Condensed Consolidated Financial Statements. To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.
Off-Balance Sheet Arrangements
As of September 30, 2021 and March 31, 2021, we had no off-balance sheet arrangements.
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 the expected revenues from existing and new drilling projects in our oil and gas operations, the proposed digital assets mining business including developing mining facilities and delivery of related infrastructure and power, increasing the electric power supply for our cryptocurrency mining operations, our planned participation in ERCOT and ability to sell power at favorable margins during shortages, the use and benefits of immersion cooling technology for our cryptocurrency mining operations, prospective future litigation, our anticipated stock dividend involving Agora common stock, regulatory changes in the oil and gas industry, our capital program for production enhancement and development, the acquisition of a broker-dealer, our anticipated capital expenditures, and future liquidity. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, 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 that could cause actual results to differ from those in the forward-looking statements include, among other things, volatility of oil and Bitcoin prices, the risks arising from the new impact of the COVID-19 pandemic, including its future effect on the U.S. and global economies including the oil and gas and cryptocurrency markets, competition, government regulation or action, the costs and results of drilling and cryptocurrency mining activities, risks inherent in drilling operations, availability of equipment, services, resources and personnel required to conduct operating activities, ability to replace reserves and uncertainties related to reserve estimates, contingencies in our development of cryptocurrency mining facilities in West Texas including the need for sufficient land and energy and regulatory approvals uncertainties related to ongoing litigation, risks related to potential impact of natural disasters, other risks and uncertainties related to the proposed digital asset mining business, and cybersecurity risks. Further information on our risk factors is contained in “Item 1A – Risk Factors” in this report and our filings with the SEC, including our Annual Report on Form 10-K for the year ended March 31, 2021 and our prospectus supplement dated August 4, 2021. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 our 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 filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls 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 Officer and Principal Financial Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no material changes in our internal control over financial reporting that occurred during the fiscal quarter ended SeptemberJune 30, 20212022 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.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than discussed below, during 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, 2021.2022.
On July 15, 2021, the Company and its directors entered into a Settlement and Mutual Release resolving the legal fees it agreed to pay when it settled a class action that was settled without any financial consequences other than paying agreed upon legal fees. The Company paid $50 to the Plaintiff’s attorneys.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. Investors should review the new risk factors described below involving our planned Agora operations as well as those contained in our prospectus supplement dated August 4, 2021, in addition to those disclosed in ourAnnual Report on Form 10-K for the year ended March 31, 2021. Amounts in risk factors are not rounded in thousands.2022.
Risks Related to Our Cryptocurrency Mining Business
We lack an operating history in the cryptocurrency mining space, and our new business is subject to a number of significant risks and uncertainties which affect its future viability.
As of September 30, 2021, we have invested approximately $5 million and agreed to invest approximately $9 million towards the development of our new cryptocurrency mining business. That business, Bitstream, has been formed and entered into agreements for equipment and services but has not commenced material cryptocurrency mining operations. In order to proceed, we must install mining infrastructure at our first mining facility which is in Texas and use electric power to mine cryptocurrencies as well as take advantage of future power shortages such as the one that affected Texas this past winter. Among the risks and uncertainties are:
For all of these reasons, our cryptocurrency mining business may not be successful.
Because we are subject to risks associated with our need for sufficient real property and a continuous source of significant electric power at economically favorable prices, our current efforts and negotiations for these resources to commence operations at our planned West Texas facilities may ultimately be unsuccessful.
Our planned Bitcoin mining operations require both land on which to install mining equipment and significant amounts of electric power to operate such equipment. We have secured a binding definitive agreement to lease or purchase land to set up mining equipment we have already purchased, and we have committed to paying approximately $3.4 million by December 2021 for the infrastructure and source of 42 MW of electricity needed to operate at the capacity intended at our West Texas facilities; however these high costs and uncertainties may harm our ability to become profitable, particularly if the price of Bitcoin declines. While we have arranged for the delivery of the transformers necessary to use up to 42 MW of electricity, we have conditional and unconditional rights to two sites in West Texas for up to 372 MW, subject to approval by the local government. If we or the third parties with whom we contract fail to obtain, deliver and install the necessary items for the required energy as and when needed and on commercially viable terms, our results of operations and future prospects will be materially adversely affected. There may not be an alternative source of electricity, or the resources needed to access it, and the establishment and growth of our cryptocurrency mining operations may be stifled or hindered as a result.
To the extent we purchase additional miners or acquire new miners which require greater surface areas and/or higher energy inputs, our land and electricity requirements would grow. If we are unable to continue to obtain sufficient electric power to operate our miners on a cost-effective basis, we may not realize the anticipated benefits of our significant capital investments in new miners. Further, if we are unable to locate and acquire new locations to expand our mining operations, our prospects will be hindered. There can be no guarantee that our operational costs will not increase in the future, in which case there can be no assurance that we can obtain the needed energy at acceptable prices, volume and other terms, if at all.
Additionally, our mining operations could be materially and adversely affected by prolonged power outages, and we may have to reduce or cease our operations in the event of an extended power outage, or as a result of the unavailability or increased cost of electric power as occurred in Texas last Winter. While we intend to participate in the responsive reserve program of the Electric Reliability Council of Texas should this issue arise, which could offset some or all of the revenue losses, were this were to occur, our business and results of operations could nonetheless be materially and adversely affected, particularly if the reserve program fails.
Our mining operating costs could outpace our mining revenues, which would continue to put a strain on our business or increase our losses.
Our mining operations will be costly and our expenses may increase in the future. This expense increase may not be offset by a corresponding increase in revenue. Our expenses may be greater than we anticipate, and our investments to make our business more efficient may not succeed and may outpace monetization efforts. For example, we recently agreed to pay approximately $3.4 million for delivery, installment and operation of 42 MW electrical capacity which we may increase in the future. Increases in our costs without a corresponding increase in our revenue would increase our losses and could seriously harm our business and financial performance.
The cost of obtaining new and replacement miners and parts will likely continue to be highly capital intensive which may have a material and adverse effect on our business and results of operations.
Our mining operations can only be successful and ultimately profitable if the costs, including hardware and electricity costs, associated with mining Bitcoin are lower than the price of the Bitcoin we mine when we sell them. Our miners and related equipment will be subject to ordinary wear and tear from operation and may also face more significant malfunctions caused by factors which may be beyond our control. For example, certain miner models such as the Bitmain S17 model has displayed glitches and defects in the past, such that many operators were forced to repair or replace them. To launch our cryptocurrency operations, we have acquired 5,000 used Canaan AvalonMiner 841 13 (TH/s) miners. Upon delivery in late 2021, our third-party hosting company will deploy Bitmain S19 Pro miners which we will share. Further, the initial AvalonMiner 841 miners we will use are less effective at mining Bitcoin than the Bitmain S19 Pro miners because they operate at a lower hashrate, meaning our initial revenue will be lower than the potential of our mining facility due to less effective equipment as well as lower electricity access. Therefore, while risk of loss of the initial miners during the facility set up process will be mitigated due to the lower price of such miners, in this case the reduction in revenue potential is the tradeoff. Contingencies such as these are one of the factors that render cryptocurrency mining highly cost intensive and pose a serious potential hindrance on our mining operations and ability to generate revenue or obtain profitability.
Additionally, as the mining technology evolves, we may need to acquire newer models of miners to remain competitive in the market. Over time, we may replace those miners which are no longer functional or efficient or powerful enough with new miners purchased from third-party manufacturers, the cost of which may be higher than what we spent on prior models and/or such that we will need to raise more capital to do so. For instance, the price of Bitcoin miners has historically been somewhat correlated to the price of Bitcoin, which has appreciated in recent years. Depending on the price of new miners and our operational needs at the time we decide to replace miners in the future, we may have to do so at higher costs than we could have previously, which would add to our losses. Alternatively, even absent defects or reductions in computing power, mining machine models are upgraded frequently, and we are and will continue to be subject to either higher competitive pressure as a result or will be forced to expend large amounts of capital to remain competitive and maintain optimal hash rates.
Inevitably, our older miners and related equipment we deploy will need to be repaired or replaced as a product of ordinary wear and tear and depreciation and/or competitive forces in the marketplace or other factors rendering our current miners obsolete. Any upgrading we may need or choose to undertake will require substantial capital investment, and we may face challenges in locating the requisite capital in a timely manner and/or on terms favorable to us or not highly dilutive to our investors. If we are unable to obtain adequate numbers of new and replacement miners in sufficient quantities or without delay, we may be unable to compete in our highly competitive and continuously developing industry. If this happens, we may not be able to mine Bitcoin or other cryptocurrency as efficiently or in sufficient amounts relative to our competition or at all and, as a result, our business and financial results could suffer which could, in turn, have a material adverse effect on the trading price of our common stock.
Governmental action against digital assets and Bitcoin mining may have a materially adverse effect on the industry, and could affect us if widely adopted.
We and the cryptocurrencies on which our operations will depend are and could become subject to bans and other regulations aimed at preventing what are perceived as some of the negative attributes of Bitcoin and Bitcoin mining. For example, on September 24, 2021 China declared all transactions in and mining of cryptocurrencies, including Bitcoin, illegal. While the ultimate long-term effect of this ban remains uncertain, it could significantly hinder our prospects by limiting a large market for cryptocurrencies within a growing economy. In the hours following China’s announcement of the ban, the price of Bitcoin, which is tied to some extent to public perception of its future value as a form of currency, dropped by nearly $4,000. The ban followed piecemeal regulatory action within China against cryptocurrencies, which was due in part to concerns about the potential for manipulative practices and excessive energy consumption. This could demonstrate the beginning of a regional or global regulatory trend in response to these or other concerns surrounding cryptocurrencies, and similar action in a jurisdiction in which we operate or in general could have devastating effects to our operations. If further regulation follows, it is possible that our industry may not be able to adjust to a sudden and dramatic overhaul to our ability to deploy energy towards the operation of mining equipment.
Because we are unable to influence or predict future regulatory actions taken by governments, we may face difficulty monitoring and responding to rapid regulatory developments affecting Bitcoin mining, which may have a materially adverse effect on our industry and, therefore, our business and results of operations. If further regulatory action is taken by governments in the United States or elsewhere, our business may be materially harmed and you could lose some or all of your investment.
Because there are several competitors in our industry that are purchasing mining equipment at scale and due to supply chain disruptions, we may encounter delays or difficulty in us obtaining new miners, which could materially and adversely affect our business and results of operations.
Many of the competitors in our industry have also been purchasing mining equipment at scale, which has caused a world-wide shortage of mining equipment and components used to produce them, as well as delayed delivery schedules for new miner purchases. There can be no assurances the mining equipment manufacturers on which we will rely will be able to keep pace with the surge in demand for mining equipment when we obtain, upgrade and/or expand upon our current miners. The supply chain disruptions we are facing may adversely affecting us including the shortages of transformers needed to power our miners. Additionally, the supply of the materials used to produce miners, such as the application-specific integrated circuit (“ASIC”) computer chips that are the primary feature in their computing power, may become subject to shortages, which could also either increase the cost beyond what we can reasonably afford or reduce their availability without unreasonable delay or at all. It is uncertain how manufacturers will respond to these trends and whether they can deliver on the schedules promised to any or all of their customers in the future. In the event manufacturers of mining equipment or component parts or materials are not able to keep pace with demand or avoid supply shortages, we may not be able to purchase such products in sufficient quantities, at reasonable prices or on the delivery schedules that meet our business needs, which could have a material adverse effect on our business and results of operations.
To the extent that the profit margins of Bitcoin mining operations are not high, Bitcoin mining companies or other participants in the Bitcoin industry are more likely to immediately sell Bitcoins in the market, thereby constraining growth of the price of Bitcoin that could adversely impact us.
Over the years, Bitcoin mining operations have shifted from individual users mining with computer processors, graphics processing units and first-generation ASIC servers to larger enterprises with newer, more “professionalized” sources of processing power which has been predominantly added by “professionalized” mining operations and resulting demand for more professionalized and powerful miners having faster hash rates. These professionalized mining operations may use proprietary hardware or sophisticated ASIC machines acquired from ASIC manufacturers. Acquiring this specialized hardware at scale requires the investment of significant up-front capital, and mine operators incur significant expenses related to the operation of this hardware at scale, such as the leasing of operating space, which is often done in data centers or warehousing facilities, obtaining and paying for an electricity supply to run the miners and employing technicians to operate the mining facilities.
As a result, these professionalized mining operations are of a greater scale than prior miners and have more defined and regular expenses and liabilities. Because these regular expenses and liabilities require professionalized mining operations to maintain profit margins on the sale of Bitcoin, to the extent the price of Bitcoin declines and such profit margin is constrained, such mining companies are incentivized to sell Bitcoin earned from mining operations more rapidly than individual mining companies who in past years were more likely to hold newly mined Bitcoin for longer periods. The immediate selling of newly mined Bitcoin greatly increases the trading volume of Bitcoin, creating downward pressure on the market price of Bitcoin rewards.
The extent to which the value of Bitcoin mined by a professionalized mining operation exceeds the allocable capital and operating costs determines the profit margin of such an operation. A professionalized mining operation may be more likely to sell a higher percentage of its newly mined Bitcoin rapidly if it is operating at a low profit margin and it may partially or completely cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold more rapidly, thereby potentially depressing Bitcoin prices. Lower Bitcoin prices could result in further tightening of profit margins for professionalized mining operations creating a network effect that may further reduce the price of Bitcoin until mining operations with higher operating costs become unprofitable forcing them to reduce mining power or cease mining operations temporarily.
Because many of our miners are designed specifically to mine Bitcoin, our future success will depend in large part upon the value of Bitcoin, and any sustained decline in its value could adversely affect our business and results of operations.
Our operating results will depend in large part upon the value of Bitcoin because it is the primary cryptocurrency we intend to mine, particularly during the short term. Specifically, our revenues from our Bitcoin mining operations are expected to be based upon two factors: (1) the number of Bitcoin rewards we successfully mine and (2) the value of Bitcoin. This means that our operating results will be subject to swings based upon increases or decreases in the value of Bitcoin. Furthermore, our mining operations will focus primarily on producing Bitcoin (as opposed to other cryptocurrencies), and our current miners will principally utilize an algorithm, referred to as SHA-256, which is designed primarily for mining Bitcoin. We will therefore be unable to use these miners to mine other cryptocurrencies, such as Ethereum, because of this algorithm. If other cryptocurrencies overtake Bitcoin in terms of acceptance, the value of Bitcoin could decline. Further, if Bitcoin were to switch its proof of work algorithm from SHA-256 to another algorithm for which our miners would not be suited or if the value of Bitcoin were to decline for other reasons, particularly if such decline were significant or over an extended period of time, we would likely incur very significant costs in retooling or replacing our existing miners with miners better suited for these new protocols and our operating results could be adversely affected. This could result in a material adverse effect on our ability to execute our business strategy, which would harm your investment in us.
Bitcoin is subject to halving, meaning that the Bitcoin rewarded for solving a block will be reduced in the future and its value may not commensurately adjust to compensate us for such reductions, and the overall supply of Bitcoin is finite.
Bitcoin is subject to “halving,” which is the process by which the Bitcoin reward for solving a block is reduced by 50% for every 210,000 blocks that are solved. This means that the amount of Bitcoin we (or any other mining company) are rewarded for solving a block in the blockchain is permanently cut in half. For example, the latest halving having occurred in May 2020, with a revised payout of 6.25 Bitcoin per block solved, down from the previous reward rate of 12.5 Bitcoin per block solved. There can be no assurance that the price of Bitcoin will sufficiently increase to justify the increasingly high costs of mining for Bitcoin given the halving feature. If a corresponding and proportionate increase in the trading price of these cryptocurrencies does not follow these anticipated halving events, the revenue we earn from our mining operations would see a corresponding decrease, which would have a material adverse effect on our business and operations. To illustrate, even if the price of Bitcoin remains at its price as of today, all other factors being equal (including the same number of miners and a stable hash rate) our revenue would decrease substantially upon the next halving.
Further, due to the halving process, unless the underlying code of the Bitcoin blockchain is altered (which may be unlikely given its decentralized nature), the supply of Bitcoin is finite. Once 21 million Bitcoin have been generated by virtue of solving blocks in the blockchain, the network will stop producing more which is not anticipated until 2140. Currently, there are approximately 19 million Bitcoin in circulation representing about 90% of the total supply of Bitcoin under the current source code. For the foregoing reasons, the halving feature exposes us to inherent uncertainty and reliance upon the historically volatile price of Bitcoin, rendering an investment in us particularly speculative, especially in the long-term. If the price of Bitcoin does not significantly increase in value, your investment could become worthless.
Interruptions to Internet access could disrupt our operations, which could adversely affect our business and results of operations.
Our cryptocurrency mining operations will require access to high-speed Internet to be successful. If we lose Internet access for a prolonged period, we may be required to reduce our operations or cease them altogether. A disruption of the Internet may affect the use of cryptocurrencies and subsequently the value of our securities. Generally, cryptocurrencies and our business of mining cryptocurrencies is dependent upon the Internet. A significant disruption in Internet connectivity could disrupt a currency’s network operations until the disruption is resolved and have an adverse effect on the price of Bitcoin and our ability to mine Bitcoin. If this occurs, our business and results of operations may suffer, and our investors may be materially and adversely effected.
Bitcoin has forked multiple times and additional forks may occur in the future which may affect the value of Bitcoin held or mined by the Company.
To the extent that a significant majority of users and mining companies on a cryptocurrency network install software that changes the cryptocurrency network or properties of a cryptocurrency, including the irreversibility of transactions and limitations on the mining of new cryptocurrency, the cryptocurrency network would be subject to new protocols and software. However, if less than a significant majority of users and mining companies on the cryptocurrency network consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the consequence would be what is known as a “fork” of the network, with one prong running the pre-modified software and the other running the modified software. The effect of such a fork would be the existence of two versions of the cryptocurrency running in parallel yet lacking interchangeability and necessitating exchange-type transaction to convert currencies between the two forks. Additionally, it may be unclear following a fork which fork represents the original cryptocurrency and which is the new cryptocurrency. Different metrics adopted by industry participants to determine which is the original asset include: referring to the wishes of the core developers of a cryptocurrency, blockchains with the greatest amount of hashing power contributed by miners or validators; or blockchains with the longest chain. A fork in the network of a particular cryptocurrency could adversely affect an investment in our securities or our ability to operate.
Since August 1, 2017, Bitcoin’s blockchain was forked multiple times creating alternative versions of the cryptocurrency such as Bitcoin Cash, Bitcoin Gold and Bitcoin SV. The forks resulted in a new blockchain being created with a shared history, and a new path forward. The value of the newly created versions including Bitcoin Cash, Bitcoin Gold and Bitcoin SV may or may not have value in the long run and may affect the price of Bitcoin if interest is shifted away from Bitcoin to the newly created cryptocurrencies. The value of Bitcoin after the creation of a fork is subject to many factors including the value of the fork product, market reaction to the creation of the fork product, and the occurrence of forks in the future. As such, the value of Bitcoin could be materially reduced if existing and future forks have a negative effect on Bitcoin’s value.
If we successfully complete the development of our initial facilities, our planned mining operations, including the miners, the housing infrastructure, the land and the facilities as a whole in which our miners will be operated, will be subject to risks related to uninsured losses and potential damage and contingencies for which we may not be adequately prepared.
Our initial mining facilities and any future facilities we may establish will be subject to a variety of risks relating to housing all of our operations, which include keeping expensive revenue-generating equipment at a single physical location. While we intend to obtain insurance covering general liability, it may not cover all potential losses fully or at all. Some of the risks we face are expected to include:
For example, our facilities could be rendered inoperable, temporarily or permanently, as a result of a fire or other natural disaster or by a terrorist or other attack on a facility. The security and other measures we take to protect against these risks may not be sufficient. Additionally, our mining efforts could be materially adversely affected by a power outage or loss of access to the electrical grid or loss by the grid of cost-effective sources of electric power generating capacity. Given our constant power requirement to operate our miners and generate revenue, it would not be feasible to run miners on back-up power generators in the event of a power outage. In the event of an uninsured or under-insured loss, including a loss in excess of insured limits, at any of the miners in our network, such miners may not be adequately repaired in a timely manner or at all and we may lose some or all of the future revenues which could have otherwise been derived from such miners. To the extent the miners, the housing infrastructure in which they are held, or the land itself is permanently damaged, we may not be able to bear the cost of repair or replacement. Should any of these events transpire, we may not be able to recover, could lose a material amount of potential revenue, and our business and results of operations could be materially harmed as a result.
We will be relying upon a third party to establish and grow our mining efforts and will have limited ability to control their operations.
We have entered into a binding agreement with a third party pursuant to which it will host a third parties’ miners. We will receive a portion of the resulting revenue. Under the agreement, we will also have the ability to purchase the hosted miners in a “virtual swap” transaction wherein we pay for replacement equipment and in turn have the mining revenue from the hosted miners routed to our digital account. Our agreement gives us limited ability to control the initial mining efforts or oversee the operations. Further the equipment to be used will also include new state-of-the art miners using immersion technology to cool the computer hardware. If this technology fails to work as anticipated, it will adversely affect our future operations. Further our agreement provides no remedies, and we may not be successful in proving or collecting any damages.
Because of the reliance on a third-party mining pool service providers for our mining, its operations may have a negative impact on the Company’s results of operations.
The third-party hosting company will arrange our cryptocurrency mining operations using a mining pool, in which multiple cryptocurrency mining operators agree to join together and if any of them are rewarded Bitcoin for mining a block on the blockchain, the pool participants receive a portion of such reward based on the computing power contributed to mining that block. If we are able to participate in a mining pool, we would receive Bitcoin mining rewards from our mining activity through a third-party mining pool operator. Mining pools allow miners to combine their processing power, increasing their chances of solving a block and getting paid by the network. Should the pool operator’s system suffer downtime due to a cyber-attack, software malfunction or other similar issues, it will negatively impact our ability to mine and receive revenue. Furthermore, we are dependent on the accuracy of the mining pool operator’s record keeping to accurately record the total processing power provided to the pool for a given Bitcoin mining application in order to assess the proportion of that total processing power we provided. We would have limited means of recourse against the mining pool operator if we determine the proportion of the reward paid out to us by the mining pool operator is incorrect, other than leaving the pool. If we are unable to consistently obtain accurate proportionate rewards from our mining pool operators, we may experience reduced reward for our efforts, which would have an adverse effect on our business and operations.
There is a possibility of cryptocurrency mining algorithms transitioning to proof of stake validation and other mining related risks, which could make us less competitive and ultimately adversely affect our business and the value of our stock.
Proof of stake is an alternative method in validating cryptocurrency transactions that is less dependent on the consumption of electricity. Should the algorithm shift from a proof of work validation method to a proof of stake method, mining would likely require less energy, which may render any company that maintains advantages in the current climate (for example, from lower priced electricity, processing, real estate, or hosting) less competitive. We, as a result of our efforts to optimize and improve the efficiency of our Bitcoin mining operations by seeking to acquire low cost, long-term electricity, may be exposed to the risk in the future of losing the relative competitive advantage we may have over some of our competitors as a result, and may be negatively impacted if a switch to proof of stake validation were to occur. This is because we have invested heavily in setting up our facility based on the mining algorithms method of validation. Such events could have a material adverse effect on our ability to continue as a going concern, which could have a material adverse effect on our business, prospects or results of operations, the value of Bitcoin and your investment in us.
We may be accused of infringing intellectual property rights of third parties.
We may be subject to legal claims of alleged infringement of the intellectual property rights of third parties. Due to the open-source and constantly evolving nature of businesses involving digital assets such as cryptocurrencies, we may not always be able to determine that we are using or accessing protected information or software. For example, there could be issued patents of which we are not aware that our activities or the equipment or software we use may infringe. The ready availability of damages, royalties and the potential for injunctive relief has increased the defense litigation costs of patent infringement claims, especially those asserted by third parties whose sole or primary business is to assert such claims. Such claims, even if not meritorious, may result in significant expenditure of financial and managerial resources, and the payment of damages or settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or business processes we currently use or may need to use in the future or requiring us to obtain licenses from third parties when such licenses may not be available on financially feasible terms or terms acceptable to us or at all. In addition, we may not be able to obtain on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing ecommerce services to other businesses and individuals under commercial agreements.
Because of our focus on Bitcoin mining, particularly during the short-term, the trading price of shares of our common stock may increase or decrease with the trading price of Bitcoin, which subjects investors to pricing risks, including “bubble” type risks, and volatility.
Because of our dependence on Bitcoin, particularly in our early stages, the trading prices of our common stock may at times be tied to the trading prices of Bitcoin. Specifically, we may experience adverse effects on our stock price when the value of Bitcoin drops. Furthermore, if the market for Bitcoin mine operators’ stocks or the stock market in general experiences a loss of investor confidence, the trading price of our stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock could be subject to arbitrary pricing factors that are not necessarily associated with traditional factors that influence stock prices or the value of non-cryptocurrency assets such as revenue, cash flows, profitability, growth prospects or business activity since the value and price, as determined by the investing public, may be influenced by uncertain contingencies such as future anticipated adoption or appreciation in value of cryptocurrencies or blockchains generally, and other factors over which we have little or no influence or control.
Bitcoin and other cryptocurrency market prices, which have historically been volatile and are impacted by a variety of factors (including those discussed below), are determined primarily using data from various exchanges, over-the-counter markets and derivative platforms. Furthermore, such prices may be subject to factors such as those that impact commodities, more so than business activities, which could be subjected to additional influence from fraudulent or illegitimate actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue to result in, speculation regarding future appreciation in the value of cryptocurrencies, or our share price, making their market prices more volatile or creating “bubble” type risks for the trading price of Bitcoin.
During the year ended December 31, 2020, the trading price of Bitcoin appreciated significantly, from a low closing value of approximately $5,000 per Bitcoin in March 2020, to a high closing value of approximately $29,400 per Bitcoin in December 2020. During 2021, the trading price of Bitcoin has been volatile with a high of $66,999 as of October 19, 2021 and lows of $33,077.43 as of July 12, 2021 and $35,513 as of February 2, 2021. As of November 1, 2021, the price was $61,482.70. This volatility was reflected on September 24, 2021 when at 1:30 pm Eastern Time the price of Bitcoin was approximately $41,151, down almost $4,000 from earlier in the day following news of China’s blanket ban on cryptocurrencies. In 2017, the trading price of Bitcoin increased to nearly $20,000 per Bitcoin (then an all-time high), only to decline significantly and sharply to a low of approximately $3,400 per Bitcoin in December 2018. There can be no assurances that similar fluctuations in the trading price of Bitcoin will not occur in the future. Accordingly, since our revenue will depend on the price of Bitcoin, and the trading price of our securities may therefore at times be connected to the trading price of Bitcoin, if the trading price of Bitcoin again experiences a significant decline, we could experience a similar decline in revenue and/or in the trading price for shares of our common stock. If this occurs, you may lose some or all of your investment.
The markets for Bitcoin and other cryptocurrencies and the existing markets may be under-regulated and, as a result, the market price of Bitcoin may be subject to significant volatility or manipulation, which could decrease consumer confidence in cryptocurrencies and have a materially adverse effect on our business and results of operations.
Cryptocurrencies that are represented and trade on a ledger-based platform and those who hold them may not enjoy the same benefits as traditional securities available on trading markets and their investors. Stock exchanges have listing requirements and vet issuers, requiring them to be subjected to rigorous listing standards and rules, and monitor investors transacting on such platform for fraud and other improprieties. These conditions may not necessarily be replicated on a distributed ledger platform, depending on the platform’s controls and other policies. The more lax a distributed ledger platform is about vetting issuers of cryptocurrency assets or users that transact on the platform, the higher the potential risk for fraud or the manipulation of the ledger due to a control event. We believe that Bitcoin is not a security under federal and state law. This eliminates an ability to police fraud.
Bitcoin and other cryptocurrency market prices have historically been volatile, are impacted by a variety of factors, and are determined primarily using data from various exchanges, over-the-counter markets and derivative platforms. Furthermore, such prices may be subject to factors such as those that impact commodities, more so than business activities, which could be subjected to additional influence from fraudulent or illegitimate actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue to result in, speculation regarding future appreciation in the value of cryptocurrencies, or our share price, making their market prices more volatile or creating “bubble” type risks for both Bitcoin and shares of our common stock.
These factors may inhibit consumer trust in and market acceptance of cryptocurrencies as a means of exchange which could have a material adverse effect on our business, prospects, or operations and potentially the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire.
The development and acceptance of cryptographic and algorithmic protocols governing the issuance of and transactions in cryptocurrencies is subject to a variety of factors that are difficult to evaluate.
The use of cryptocurrencies, including Bitcoin, to, among other things, buy and sell goods and services and complete transactions, is part of a new and rapidly evolving industry that employs cryptocurrency assets based upon a computer-generated mathematical and/or cryptographic protocol. Large-scale acceptance of cryptocurrencies as a means of payment has not, and may never, occur. The growth of this industry in general, and the use of Bitcoin in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing protocols may occur unpredictably. The factors include, but are not limited to:
The outcome of these factors could have negative effects on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations as well as potentially negative effects on the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire, which would harm investors in our securities. If Bitcoin or other cryptocurrencies we mine do not gain widespread market acceptance or accrete in value over time, our prospects and your investment in us would diminish.
Banks and financial institutions may not provide banking services, or may cut off services, to businesses that engage in cryptocurrency-related activities.
A number of companies that engage in Bitcoin and/or other cryptocurrency-related activities have been unable to find banks or financial institutions that are willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with cryptocurrencies may have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions in response to government action, particularly in China, where regulatory response to cryptocurrencies has been to initially exclude their use for ordinary consumer transactions within China and later to deem all cryptocurrency-related transactions illegal in September 2021. The difficulty that many businesses that provide Bitcoin and/or derivatives on other cryptocurrency-related activities have and may continue to have in finding banks and financial institutions willing to provide them services may be decreasing the usefulness of cryptocurrencies as a payment system and harming public perception of cryptocurrencies and could decrease their usefulness and harm their public perception in the future.
The usefulness of cryptocurrencies as a payment system and the public perception of cryptocurrencies could be damaged if banks or financial institutions were to close the accounts of businesses engaging in Bitcoin and/or other cryptocurrency-related activities. This could occur as a result of compliance risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national stock and derivatives on commodities exchanges, the over-the-counter market, and the Depository Trust Company (“DTC”), which, if any of such entities adopts or implements similar policies, rules or regulations, could negatively affect our relationships with financial institutions and impede our ability to convert cryptocurrencies to fiat currencies. Such factors could have a material adverse effect on our ability to continue as a going concern or to monetize our mining efforts, which could have a material adverse effect on our business, prospects or operations and harm investors.
Political or economic crises may motivate large-scale sales of cryptocurrencies, which could result in a reduction in values of cryptocurrencies such as Bitcoin and adversely affect an investment in us.
Geopolitical crises may motivate large-scale sales of cryptocurrencies, which could rapidly decrease the price of cryptocurrencies such as Bitcoin. Alternatively, as an emerging asset class with limited acceptance as a payment system or commodity, global crises and general economic downturn may discourage investment in cryptocurrencies as investors focus their investment on less volatile asset classes as a means of hedging their investment risk.
As an alternative to fiat currencies that are backed by central governments, cryptocurrencies such as Bitcoin, which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of cryptocurrencies either globally or locally. Large-scale sales of cryptocurrencies would result in a reduction in cryptocurrency values and could adversely affect an investment in us.
The decentralized nature of cryptocurrency systems may lead to slow or inadequate responses to crises, which may negatively affect our business.
The decentralized nature of the governance of cryptocurrency systems may lead to ineffective decision making that slows development or prevents a network from overcoming emergent obstacles. Governance of many cryptocurrency systems is by voluntary consensus and open competition with no clear leadership structure or authority. To the extent lack of clarity in corporate governance of cryptocurrency systems leads to ineffective decision making that slows development and growth of such cryptocurrencies, the value of our common stock may be adversely affected.
The emergence of competing blockchain platforms or technologies may harm our business as presently conducted.
If blockchain platforms or technologies which compete with Bitcoin and its blockchain, including competing cryptocurrencies which our miners may not be able to mine, such as cryptocurrencies being developed or may be developed by popular social media platforms, online retailers, or government sponsored cryptocurrencies, consumers may use such alternative platforms or technologies. If that were to occur, we would face difficulty adapting to emergent such digital ledgers, blockchains, or alternative platforms, cryptocurrencies or other digital assets. This may adversely affect us by preventing us from realizing the anticipated profits from our investments and forcing us to expend additional capital in an effort to adapt. Further, to the extent we cannot adapt, be it due to our specialized miners or otherwise, we could be forced to cease our mining or other cryptocurrency-related operations. Such circumstances would have a material adverse effect on our business, and in turn investors’ investments in our securities.
Cryptocurrencies face significant scaling obstacles that can lead to high fees or slow transaction settlement times.
Cryptocurrencies face significant scaling obstacles that can lead to high fees or slow transaction settlement times, and attempts to increase the volume of transactions may not be effective. Therefore, scaling cryptocurrencies will be essential to the widespread acceptance of cryptocurrencies as a means of payment, which widespread acceptance is necessary to the continued growth and development of our business. Many cryptocurrency networks face significant scaling challenges, such as limitations on how many transactions can occur per second. There can be no guarantee that any of the systems in place or being considered to increasing the scale of settlement of cryptocurrency transactions will be effective, or how long they will take to become effective, which could adversely affect an investment in our securities.
The price of cryptocurrencies may be affected by the sale of such cryptocurrencies by other vehicles investing in cryptocurrencies or tracking cryptocurrency markets.
The global market for cryptocurrency is characterized by supply constraints that differ from those present in the markets for commodities or other assets such as gold and silver. The mathematical protocols under which certain cryptocurrencies are mined permit the creation of a limited, predetermined amount of digital currency, while others have no limit established on total supply. Increased numbers of miners and deployed mining power globally will likely continue to increase the available supply of Bitcoin and other cryptocurrencies, which may depress their market price. Further, large “block sales” involving significant numbers of Bitcoin following appreciation in the market price of Bitcoin may also increase the supply of Bitcoin available on the market, which, without a corresponding increase in demand, may cause its price to fall. Additionally, to the extent that other vehicles investing in cryptocurrencies or tracking cryptocurrency markets form and come to represent a significant proportion of the demand for cryptocurrencies, large redemptions of the securities of those vehicles and the subsequent sale of cryptocurrencies by such vehicles could negatively affect cryptocurrency prices and therefore affect the value of the cryptocurrency inventory we hold. Such events could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or other cryptocurrencies we mine.
The Bitcoin we mine may be subject to loss, damage, theft or restriction on access.
There is a risk that some or all of the Bitcoin we mine could be lost or stolen. In general, cryptocurrencies are stored in cryptocurrency sites commonly referred to as “wallets” by holders of cryptocurrencies which may be accessed to exchange a holder’s cryptocurrency assets. Access to our Bitcoin could also be restricted by cybercrime (such as a denial of service attack). While we plan to take steps to attempt to secure the Bitcoin we hold, there can be no assurance our efforts to protect our cryptocurrencies will be successful.
Hackers or malicious actors may launch attacks to steal, compromise or secure cryptocurrencies, such as by attacking the cryptocurrency network source code, exchange miners, third-party platforms, cold and hot storage locations or software, or by other means. Any of these events may adversely affect our operations and, consequently, our ability to generate revenue and become profitable. The loss or destruction of a private key required to access our digital wallets may be irreversible and we may be denied access for all time to our Bitcoin holdings. Our loss of access to our private keys or our experience of a data loss relating to our digital wallets could adversely affect our business.
Cryptocurrencies are controllable only by the possessor of both the unique public and private keys relating to the local or online digital wallet in which they are held, which wallet’s public key or address is reflected in the network’s public blockchain. We will be required to publish the public key relating to digital wallets in use when we verify the receipt of transfers and disseminate such information into the network, but we will need to safeguard the private keys relating to such digital wallets. To the extent such private keys are lost, destroyed or otherwise compromised, we will be unable to access our Bitcoin rewards and such private keys may not be capable of being restored by any network. Any loss of private keys relating to digital wallets used to store our mined Bitcoin could have a material adverse effect on our results of operations and ability to continue as a going concern, which could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin we mine. For example, the New York Times reported in January 2021 that about 20% of existing Bitcoin appears to be “lost” due to password issues.
Incorrect or fraudulent cryptocurrency transactions may be irreversible.
Cryptocurrency transactions are irrevocable and stolen or incorrectly transferred cryptocurrencies may be irretrievable. As a result, any incorrectly executed or fraudulent cryptocurrency transactions, such as a result of a cybersecurity breach against our Bitcoin holdings, could adversely affect our investments and assets. This is because cryptocurrency transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the cryptocurrencies from the transaction. Once a transaction has been verified and recorded in a block that is added to a blockchain, an incorrect transfer of a cryptocurrency or a theft thereof generally will not be reversible and we may not have sufficient recourse to recover our losses from any such transfer or theft. Further, it is possible that, through computer or human error, or through theft or criminal action, our cryptocurrency rewards could be transferred in incorrect amounts or to unauthorized third parties, or to uncontrolled accounts. If an errant or fraudulent transaction in our Bitcoin were to occur, we would have very limited means of seeking to reverse the transaction or seek recourse. To the extent that we are unable to recover our losses from such action, error or theft, such events could have a material adverse effect on our business.
If a malicious actor or botnet obtains control of more than 50% of the processing power on a cryptocurrency network, such actor or botnet could manipulate blockchains to adversely affect us, which would adversely affect an investment in us or our ability to operate.
If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power dedicated to mining a cryptocurrency, it may be able to alter blockchains on which transactions of cryptocurrency reside and rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all. The malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new units or transactions using such control. The malicious actor could “double-spend” its own cryptocurrency (i.e., spend the same Bitcoin in more than one transaction) and prevent the confirmation of other users’ transactions for as long as it maintained control. To the extent that such malicious actor or botnet does not yield its control of the processing power on the network or the cryptocurrency community does not reject the fraudulent blocks as malicious, reversing any changes made to blockchains may not be possible. The foregoing description is not the only means by which the entirety of blockchains or cryptocurrencies may be compromised but is only an example.
Although there are no known reports of malicious activity or control of blockchains achieved through controlling over 50% of the processing power on the network, it is believed that certain mining pools may have exceeded the 50% threshold in Bitcoin. The possible crossing of the 50% threshold indicates a greater risk that a single mining pool could exert authority over the validation of Bitcoin transactions. To the extent that the Bitcoin community, and the administrators of mining pools, do not act to ensure greater decentralization of Bitcoin mining processing power, the feasibility of a botnet or malicious actor obtaining control of the blockchain’s processing power will increase, because such botnet or malicious actor could more readily infiltrate and seize control over the blockchain by compromising a single mining pool, if the mining pool compromises more than 50% of the mining power on the blockchain, than it could if the mining pool had a smaller share of the blockchain’s total hashing power. Conversely, if the blockchain remains decentralized it is inherently more difficult for the botnet or malicious actor to aggregate enough processing power to gain control of the blockchain. If this were to occur, the public may lose confidence in the Bitcoin blockchain, and blockchain technology more generally. This would likely have a material and adverse effect on the price of Bitcoin, which could have a material adverse effect on our business, financial results and operations, and harm investors.
If the Bitcoin rewards for solving blocks are not sufficiently high, miners may not have adequate incentive to continue mining and may cease mining operations, which may make the blockchains they support with their mining activity less stable.
As the number of cryptocurrency rewards awarded for solving a block in a blockchain decreases, the relative cost of producing a single cryptocurrency will also increase, unless there is a corresponding increase in demand for that cryptocurrency. Even relatively stable demand may not be sufficient to support the costs of mining, because as new miners begin working to solve blocks, the relative amount of energy expended to obtain a cryptocurrency award will tend to increase. This increased energy directly relates to an increased cost of mining, which means an increased cost of obtaining a cryptocurrency award. This increased cost, if not met with a corresponding increase in the market price for the cryptocurrency resulting from increased scarcity and demand, may lead miners, such as us, to conclude they do not have an adequate incentive to continue mining and, therefore, may cease their mining operations. This could in turn reduce the sustainability of the Bitcoin blockchain, which is dependent upon continued mining to solve the block’s algorithms and process transactions in Bitcoin. If this were to occur, your investment in us could become worthless.
Current interpretations require the regulation of Bitcoin under the Commodity Exchange Act by the Commodity Futures Trading Commission, and we may be required to register and comply with such regulations. Any disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
Current and future legislation, regulation by the Commodity Futures Trading Commission (the “CFTC”) and other regulatory developments, including interpretations released by a regulatory authority, may impact the manner in which Bitcoin and other cryptocurrencies are treated for classification and clearing purposes. In particular, derivatives on these assets are not excluded from the definition of “commodity future” by the CFTC. We cannot be certain as to how future regulatory developments will impact the treatment of Bitcoin and other cryptocurrencies under the law.
Bitcoins have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation under the Commodity Exchange Act, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to register as a commodity pool operator and to register us as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect an investment in us.
Additionally, governments may develop and deploy their own blockchain-based digital assets, which may have a material adverse impact on Bitcoin’s price and utility.
New Risks Relating to our Energy Business
Risks arising from the threat of climate change and the legislation, regulations or government actions related to climate change, greenhouse gas emissions and sustainability initiatives, could result in increased compliance and operating costs.
Since he took office in January 2021, President Biden has signed a series of executive orders seeking to adopt new regulations to address climate change and to suspend, revise, or rescind certain prior agency actions which were part of the Trump Administration’s de-regulatory push, and the Biden Administration is expected to continue to aggressively seek to regulate the energy industry and seek to eliminate in time the use of fossil fuels. Among other things, in January 2021, President Biden issued an executive order calling for methane emissions regulations to be reviewed and for the United States Environmental Protection Agency (the “EPA”) to establish new standards. On September 17, 2021, President Biden pledged to reduce global methane emissions in the United States by at least 30% below 2020 levels by 2030.
Further, in November 2021 the EPA released new proposed methane rules which would impose regulations on methane release at existing wells nationwide. These new rules, among other things, would implement a comprehensive monitoring program to require oil and gas companies to find and fix leaks. Additionally, the new rules would require well operators to place gas that is produced in a pipeline to be sold when possible, to prevent wasting the gas, which could force us or well operators on which we rely to sell the gas at lower prices and thereby reduce our revenues. The EPA is expected to issue a supplemental proposal in 2022 in the hopes of identifying additional regulatory means of reducing methane and other emissions and has indicated an intention to adopt final rules before the end of calendar year 2022.
These and other adverse changes to the existing regulations and the adoption and implementation of new regulations related to climate change could require us to incur material costs to monitor and report on greenhouse gas emissions or install new equipment to reduce emissions of greenhouse gases associated with our operations, which may require us to divert significant capital and human resources, result in a reduction of revenue, or otherwise have a material adverse effect on our financial condition and results of operations.
Because we have not proven the viability of using flared natural gas as a solution to lower the costs of generating electricity, the operations of Trend Exploration may not be a successful adjunct to our Bitstream mining business.
Trend Discovery formed Trend Exploration in order to explore using flared natural gas as a solution to lower the costs of power generation for Bitcoin mining. Oil production involves the discharge of excess natural gas near the wellhead in areas where it is not economical to transport the natural gas. Flared natural gas involves the burning of this natural gas. We believe that if we can harness enough stranded natural gas, it can reduce our power costs and reduce the environmental effects from the discharge and burning of this natural gas. We have been exploring the feasibility of this process and seeking a sufficient supply to meet our needs. While our management is optimistic that we have an economically viable solution, we may not be successful in either obtaining an adequate supply of natural gas or generating enough power at costs which meet our needs.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
76
ITEM 6. EXHIBITS
| Incorporated by Reference | Filed or Furnished | ||||||||||
| Exhibit No. | Exhibit Description | Form | Date | Number | Herewith | ||||||
| 3.1(a) | Articles of Incorporation, as amended | 10-Q | 2/12/21 | 3.1 | |||||||
| 3.1(b) | Certificate of Amendment to Articles of Incorporation | 8-K | 10/12/21 | 3.1 | |||||||
| 3.2(a) | Amended and Restated Bylaws | 8-K | 4/28/17 | 3.1 | |||||||
| 3.2(b) | Amendment to Bylaws | 8-K | 8/30/21 | 3.1 | |||||||
| 4.1 | Form of Warrant | 8-K | 8/5/21 | 4.1 | |||||||
| 4.2 | Form of Placement Agent Warrant | 8-K | 8/5/21 | 4.2 | |||||||
| 10.1 | Form of Securities Purchase Agreement** | 8-K | 8/5/21 | 10.1 | |||||||
| 10.2 | Engagement Agreement+ | 8-K | 8/5/21 | 10.2 | |||||||
| 10.3 | Amendment to Engagement Agreement | 8-K | 8/5/21 | 10.3 | |||||||
| 31.1 | Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 | Filed | |||||||||
| 31.2 | Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 | Filed | |||||||||
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished* | |||||||||
| 32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished* | |||||||||
| 101.INS | Inline XBRL Instance Document. | Filed | |||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | Filed | |||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | Filed | |||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | Filed | |||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | Filed | |||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | Filed | |||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | Filed | |||||||||
| * | 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 shareholdersstockholders who make a written request to our Corporate Secretary at Ecoark Holdings, Inc., 303 Pearl Parkway Suite #200, San Antonio, Texas 78215.
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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.
| Ecoark Holdings, Inc. | |||
| Date: | By: | /s/ Randy May | |
| Randy May | |||
| Chief Executive Officer | |||
| Date: | By: | /s/ | |
| Jay Puchir | |||
| Chief Financial Officer | |||
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