The information in this preliminary prospectus is not complete and may be changed. These securitiesThe selling stockholders may not be soldsell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor doesand it seekis not soliciting an offer to buy these securities in any jurisdictionstate where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 1, 2019
Ecoark Holdings, Inc.
8,673,250
Up to [11,921,569] Shares of
Common Stock
This prospectus relates to the resaleoffer and sale from time to time by the selling securityholdersstockholders identified in this prospectus, or the Selling Stockholders, of Ecoark Holdings, Inc. named herein purchased in an offeringup to [11,921,569] shares of units which ended on April 28, 2016. In this offering, we offered units for $4.00 per unit, consistingour common stock. These shares consist of one share(i) 3,921,569 shares, or the Underlying Shares, of our common stock issuable upon conversion of our Series B Convertible Preferred Stock, and a warrant to purchase one share(ii) [8,000,000] shares, or the Warrant Shares, of our common stock for $5.00. The selling securityholdersissuable upon exercise of outstanding warrants (including [4,078,431] additional Warrant Shares that may sell up to 8,673,250 sharesbe issued based on the market price of our common stock par value $0.001 per share. These shares include (i) 4,336,625 shareson the 11-month anniversary of issued and outstanding common stock currently held by the selling securityholders and (ii) 4,336,625 sharesclosing date of common stock currently underlying certain warrants held by the selling securityholders which, in each case, were initially issued and sold in a private placement offering that closed on April 28, 2016 (collectively the “Private Offering”)offering). The Company received $17.3 million from the Private Offering which it is using for general working capital purposes. The warrants entitle the holders thereof to purchase shares of common stock at an exercise price equal to $5.00 per share, subject to adjustment for stock splits or corporate reorganizations.
The registrationshares of our common stock registered hereby may be offered and sold by the Selling Stockholders from time to time in the over-the-counter market or other national securities exchange or automated interdealer quotation system on which our common stock is then listed or quoted, or through one or more underwriters, broker-dealers or agents. If the shares of common stock hereunder does not mean that any ofare sold through underwriters or broker-dealers, the selling securityholdersSelling Stockholders will actually offerbe responsible for underwriting discounts or sell the full number of shares being registered pursuant to this prospectus.commissions or agent’s commissions. The selling securityholders may sell the shares of common stock tomay be registered hereby fromsold in one or more transactions at fixed prices, at prevailing market prices at the time to time. We will, however, receive the exercise price of the warrants if and when the warrants are exercised for cash by the securityholders. The selling securityholders may offer and sell the shares in a variety of transactions described under the heading “Plan of Distribution” beginning on page 16, including transactions on any stock exchange, market or facility on which the common stock may be traded, in privately negotiated transactions or otherwisesale, at marketvarying prices prevailingdetermined at the time of sale, at prices related to such market prices or at negotiated prices. See “Plan of Distribution.”
We are not selling any securities covered byshares of common stock under this prospectus, and we will not receive any of the proceeds from the offer and sale of shares of our common stock by the selling securityholders.Selling Stockholders. We will, however, receive approximately $21.683 millionproceeds from the selling securityholders if they exercise all of the warrants on a cash basis (assuming, in each case, no adjustments are made to the exercise price or number of shares issuable upon exercise of the warrants),Warrants if and when they are exercised in cash. See “Use of Proceeds.”
This prospectus describes the general manner in which we expect we would use primarily for working capital purposes. We are registering the common stock on behalf of the selling securityholders. We are bearing all of the expenses in connection with the registration of the shares of common stock but all sellingmay be offered and other expenses incurredsold by any Selling Stockholders. When the selling securityholders, including commissionsSelling Stockholders sell shares of common stock under this prospectus, we may, if necessary and discounts, ifrequired by law, provide a prospectus supplement that will contain specific information about the terms of that offering. Any prospectus supplement may also add to, update, modify or replace information contained in this prospectus. We urge you to read carefully this prospectus, any attributable to the sale or dispositionaccompanying prospectus supplement and any documents we incorporate by such selling securityholders will be borne by them.
reference into this prospectus and any accompanying prospectus supplement before you make your investment decision.
Our common stock is quoted on the OTCQBOTCQX which is maintained by the OTC Market Group Inc. under the symbol “EARK”.“ZEST.” On July 1, 2016,September 23, 2019, the closinglast reported sale price as reported by the OTC Market Group Inc. was $18.00 per share. This price will fluctuate based on the demand for our common stock. We filed an application forof our common stock to be listed on the NASDAQ Capital Market.was $[*] per share.
We are a “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings.
Investing in our common stock and warrants involves a high degree of risk. SeePlease read “Risk Factors” beginning on page 45 of thisthe prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined ifpassed upon the adequacy or accuracy of this prospectus is truthful or complete.prospectus. Any representation to the contrary is a criminal offense.
Prospectus dated , 2016
The date of this prospectus is October 1, 2019
Business to Business Products and Services Provider
AppliedRetailKnowledge.
Intelleflex– Intelligent, On-Demand Solutions for Retailers and Companies that Ship and Store Products
Eco3D- 3D Mapping, Modeling, and Consulting Services for Retailers and Other Clients
Pioneer Products - Recovering Plastic Waste from Retail Supply Chains and Creating New Consumer Products with the Reclaimed Material
Magnolia Solar – Leveraging Nanotechnology to Increase the Performance of Retail ProductsTABLE OF CONTENTS
You should rely only onNeither we nor the selling stockholders have authorized anyone to provide any information or to make any representations other than those contained in this prospectus andor in any free writing prospectus supplement prepared by or on behalf of us or to which we have referred you. We have not authorized anyoneNeither we nor the selling stockholders take responsibility for, and can provide no assurance as to provide you withthe reliability of, any other information that is different. If anyone provides you with different or inconsistentothers may give you. The information you should not rely upon it. This prospectus is not an offer to sell, nor are the selling securityholders seeking an offer to buy, securities in any state where such offer or solicitation is not permitted. The informationcontained in this prospectus or in any applicable free writing prospectus is complete and accuratecurrent only as of theits date, on the front cover of this prospectus, regardless of theits time of delivery of this prospectus or any sale of shares of our common stock.shares. Our business, financial condition, results of operations and prospects may have changed since these dates.that date.
For investors outside the United States: neither we nor any of the selling securityholders have done anything that would permitWe use our registered trademarks and trade names, such as Zest™, in this offering or possession or distribution ofprospectus. Solely for convenience, trademarks and trade names referred to in this prospectus in any jurisdiction where action forappear without the ® and ™ symbols, but those references are not intended to indicate that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relatingwe will not assert, to the offeringfullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names. We do not intend our use or display of sharesother companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of our common stock and warrants and the distribution of this prospectus outside the United States.us by, any other companies.
Except as otherwise indicated herein or asUnless the context requires otherwise, requires, references in this prospectus to “Ecoark Holdings,” “the Company,” “we,” “us,” “our” and“our,” “our company,” or similar referencesterminology refer to Ecoark Holdings, Inc.
On March 18, 2016, we effected a 1-for-250 reverse stock split. Unless context indicates or otherwise requires, all share numbers and share price data included in this prospectus have been adjusted to give effect to that reverse stock split.i
The followingThis summary highlights selected information contained elsewhere in this prospectus, and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. Before you decide to investThis summary is qualified in our common stock, youits entirety by, and should be read and carefully consider the following summary togetherin conjunction with, the entire prospectus, including our financial statements and the related notes theretomore detailed information appearing elsewhere in this prospectus. You should read this entire prospectus andcarefully, including the matters discussedinformation set forth in the sections in this prospectus entitledtitled “Risk Factors,” “Summary Consolidated Financial Data”Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Some of theOperations” and our financial statements and related notes thereto contained in this prospectus, constitute forward-looking statements that involve risks and uncertainties. See the section in this prospectus entitled “Special Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those discussed in the “Risk Factors” and other sections of this prospectus.(Note: All dollar amounts, except for shares, included in this Prospectus are rounded to thousands.)before making an investment decision.
Our CompanyDollar amounts and number of shares below are expressed in thousands, except per share amounts.
Ecoark Holdings, Inc.Overview
Ecoark Holdings, Inc. (“Ecoark Holdings”) is a Nevada corporation incorporated on November 19, 2007. Ecoark Holdings is an innovative emerging growthAgTech company focused on the developmentsolutions that reduce food waste and deploymentimprove delivered freshness and product margins for fresh and perishable foods for a wide range of business solutionsorganizations including growers, processors, distributors and products to the retail, agriculture, food service, commercial real estate and architecture, engineering and construction end markets.retailers. Ecoark Holdings has assembled a team and portfolio of proprietary, patented technologies to address the waste in operations, logistics and supply chain. Ecoark Holdings accomplishesaddresses this through twoits indirect wholly-owned operating subsidiaries, Ecoark,subsidiary: Zest Labs, Inc. (“Ecoark”Zest Labs” or “Zest”). The Company committed to a plan to focus its business on Zest Labs and divested non-core assets in 2019 that included assets of Pioneer Products, LLC (“Pioneer Products” or “Pioneer”) and Magnolia Solar, IncInc. (“Magnolia Solar”). Further, EcoarkThose assets are reported as held for sale and their operations are reported as discontinued operations in the consolidated financial statements. The subsidiary Eco3d, LLC (“Eco3d”) was sold on April 14, 2017 and is also reported as held for sale and discontinued operations in the consolidated financial statements. All discontinued operations have been sold or ceased operations by June 30, 2019, so there are no remaining assets or liabilities of the discontinued operations. The Company has three operating entities: Intelleflex, Eco3D13 employees of continuing operations and Pioneer Products.no employees of discontinued operations as of the date of this filing.
Our principal executive offices are located at 3333 Pinnacle Hills Parkway, Suite 220, Rogers, Arkansas 72758,5899 Preston Road #505, Frisco, Texas 75034, and our telephone number is (479) 259-2979.259-2977. Our website address is http://ecoarkusa.com/zestlabs.com/. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in and are not considered part of this prospectus. You should not rely on any such information in making your decision to purchase our common stock.report.
Recent Developments
Acquisition of Trend Discovery
On DecemberMay 31, 2009, Ecoark Holdings, originally known as Mobilis Relocation Services, Inc. (“Mobilis”), entered into an Agreement of Merger and Plan of Reorganization with Magnolia Solar, a privately held Delaware corporation and Magnolia Solar Acquisition Corp. Upon closing of2019, the transaction, under the Agreement of Merger and Plan of Reorganization, Magnolia Solar became a wholly-owned subsidiary of Mobilis. Thereafter, Mobilis changed its name to Magnolia Solar Corporation. The name was later changed to Ecoark Holdings, Inc. as described below.
Acquisition of Ecoark, Inc.
Prior to the acquisition of Ecoark, Ecoark Holdings’ operations were through Magnolia Solar which operations are described below.
On January 29, 2016, Ecoark HoldingsCompany entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ecoark. PursuantTrend Discovery Holdings Inc., a Delaware corporation (“Trend Holdings”) for the Company to acquire 100% of Trend Holdings pursuant to a merger of Trend Holdings with and into the Company (the “Merger”). The Merger was completed on the May 31, 2019 and as agreed in the Merger Agreement, Ecoark merged with and into a subsidiary of Ecoark Holdings (the “Merger”). Ecoark and Magnolia Solar, Inc. continue as the subsidiaries and businesses of Ecoark Holdings.
Prior toCompany is the completion of the Merger on March 24, 2016,surviving entity in a special shareholder meeting on March 18, 2016, the following actions to amend the Articles of Incorporation were undertaken by Ecoark Holdings to:
After giving effect to the Merger and the issuanceseparate corporate existence of common stockTrend Holdings has ceased to the shareholders of Ecoark, the shareholders of Ecoark received 95.34% of the shares of Ecoark Holding’s common stock (27,696,066 shares out of 29,047,062 shares).exist.
Business Modeloutperforming the S&P 500. Trend Discovery LP primarily invests in early-stage startups. In the near-term, Trend Discovery LP’s performance will be driven by its investment in Volans-i, a fully autonomous vertical takeoff and landing (“VTOL”) drone delivery platform. Trend Discovery LP currently owns approximately 1% of Volans-i, and has participation rights to future financings to maintain its ownership at 1% indefinitely. More information can be found at flyvoly.com.
Ecoark HoldingsOffering of Preferred Stock
Ecoark Holdings operates through four subsidiaries:On August 21, 2019, we sold to accredited investors an aggregate of 2 shares of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”), at a price of $1,000 per share. We also issued to each investor a warrant to purchase a number of shares of common stock of the Company equal to the number of shares of common stock issuable upon conversion of the Series B Preferred Stock purchased by the investor. Each warrant will have an exercise price equal to $0.51, subject to full ratchet price only anti-dilution provisions in accordance with the terms of the warrants, and be exercisable for five years. In addition, if the market price of our common Stock on the 11 month anniversary of the closing date of the offering is less than $0.51, holder of the warrants shall be entitled to receive additional shares of common stock based on the number of shares of common stock that would have been issuable upon conversion of the Series B Convertible Preferred Stock had the initial conversion price been equal to the market price at such time (but not less than $0.25) less the number of shares of common stock issued or issuable upon exercise of the Series B Convertible Preferred Stock based on the $0.51 conversion price.
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The Company also agreed to amend the current exercise price of the warrants that the investors received in connection with the Securities Purchase Agreements dated March 14, 2017 (the “March Warrants”) and May 22, 2017 (the “May Warrants” and, together with the March Warrants, the “Existing Securities”). The Existing Securities have a current exercise price of $0.59, which was amended from $2.50 on July 12, 2019. The current exercise price for the Existing Securities shall be amended to reduce the exercise price to $0.51, subject to adjustment pursuant to the provisions of the Existing Securities.
Intelleflex®Each share of the Series B Preferred Stock has a par value of $0.001 per share and a stated value equal to $1,000 and is convertible at any time at the option of the holder into the number of shares of common stock determined by dividing the stated value by the conversion price of $0.51, subject to certain limitations and adjustments.
Intelleflex's ZEST Data ServicesDescription of Business
Zest Labs
Zest Labs offers freshness management solutions for fresh food growers, suppliers, processors, distributors, grocers and restaurants. Its Zest Fresh solution is a secure, multi-tenant cloud-based data collection platform for aggregatingpost-harvest shelf-life and real-time permission-based sharing and analysis of information. ZEST Fresh, a fresh foodfreshness management solution that utilizesimproves delivered freshness of produce and protein and reduces post-harvest losses at the ZEST Data Service platform,retailer due to temperature handling and processing by 50% or more by intelligently matching customer freshness requirements with actual product freshness. It focuses on threefour primary value propositions – operational efficiency, consistent food quality,freshness, reduced waste, and improved food safety. ZESTZest Fresh empowers workers with real-time analytic tools and alerts that improve efficiency while driving quality consistency through best practice adherence on every pallet. ZESTat a pallet level. Zest Labs also offers its Zest Delivery solution that provides real-time monitoring and control for prepared food delivery containers, helping delivery and dispatch personnel ensure the quality and safety of delivered food.
On June 6, 2019, Zest Labs Eco3D™announced a strategic collaboration between AgroFresh and Zest Labs to strengthen their end-to-end solutions. AgroFresh will incorporate Zest Labs’ Zest Fresh™ solution into its FreshCloud™ Transit Insights platform. The agreement will utilize both companies’ resources and strengths to provide customers with a comprehensive solution that improves operations, increases visibility into produce shelf-life and reduces food waste.
Eco3DZest Labs was previously known as Intelleflex Corporation. Effective on October 28, 2016, Intelleflex Corporation changed its name to Zest Labs, Inc. to align its corporate name with its mission and the brand name of its products and services.
The Zest Fresh value proposition is focusedto reduce fresh food loss by improving quality consistency. In the U.S. produce market, it is reported that roughly 30% of post-harvest fresh food is lost or wasted and therefore not consumed. Both fresh food producers and retailers bear significant expense when harvested food is either rejected due to early spoilage or reduced in value due to early ripening. Zest Labs believes that a significant portion of this waste can be attributed to inconsistent quality or freshness based on transitioning businessesvariable post-harvest processing and handling. Fresh food producers and retailers manage food distribution and inventory based on the harvest date, with the assumption that all food harvested on the same day will have the same freshness. However, studies have shown that harvest conditions and post-harvest handling can have a significant effect on the actual remaining freshness and, if not properly accounted for, can result in food loss or spoilage ahead of expectations. Zest Fresh empowers fresh food producers and retailers to significantly reduce the post-harvest loss by providing real-time guidance to process adherence, intelligent distribution and best handling practices, with a goal of providing significant financial savings to fresh food producers and retailers.
Zest Labs has developed the industry’s first freshness metric called the Zest Intelligent Pallet Routing Code (“ZIPR Code”). The ZIPR Code has three main components: Harvest Quality which sets total freshness capacity (for example, 12 days for strawberries), Handling Impact which reflects aging acceleration due to improper handling, and Future Handling which accurately reflects how the product will be handled (for example, store shelf temperature may be 40 degrees Fahrenheit instead of the ideal 34 degrees Fahrenheit).
Zest Fresh is offered to fresh food producers, processors, distributors, restaurants and grocers with pricing based on the number of pallets managed by Zest Fresh, typically from 2D technologythe field harvest through retail grocery delivery. The Zest Fresh service includes a re-usable wireless Internet of Things (“IoT”) condition sensor that has existed for hundredstravels with the pallet of years, to a worldfresh food from the field or processor through retail delivery, continuously collecting product condition data. The collected pallet product data is analyzed, using artificial intelligence-based predictive analytics in real time by the Zest Fresh cloud-based solution, with the fresh food producers and retailers accessing data through Zest Fresh web and mobile applications. Zest Fresh provides workers with real-time feedback on the current handling or processing of digital 3D. Eco3D incorporates a variety of 3D technologieseach pallet, empowering best practice adherence to achieve customer goalsmaximum freshness. Zest Fresh also provides dynamic updates as to actual product freshness for each pallet, enabling intelligent routing and objectives. Utilizing several techniques, Eco3Dinventory management of each pallet in a manner that ensures optimum delivered freshness. Zest Fresh also includes integrated blockchain support to grower and shipper customers via the Zest Fresh platform.
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Zest Labs’ Zest Delivery solution helps to manage prepared food delivery from the restaurant through to the customer. Zest Delivery manages the delivery container environment, both monitoring and controlling the product condition. The value of Zest Delivery is to manage prepared meals in an ideal state for consumption, while accommodating extended pre-staging or delivery times. Extended pre-staging times are associated with “instant delivery” services of prepared meals, where the meals are often pre-staged in a delivery area ahead of demand. While pre-staging enables fast demand response time, it can capture existing conditions – topography, buildings, exterior/interior spaces, etc. –result in highly accurate detail that allowsprepared meals being staged for 2Dextended periods, which can potentially impact quality, value and 3D measurement. These measurements formsafety. Zest Delivery monitors and controls the basisdelivery container environment to preserve the prepared meal in ideal, ready to consume condition. Zest Delivery also provides the dispatcher with real-time remote visibility to the condition of available meals and confirming quality prior to dispatch. Zest Delivery provides automated, real-time visibility for analysis, design, documentation,a very distributed fleet of drivers, reflecting prepared meal food safety, quality and quality control. Eco3D offers solutions in multiple industries throughoutavailability. Zest Delivery is offered to meal delivery companies based on the United States.quantity of delivery containers and frequency of use.
Zest Labs currently holds rights to 67 U.S. patents (with additional patents pending), numerous related foreign patents, and U.S. copyrights relating to certain aspects of its Zest software, hardware devices including Radio-Frequency Identification (“RFID”) technology, software, and services. In addition, Zest Labs has registered, and/or has applied to register trademarks and service marks in the U.S. and a number of foreign countries for “Intelleflex,” the Intelleflex logo, “Zest,” “Zest Data Services,” and the Zest, Zest Fresh and Zest Delivery logos, and numerous other trademarks and service marks. Many of Zest Labs’ products have been designed to include licensed intellectual property obtained from third-parties. Laws and regulations related to wireless communications devices in the jurisdictions in which Zest Labs operates and seeks to operate are extensive and subject to change. Wireless communication devices, such as RFID readers, are subject to certification and regulation by governmental and standardization bodies. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications or delays in product shipment dates.
Although most components essential to Zest Labs’ business are generally available from multiple sources, certain key components including, but not limited to, microprocessors, enclosures, certain RFID or other wireless custom integrated circuits, and application-specific integrated circuits are currently obtained by Zest Labs from single or limited sources, principally in Asia.
Zest Labs is part of a very competitive industry that markets solutions to fresh food supply chain users, such as fresh food growers, producers and retailers. Many other companies that are both more established and command much greater resources compete in this market. While Zest Fresh and Zest Delivery offer new technical approaches and new user value, it remains uncertain if Zest Labs will gain sufficient adoption of its products to make them viable in the market. Further, it is unclear what industry competitors are developing that might address similar user needs. Zest Labs’ products provide a new approach for industry participants, and as with any new approach, adoption is uncertain as many in the industry can be slow to embrace new technology and/or new approaches. These market challenges can lead to extended sales cycles that may include extended pilot testing often at Zest Labs’ expense, for which the outcome remains unclear until the completion of each test. For these reasons, and others, forecasting new business adoption and future revenue can be very difficult and volatile. However, the Company believes that Zest Fresh offers fresh food retailers, growers, shippers, processors and distributors an opportunity to differentiate their businesses in ways that the shipment of canned and boxed food products cannot, as competition in the agriculture, grocery, food service and restaurant markets continues to accelerate.
The acquisition of 440labs in May 2017 allowed Zest Labs to internally maintain its software development and information solutions for cloud, mobile, and IoT applications. 440labs had been a key development partner with Zest Labs for more than four years prior to the May 2017 acquisition, contributing its expertise in scalable enterprise cloud solutions and mobile applications.
Trend Discovery Holdings, Inc.
Trend Discovery Holdings, Inc. (“Trend Holdings”) is a holding company which earns management fees and whose primary asset is Trend Discovery Capital Management. Trend Discovery Capital Management manages several entities including Trend Discovery LP and Trend Discovery SPV I. Trend Discovery LP is a hybrid hedge fund. Trend Discovery LP primarily invests in early-stage startups.
Discontinued Operations:
Pioneer Products
Pioneer Products began by creatingwas located in Rogers, Arkansas and was involved in the selling of recycled plastic products and other products. It sold to the world’s largest retailer. Pioneer Products recovered plastic waste from retail supply chains and converted the reclaimed material into new consumer products using plastic reclaimed from post-consumerwhich completed a closed loop and retailer’sreduced waste streams. One of these products is Pioneer Products’ “close looped” 45-gallon trash can.sent to landfills. Pioneer Products generates revenue from the sale of products such as plastic trash cans to 3,700 retail stores, including the largest retailerswas purchased by Ecoark in the continental U.S. Pioneer Products’ competitors include large consumer products companies such as Rubbermaid and Hefty. A new product, office chairs, was introduced in 2016.
Building on a platform of proven retail success,2012. Pioneer Products now leverages its solidified reputation and strategic network by acting as a broker for other products and companies that fit into its brand portfolio. Pioneer owns direct vendor relationships and vendor numbers with some of the largest retailers in the U.S. This vendor number facilitates introduction of a new product to a retailer. Pioneer Products recently announced a new strategic alliance with a large distributor of family brands that strengthens its platform. Additionally, Pioneer’s offerings enable Ecoark to play a key role in supporting and making good on some of the world’s largest retailer’s goals of retail-level sustainability: reduction of waste within its supply chain and operations.
On May 3, 2016,acquired Sable Polymer Solutions, LLC was acquired by(“Sable”) in a stock transaction on May 3, 2016. Since that date, Sable’s results have been included with Pioneer Products. In May 2018 the Ecoark Holdings Board of Directors (“Board”) approved a plan to sell Pioneer and Sable. Pioneer Productsconcluded operations in February 2019, and the sale of Sable assets was completed in March 2019. Relevant assets and liabilities are classified as held for 2,000,000 shares of Ecoark Holdings common stock. Sable Polymer Solutions, LLC is a wholly-owned subsidiary of Pioneer Products.Sable Polymer Solutions specializessale and operations are classified as discontinued in the sale, purchase and processing of quality post-consumer and post-industrial plastic materials. It provides services to a variety of suppliers and customers throughout the plastics processing industry, from small extruders, molders and scrap collectors to multinational corporations. It has a reputation of consistent quality and service in the market place today.consolidated financial statements.
Magnolia Solar
Magnolia Solar iswas located in Albany, New York and was principally engaged in the development and commercialization of its nanotechnology-based, high-efficiency, thin-film technology that can be deposited on a variety of substrates, including glass and flexible structures. Magnolia Solar believes that this technology has the potential to capturewas a larger partsubsidiary of the solar spectrum to produce high-efficiency solar cells, and incorporates a unique nanostructure-based antireflection coating technology to possibly further increase the solar cell's performance. If these goals are met, there is the potential of significantly reducing the cost per watt. Since its inception, Magnolia Solar has not generated material revenues or earningsCorporation that merged with Ecoark Inc. (“Ecoark”) on March 24, 2016 to create Ecoark Holdings and continued as a resultsubsidiary of its activities. Ecoark Holdings. In May 2018 the Ecoark Holdings Board approved a plan to sell Magnolia Solar, and the sale was completed in May 2019. Prior to the sale, relevant assets and liabilities were classified as held for sale and operations are classified as discontinued in the consolidated financial statements.
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Risks AssociatedCompetition
Zest Labs operates in markets for products and services that are highly competitive and face aggressive competition in all areas of their business. The market for cloud-based, real-time supply chain analytic solutions—the market in which Zest Labs competes—is rapidly evolving. There are several competitors with Our Business
Before you invest in our common stock and warrants, you should carefully consider all the informationcompeting technologies, including companies that have greater resources than Ecoark Holdings, which operate in this prospectus, including matters set forth underspace. Some of these companies have brand recognition, established customer relationships, and own the heading “Risk Factors.manufacturing process.
Research and Development
Ecoark Holdings believes that, analyzing the competitive factors affecting the market for the solutions and services its subsidiaries provide, its products/services compete favorably by offering integrated solutions to their customers. The Company has incurred research and development expenses of $3,320 and $5,576 in the years ended March 31, 2019 and 2018, respectively, to develop its solutions and differentiate those solutions from competitive offerings. The Company has incurred research and development expenses of $897 and $870 in the three months ended June 30, 2019 and 2018.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company,” We believeas defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that the following are some of the major risks and uncertainties that may affect us: applicable to other public companies. These provisions include, but are not limited to:
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The Offering
In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We chose to “opt out” of this provision. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year following the fifth anniversary of the completion of our initial public offering, (ii) the first fiscal year after our annual gross revenues exceed $1.07 billion, (iii) the date on which we offered units for $4.00 per unit consistinghave, during the immediately preceding three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of one share of common stock and a warrant to purchase one share of common stock for $5.00. Through March 31, 2016, we received proceeds from subscriptions equal to $9,555 for 2,388,750 units. From April 1, 2016 through April 28, 2016, we received proceeds of $7,792 for 1,947,875 units. In total, we received proceeds of $17,347 for 4,336,625 units, consisting of 4,336,625 shares and 4,336,625 units.
(1) The number of sharesany fiscal year in which the market value of our common stock outstanding prior to this offering is based on 29,672,062 sharesheld by non-affiliates exceeds $700 million as of common stock outstanding after the Merger, 2,000,000 shares issued toend of the holderssecond quarter of Sable Polymer Solutions, LLC and 4,336,625 shares issued to the selling securityholders. that fiscal year.
(2) The total number of shares of our common stock underlying the warrants is 4,336,625.
There are numerous risks affecting our business, some of which are beyond our control. An investmentInvesting in our common stock involves a high degree of riskrisk. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this prospectus, including our financial statements, the notes thereto and may not be appropriate for investors who cannot affordthe section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to lose their entire investment. Ifinvest in our common stock. The occurrence of any of the following risks actually occur,could have a material and adverse effect on our business, reputation, financial condition, or operating results could be materially harmed. This could causeof operations and future growth prospects, as well as our ability to accomplish our strategic objectives. As a result, the trading price of our common stock tocould decline and you maycould lose all or part of your investment. In addition to the risks outlined below,Additional risks and uncertainties not presently known to us or that we currently considerdeem immaterial may also impair our business operations. Potential risksoperations and uncertainties that could affect our operating results and financial condition include, without limitation, the following:stock price.
RISK FACTORS RELATING TO OUR OPERATIONS
We have experienced losses since our founding. A failure to obtain profitability and achieve consistent positive cash flows would have a significant adverse effect on our business.
We have incurred operating losses since our inception, including a reported net loss of $10,473 and $14,264$1,646 for the yearsthree months ended December 31, 2015 and 2014, respectively. CashJune 30, 2019 as compared to $3,227 for the three months ended June 30, 2018 Net cash used in operating activities was $973 for the yearsthree months ended December 31, 2015 and 2014 were $7,671 and $8,012, respectively.June 30, 2019, as compared to net cash used in operating activities of $1,913 for the three months ended June 30, 2018. We expect to continue to incur operating losses through at least the fiscal 2016.year ended March 31, 2020. As of December 31, 2015,June 30, 2019, we had cash and cash equivalents of $1,962,$34, a working capital deficit of $2,153,$6,018, and an accumulated deficit of $36,587,$117,532. Some of our debt and a stockholders’equity instruments may contain derivative liabilities which may result in variability in our working capital deficit of $913.as these liabilities are re-measured each reporting period. To date, we have funded our operations principally through the sale of our capital stock and debt instruments. We will need to generate significant revenues to achieve profitability, and we cannot assure you that we will ever realize revenues at such levels. If we do achieve profitability in any period, we may not be able to sustain or increase our profitability on a quarterly or annual basis. The Company, specifically Zest Labs, is engaged in discussions with potential customers and partners to significantly increase revenues and expand operations. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the uncertainties.
We may require additional financing to support our operations. Such financing may only be available on disadvantageous terms, or may not be available at all. Any new equity financing could have a substantial dilutive effect on our existing stockholders.
At DecemberAs of June 30, 2019 and March 31, 2015,2019, we had cash of $34 and cash equivalents of $1,962, a$244, respectively, working capital deficitdeficits of $2,153$6,018 at June 30, 2019 and $5,045 at March 31, 2019, and an accumulated deficit of $36,587.$117,532 at June 30, 2019 and 115,886 at March 31, 2019. While we closedexpect cash will be provided by a $17,347 Private Offering on April 28, 2016,$10,000 credit facility, we may need to raise additional capital and our cash position may decline in the future, and wefuture. We may not be successful in maintaining an adequate level of cash resources. We may be requiredcontinue to seek additional debt or equity financing in order to support our growing operations. We may not be able to obtain additional financing on satisfactory terms, or at all, and any new equity financing could have a substantial dilutive effect on our existing stockholders.stockholders and or contain complex terms subject to derivative accounting. If we cannot obtain additional financing, we will not be able to achieve the sales growth that we need to cover our costs, and our results of operations would be negatively affected.
We cannot predict our future results because we have a limited operating history.
Our direct wholly-owned subsidiaries, Ecoark and Magnolia Solar were formed on November 28, 2011 and January 8, 2008, respectively. Ecoark began realizing revenues from operations in 2012. Given our limited operating history, it may be difficult for you to evaluate our performance or prospects. You should consider the uncertainties that we may encounter as a company that should still be considered an early stage company. These uncertainties include:
| ● | our ability to market our services and products for a profit; |
| ● | our ability to recruit and retain skilled personnel; |
| ● | our ability to secure and retain key customers; and, |
| ● | our evolving business model. |
If we are not able to address successfully some or all of these uncertainties, we may not be able to expand our business, compete effectively or achieve profitability.
Recent sales have been highly concentrated with a few major customers, and loss of a major customer would have an adverse effect on our business.
As disclosed in our consolidated financial statements, sales to major customers represent significant percentages of total sales. Such a loss could have a negative impact on our business and cash flows.
If we are unable to develop and generate additional demand for our services or products, we will likely suffer serious harm to our business.
We have invested significant resources in developing and marketing our services and products. Some of our services and products are often considered complex and often involve a new approach to the conduct of business by our customers. As a result, intensive marketing and sales efforts may be necessary to educate prospective customers regarding the uses and benefits of our services and products in order to generate additional demand. The market for our services and products may weaken, competitors may develop superior offerings, or we may fail to develop acceptable solutions to address new market conditions. Any one of these events could have a material adverse effect on our business, results of operations, cash flow and financial condition.
Undetected errors or failures in our software, products or services could result in loss or delay in the market acceptance for our products or lost sales.
Because our software services and products, and the environments in which they operate, are complex, our software and products may contain errors that can be detected at any point in its lifecycle. While we continually test our services and products for errors, errors may be found at any time in the future. Detection of any significant errors may result in, among other things, loss of, or delay in, market acceptance and sales of our services and products, diversion of development resources, injury to our reputation, increased service and warranty costs, license terminations or renegotiations or costly litigation. Additionally, because our services and products support or rely on other systems and applications, any software or hardware errors or bugsdefects in these systems or applications may result in errors in the performance of our service or products, and it may be difficult or impossible to determine where the error resides.
We may not be competitive, and increased competition could seriously harm our business.
Relative to us, some of our current competitors or potential competitors of our products and services may have one or more of the following advantages:
| ● | longer operating histories; |
| ● | greater financial, technical, marketing, sales and other resources; |
| ● | positive cash flows from operations; |
| ● | greater name recognition; |
| ● | a broader range of products to offer; |
| ● | an established intellectual property portfolio; |
| ● | a larger installed base of customers; | |
| ● | superior customer service; | |
| ● | higher levels of quality and reliability; | |
| ● | dependable and efficient distribution networks; and |
| ● | competitive product and services pricing. |
Although no single competitive factor is dominant, current and potential competitors may establish cooperative relationships among themselves or with third parties to enhance their offerings that are competitive with our products and services, which may result in increased competition. We cannot assure that we will be able to compete successfully against current or future competitors. Increased competition in mobile data capture products, software, and related products and solutions, or supplies may result in price reductions, low gross profit margins, and loss of market share, and could require increased spending on research and development, sales and marketing, and customer support. Some competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that produce complementary products, which may create additional pressures on our competitive position in the marketplace.
Sales to many of our target customers involve long sales and implementation cycles, which may cause revenues and operating results to vary significantly.
A prospective customer’s decision to purchase our services or products may often involve lengthy evaluation and product qualification processes. Throughout the sales cycle, we anticipate often spending considerable time educating and providing information to prospective customers regarding the use and benefits of our services and products. Budget constraints and the need for multiple approvals within these organizations may also delay the purchase decision. Failure to obtain the timely required approval for a particular project or purchase decision may delay the purchase of our services or products. As a result, we expect that the sales cycle for some of our services and products will typically range from 90 days to more than 360 days, depending on the availability of funding to the prospective customer. These long cycles may cause delays in any potential sale, and we may spend a large amount of time and resources on prospective customers who decide not to purchase our services or products, which could materially and adversely affect our business.
Additionally, some of our services and products are designed for corporate customers, which requires us to maintain a sales force that understands the needs of these customers, engages in extensive negotiations and provides high-level support to complete sales. If we do not successfully market our services and products to these targeted customers, our operating results will be below our expectations and the expectations of investors and market analysts, which would likely cause the price of our common stock to decline.
We will not be able to develop or continue our business if we fail to attract and retain key personnel.
Our future success depends on our ability to attract, hire, train and retain a number of highly skilled employees and on the service and performance of our senior management team and other key personnel. The loss of the services of our executive officers or other key employees could adversely affect our business. Competition for qualified personnel possessing the skills necessary to implement our strategy is intense, and we may fail to attract or retain the employees necessary to execute our business model successfully. We have obtained “key person” life insurance policies covering three of ourcertain employees.
Our success will depend to a significant degree upon the continued contributions of our key management, engineering and other personnel, many of whom would be difficult to replace. In particular, we believe that our future success is highly dependent on Randy May, our Chief Executive Officer, and Peter Mehring, President of Intelleflex and Ken Smerz, President of Eco3D.Zest Labs. If Messrs. May Mehring or Smerz,Mehring, or any other key members of our management team, leave our employment, our business could suffer, and the share price of our common stock would likelycould decline. Although
Our acquisition strategy involves a number of risks.
We intend to pursue continued growth through opportunities to acquire companies or assets that will enable us to expand our product and service offerings and to increase our geographic footprint. We routinely review potential acquisitions. However, we have entered into an employmentmay be unable to implement this growth strategy if we cannot reach agreement with each of Messrs. May, Mehring and Smerz, oneon potential strategic acquisitions on acceptable terms or more of themfor other reasons. Moreover, our acquisition strategy involves certain risks, including:
| ● | difficulties in the post-acquisition integration of operations and systems; |
| ● | the termination of relationships with key personnel and customers of the acquired company; |
| ● | a failure to add additional employees to manage the increased volume of business; |
| ● | additional post acquisition challenges and complexities in areas such as tax planning, treasury management, financial reporting and legal compliance; |
| ● | risks and liabilities from our acquisitions, some of which may not be discovered during the pre-acquisition due diligence process; |
| ● | a disruption of our ongoing business or an inability of our ongoing business to receive sufficient management attention; and |
| ● | a failure to realize the cost savings or other financial benefits we anticipated prior to acquisition. |
Future acquisitions may voluntarily terminate his services at any time.require us to obtain additional equity or debt financing, which may not be available on current attractive market terms.
If we do not protect our proprietary information and prevent third parties from making unauthorized use of our products and technology, our financial results could be harmed.
MostMuch of our software and underlying technology is proprietary. We seek to protect our proprietary rights through a combination of confidentiality agreements and through copyright, patent, trademark, and trade secret laws. However, all of these measures afford only limited protection and may be challenged, invalidated, or circumvented by third parties. Any patent licensed by us or issued to us could be challenged, invalidated or circumvented or rights granted there underthereunder may not provide a competitive advantage to us. Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property in a cost-effective manner.
Third parties claiming that we infringe their proprietary rights could cause us to incur significant legal expenses and prevent us from selling our products and services.
From time to time, we might receive claims that we have infringed the intellectual property rights of others, including claims regarding patents, copyrights, and trademarks. Because of constant technological change in the markets in which we compete, the extensive patent coverage of existing technologies, and the rapid rate of issuance of new patents, it is possible that the number of these claims may grow.In addition, former employers of our former, current, or future employees may assert claims that such employees have improperly disclosed to us the confidential or proprietary information of these former employers. Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are not successful in defending such claims, we could be required to stop selling, delay shipments of, or redesign our products, pay monetary amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of our customers. We cannot assure you that any royalty or licensing arrangements that we may seek in such circumstances will be available to us on commercially reasonable terms or at all. We may incur significant expenditures to investigate, defend and settle claims related to the use of technology and intellectual property rights as part of our strategy to manage this risk.
Periods of sustained economic adversity and uncertainty could negatively affect our business, results of operations and financial condition.
Demand for our services and products depend in large part upon the level of capital and maintenance expenditures by many of our customers. Lower budgets could have a material adverse effect on the demand for our services and products, and our business, results of operations, cash flow and overall financial condition would suffer.
Disruptions in the financial markets may have an adverse impact on regional and world economies and credit markets, which could negatively impact the availability and cost of capital for us and our customers. These conditions may reduce the willingness or ability of our customers and prospective customers to commit funds to purchase our services or products, or their ability to pay for our services after purchase. These conditions could result in bankruptcy or insolvency for some customers, which would impact our revenue and cash collections. These conditions could also result in pricing pressure and less favorable financial terms in our contracts and our ability to access capital to fund our operations.
Patents, trademarks, copyrights and licenses are important to the Company’s business, and the inability to defend, obtain or renew such intellectual property could adversely affect the Company’s operating results.
The Company currently holds rights to patents and copyrights relating to certain aspects of its solar panel technology, Radio-Frequency Identification (“RFID”)RFID technology, software, and services. In addition, the Company has registered, and/or has applied to register trademarks and service marks in the U.S. and a number of foreign countries for "Intelleflex,"“Intelleflex,” the Intelleflex logo, "ZEST," "ZEST“Zest,” “Zest Data Services," "ZEST Fresh,"Services”, the Zest logo, and numerous other trademarks and service marks. Although the Company believes the ownership of such patents, copyrights, trademarks and service marks is an important factor in its business and that its success does depend in part on the ownership thereof, the Company relies primarily on the innovative skills, technical competence, and marketing abilities of its personnel.
Table Loss of Contentsa significant number of licenses may have an adverse effect of the Company’s operations.
Many of the Company'sZest Labs’ products are designed to include intellectual property obtained from third-parties.third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of its products and business methods, the Company believes, based upon past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms; however, there is no guarantee that such licenses could be obtained at all.
Final assembly of certain products is performed by third-party manufacturers. We may be dependent on these third-party manufacturers as a sole-source of supply for the manufacture of such products.
A failure by such manufacturers to provide manufacturing services to us, or any disruption in such manufacturing services, may adversely affect our business results. We may incur increased business disruption risk due to the dependence on these third-party manufacturers, as we are not able to exercise direct control over the assembly or related operations of certain of our products. If these third-party manufacturers experience business difficulties or fail to meet our manufacturing needs, then we may be unable to satisfy customer product demands, lose sales, and be unable to maintain customer relationships. Longer production lead times may result in shortages of certain products and inadequate inventories during periods of unanticipated higher demand. Without such third parties continuing to manufacture our products, we may have no other means of final assembly of certain of our products until we are able to secure the manufacturing capability at another facility or develop an alternative manufacturing facility. This transition could be costly and time consuming.
Failure of information technology systems and breaches in data security could adversely affect the Company'sCompany’s financial condition and operating results.
Information technology system failures and breaches of data security could disrupt the Company'sCompany’s operations by causing delays or cancellation of customer orders, impeding the manufacture or shipment of products, or resulting in the unintentional disclosure of customer or Company information. Management has taken steps to address these concerns by implementing sophisticated network security and internal control measures. There can be no assurance, however, that a system failure or data security breach will not have a material adverse effect on the Company'sCompany’s financial condition and operating results.
Failure in our operational systems or cyber security attacks on any of our facilities, or those of third parties, may adversely affect our financial results.
The Company is subject to risks associated with laws, regulations and industry-imposed standards related to wireless communications devices.
LawsOur business is dependent upon our operational systems to process a large amount of data and regulations relatedcomplex transactions. If any of our financial, operational, or other data processing systems fail or have other significant shortcomings, our financial results could be adversely affected. Our financial results could also be adversely affected if an employee causes our operational systems to wireless communications devicesfail, either as a result of inadvertent error or by deliberately tampering with or manipulating our operational systems. Due to increased technology advances, we have become more reliant on technology to help increase efficiency in the many jurisdictions in which the Company operates are extensiveour business. We use computer programs to help run our financial and operations sectors, and this may subject our business to change. Such changes, whichincreased risks. Any future cyber security attacks that affect our facilities, our customers and any financial data could include but are not limited to restrictions on production, manufacture, distribution, and use of the device, may have a material adverse effect on the Company'sour business. In addition, cyber-attacks on our customer and employee data may result in a financial conditionloss, including potential fines for failure to safeguard data, and operatingmay negatively impact our reputation. Third-party systems on which we rely could also suffer operational system failure. Any of these occurrences could disrupt our business, result in potential liability or reputational damage or otherwise have an adverse effect on our financial results.
Wireless communication devices, such as RFID readers, are subject to certification and regulation by governmental and standardization bodies. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications or delays in product shipment dates, which may have a material adverse effect on the Company's financial condition and operating results.
The Company relies on accesslicenses to third-party patents and intellectual property, and the Company'sCompany’s future results could be materially adversely affected if it is alleged or found to have infringed intellectual property rights.
Many of the Company'sZest Labs’ products are designed to includeuse third-party intellectual property, and it may be necessary in the future to seek or renew licenses relating to various aspects of its products and business methods. Although the Company believes that, based on past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms, there is no assurance that the necessary licenses would be available on acceptable terms or at all.
The Company is subject to risks associated with laws, regulations and industry-imposed standards related to wireless communications devices.
Laws and regulations related to wireless communications devices in the many jurisdictions in which Zest Labs operates and seeks to operate are extensive and subject to change. Such changes, which could include but are not limited to restrictions on production, manufacture, distribution, and use of the device, may have a material adverse effect on the Company’s financial condition and operating results.
Wireless communication devices, such as RFID readers, are subject to certification and regulation by governmental and standardization bodies. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications or delays in product shipment dates, which may have a material adverse effect on the Company’s financial condition and operating results.
Because of technological changes in the business software, web and device applications, sensors and sensor-based devices, and RFID and wireless communication industries, current extensive patent coverage, and the rapid issuance of new patents, it is possible that certain components of the Company'sZest Labs’ products and business methods may unknowingly infringe the patents or other intellectual property rights of third parties. From time to time, the Company has beenZest Labs may be notified that it may be infringing such rights. Responding to such claims, regardless of their merit, can consume significant time and expense. In certain cases, the Company may consider the desirability of entering into licensing agreements, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. If there is a temporary or permanent injunction prohibiting the Company from marketing or selling certain products or a successful claim of infringement against the Company requires it to pay royalties to a third party, the Company'sCompany’s financial condition and operating results could be materially adversely affected.
The inability to obtain certain raw materialscomponents could adversely impact the Company’s ability to deliver on its contractual commitments which could negatively impact operations and cash flows.
Although most components essential to the Company'sCompany’s business are generally available from multiple sources, certain key components including, but not limited to, microprocessors, enclosures, certain RFID custom integrated circuits, and application-specific integrated circuits ("ASICs") are currently obtained by the Company from single or limited sources. Magnolia Solar is also developing nanostructured optical coating technology to improve the solar cell performance. The raw materials for this effort are glass, quartz, silicon wafers and nitrogen gas. Some key components, while currently available to the Company from multiple sources, are at times subject to industry-wide availability constraints and pricing pressures. If the supply of a key or single-sourced component to the Company were to be delayed or curtailed or in the event a key manufacturing vendor delayed shipment of completed products to the Company, the Company'sCompany’s ability to ship related products in desired quantities, and in a timely manner, could be adversely affected. The Company'sCompany’s business and financial performance could also be adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components may be affected if suppliers were to decide to concentrate on the production of common components instead of components customized to meet the Company'sCompany’s requirements. The Company attempts to mitigate these potential risks by working closely with these and other key suppliers on product introduction plans, strategic inventories, coordinated product introductions, and internal and external manufacturing schedules and levels. Consistent with industry practice, the Company acquires components through a combination of formal purchase orders, supplier contracts, and open orders based on projected demand information. However, adverse changes in the supply chain of the Company’s vendors may adversely impact the supply of key components.
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Our solar products have never been sold on a commercial basis, and we do not know whether they will be accepted by the market.
According to the BP Statistical Review of World Energy published in 2015, the installed solar PV capacity was about 180 Gigawatt hours at the end of 2014. Total global production of electricity was about 23,536 terawatt hours in 2014. Thus, at the end of 2014 less than 1 percent electric power came from solar photovoltaic sources. Even with many advances in the solar photovoltaic technology, adoption of solar photovoltaic power technology by energy users remains low and the total solar electricity production capacity remains well below one percent of the world consumption of electricity. Thus, the solar energy market is at a relatively early stage of development and the extent to which solar modules will be widely adopted is uncertain. If our products are not accepted by the market, our business, prospects, results of operations and financial condition will suffer. Moreover, demand for solar modules in our targeted markets may not develop or may develop to a lesser extent than we anticipate. The development of a successful market for our proposed products and our ability to sell them at a lower price per watt may be affected by a number of factors, many of which are beyond our control, including, but not limited to:
If our proposed products fail to gain sufficient market acceptance, our business plans, prospects, results of operations and financial condition may suffer.
Our ability to manufacture and distribute commercially viable solar cells is unproven, which could have a detrimental effect on our ability to generate or sustain revenues.
The technologies we will use to manufacture solar cells have never been utilized on a commercial basis. Our technology, while intended to create a highly efficient solar cells may never achieve technical or commercial viability. All of the tests conducted to date by us with respect to the technology have been performed in a limited scale environment and the same or similar results may not be obtainable at competitive costs on a large-scale commercial basis. We have never utilized technology under the conditions or in the volumes that will be required for us to be profitable and cannot predict all of the difficulties that may arise. Accordingly, our technology may not perform successfully on a commercial basis and may never generate any revenues or be profitable.
The reduction or elimination of government subsidies and economic incentives for on-grid solar electricity applications could reduce demand for our solar modules and harm our business plans.
The reduction, elimination or expiration of government subsidies and economic incentives for solar electricity could result in the diminished competitiveness of solar energy relative to conventional and non-solar renewable sources of energy, which would negatively affect the growth of the solar energy industry overall. We believe that the near-term growth of the market for on-grid applications, where solar energy is used to supplement the electricity a consumer purchases from the utility network, depends significantly on the availability and size of government and economic incentives. Currently the cost of solar electricity substantially exceeds the retail price of electricity in every significant market in the world. As a result, federal, state and local governmental bodies in many countries have provided subsidies in the form of tariffs, rebates, tax write-offs and other incentives to end-users, distributors, systems integrators and manufacturers of photovoltaic products. Many of these government incentives could expire, phase-out over time, exhaust the allocated funding or require renewal by the applicable authority. Even though the price of electricity from conventional sources continues to rise, a reduction, elimination or expiration of government subsidies and economic incentives for solar electricity could result in the diminished competitiveness of solar energy, which would in turn hurt our sales and financial condition.
RISK FACTORS RELATING TO OUR COMMON STOCK AND WARRANTS
We have a substantial number of authorized common and preferred shares available for future issuance that could cause dilution of our stockholders’ interestinterests and adversely impact the rights of holders of our common stock. The numbers set forth below are represented in thousands, and the numbers in the selling stockholders section are unrounded.
We have a total of 100,000,000100,000 shares of common stock and 5,000,0005,000 shares of preferred stock authorized for issuance. As of July 1, 2016,September 23, 2019, we have 36,021,21062,648 shares of common stock issued and outstanding (including theand 2 shares of commonpreferred stock sold in the Offering)issued and no preferred shares issued or outstanding. As of July 1, 2016,September 23, 2019, we had 63,978,79037,352 shares of common stock and 5,000,0004,998 shares of preferred stock available for issuance. Further, out of the 63,978,790 unissued shares of common stock, as of July 1, 2016,September 23, 2019, we have reserved 4,336,625unexercised options for 7,139 shares. Up to 3,529 shares of our common stock for issuancemay be issued upon the exercise of outstanding warrants, 1,500,000 shares of our common stock upon conversion of outstanding convertible notes, and 5,497,142 additional shares available for future grants under our stock incentive plan and no shares reserved for conversion of our preferred stock.warrants. We may seek financing that could result in the issuance of additional shares of our capital stock and/or rights to acquire additional shares of our capital stock. We may also make acquisitions that result in issuances of additional shares of our capital stock. Those additional issuances of capital stock would result in a significant reduction of yourthe percentage interest in us.of existing or future investors. Furthermore, the book value per share of our common stock may be reduced. This reduction would occur if the exercise price of any issued warrants, the conversion price of any convertible notes or the conversion ratio of any issued preferred stock is lower than the book value per share of our common stock at the time of such exercise or conversion.
The addition of a substantial number of shares of our common stock into the market or by the registration of any of our other securities under the Securities Act may significantly and negatively affect the prevailing market price for our common stock. The future sales of shares of our common stock issuable upon the exercise of outstanding warrants and options may have a depressive effect on the market price of our common stock, as such warrants and options would be more likely to be exercised at a time when the price of our common stock is greater than the exercise price.
We effected our 1-for-250 reverse stock split on March 18, 2016. However, we cannot assure you that we will be able to continue to comply with the minimum price requirements of the NASDAQ Capital Market.
We effected our 1-for-250 reverse stock split on March 18, 2016, with the intent to list the common stock on the NASDAQ Capital Market. We effectuated the reverse stock split in order to achieve the requisite increase in the market price of our common stock to be in compliance with the minimum price requirements of the NASDAQ Capital Market. We cannot assure you that the market price of our common stock following the reverse stock split will remain at the level required for continuing compliance with that requirement. It is not uncommon for the market price of a company’s common stock to decline in the period following a reverse stock split. If the market price of our common stock declines following the effectuation of the reverse stock split, the percentage decline may be greater than would occur in the absence of the reverse stock split. In any event, other factors unrelated to the number of shares of our common stock outstanding, such as negative financial or operational results, could adversely affect the market price of our common stock and jeopardize our ability to maintain the NASDAQ Capital Market’s minimum price requirements.
There may not be an active market for shares of our common stock.
Our common stock is quoted OTCQBon the OTCQX which is maintained by the OTC Market Group Inc. under the symbol “EARK”“ZEST”. However, no assurance can be given that an active trading market for our common stock will further develop and continue. As a result, youit may find itbecome more difficult to purchase, dispose of and obtain accurate quotations as to the value of our common stock. If we are unable to achieve the NASDAQ Capital Marketa listing requirements,on a national securities exchange, our common stock would continue to trade on the OTCQB.
OTCQX.
The reverse stock split may decrease the liquidity of the shares of our common stock.
The liquidity of the shares of our common stock may be affected adversely by the 1-for-250 reverse stock split given the reduced number of shares outstanding following the reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split.
Following the reverse stock split, the resultingThe market price of our common stock may not attract new investors, including institutional investors, and may not satisfy the investing requirements of those investors. Consequently, the trading liquidity of our common stock may not improve.
Although we believe that a higher market price of our common stock may help generate greater or broader investor interest, we cannot assure youthere can be no assurance that the reverse stock splitwe will attract new investors, including institutional investors. In addition, there can be no assurance that the market price of our common stock will satisfy the investing requirements of those investors. As a result, the trading liquidity of our common stock may not necessarily improve.
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Our stock could be subject to volatility.
The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including:
| ● | actual or anticipated fluctuations in our quarterly and annual results; | |
| ● | changes in market valuations of companies in our industry; | |
| ● | announcements by us or our competitors of new strategies, significant contracts, acquisitions, strategic relationships, joint ventures, capital commitments or other material developments that may affect our prospects; | |
| ● | shortfalls in our operating results from levels forecasted by | |
| ● | additions or departures of | |
| ● | sales of our capital stock in the future; | |
| ● | liquidity or cash flow constraints; and, | |
| ● | fluctuations in stock market prices and volume, which are particularly common for the securities of emerging technology companies, such as us. |
We may not pay dividends on our common stock in the foreseeable future.
We have not paid any dividends on our common stock. We might pay dividends in the future at the discretion of our Board of Directors.stock to date. We are unlikely to pay dividends at any time in the foreseeable future; rather, we are likely to retain earnings, if any, to fund our operations and to develop and expand our business.
Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.
We maycontinue to issue additional securities following the completion of this offering.to raise capital. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, our stockholders may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock.
Future changes in the fair value of outstanding warrants could result in income volatility.
Changes in the fair value of the warrant liabilities caused by stock price volatility or other factors impacting the fair value determined by the Black Scholes model will impact other income or expense.
SPECIALCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY AND MARKET DATA
Special Note Regarding Forward-Looking Statements
This prospectusregistration statement on Form S-1 contains “forward-looking statements” within the meaningforward-looking statements under Section 21E of the Private Securities Litigation ReformExchange Act of 1995 (PSLRA). All statementsand other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws including:that are subject to a number of risks and uncertainties, many of which are beyond our control including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any projectionstime at our discretion; (ii) our plans and results of earnings, revenuesoperations will be affected by our ability to manage growth; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission (the “Commission” or “SEC”).
In some cases, you can identify forward-looking statements by terminology such as “may,’’ “will,’’ “should,’’ “could,’’ “expects,’’ “plans,’’ “intends,’’ “anticipates,’’ “believes,’’ “estimates,’’ “predicts,’’ “seeks,” “potential,’’ or “continue’’ or the negative of such terms 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. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan” or “anticipate” and other similar words. Such forward-looking statements may be contained in the sections “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” among other places in this prospectus.
comparable terminology. Although we believe that the expectations reflected in ourthe forward-looking statements are reasonable, actualwe cannot guarantee future results, could differ materially from those projectedlevels of activity, performance or assumed. Our future financial conditionachievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and resultscompleteness of operations, as well as anysuch statements.
These forward-looking statements are subject to change and to inherent risks and uncertainties, such as those disclosed in this prospectus. We do not intend, and undertake no obligation, to update any forward-looking statement.
We sold units to the selling securityholders for $4.00 per unit consisting of one share of common stock and a warrant to purchase one share of common stock for $5.00. Through March 31, 2016, we received proceeds from subscriptions equal to $9,555 for 2,388,750 units. From April 1, 2016 through April 28, 2016, we received proceeds of $7,792 for 1,947,875 units. In total, we received proceeds of $17,347 for 4,336,625 units, consisting of 4,336,625 shares and 4,336,625 warrants.
This prospectus covers the resale from time to time by the selling securityholders identified in the table below of up to an aggregate of (i) 4,336,625 shares issued pursuant to the conversion of certain convertible promissory notes and (ii) 4,336,625 issuable upon the exercise of warrants, in each case, issued in the Private Offering.
The exercise price of each warrant is $5.00 per share, subject to adjustment for stock splits and corporate reorganizations. Each warrant is exercisable on or before December 31, 2018. Ecoark Holdings may require a warrant holder to exercise all, but not less than all of the unexercised portion of the warrant, upon written notice that (i) the last reported sale price of common stock on each of 60 consecutive trading days exceeded $7.50 and (ii) the average daily trading volume (as reported on Bloomberg) of the common stock over the 60 consecutive trading period was not less than 100,000 shares on the trading market on which the common stock is listed or designated for quotation. In the event that the holder does not exercise the warrant, the holder shall forfeit any rights under the warrant, including the right to exercise the warrant to the extent not previously exercised and the warrant shall be treated as canceled for all purposes.
We are registering the shares of common stock hereby pursuant to the terms of the subscription agreement (the “Subscription Agreement”) among us and the investors in the Private Offering in order to permit the selling securityholders identified in the table below to offer the shares for resale from time to time. Because the shares of common stock issuable upon the exercise of our warrants are subject to adjustment if our shares of common stock are subdivided or combined (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise) the number of shares that will actually be issuable upon any exercise thereof may be more or less than the number of shares being offered by this prospectus.
None of the selling securityholders are licensed broker-dealers or affiliates of licensed broker-dealers.
The table below (i) lists the selling securityholders and other information regarding the beneficial ownership (except with respect to the totals in Column 2, as determined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of our common stock by each of the selling securityholders (including securities issued in transactions unrelated to the Private Offerings, if any); (ii) have been prepared based upon information furnished to us by the selling securityholders; and (iii) to our knowledge, is accuratemade only as of the date of this prospectus. The selling securityholders may sell all, some or none of their shares in this offering. The selling securityholders identified in the table below may have sold, transferred or otherwise disposed of some or all of theirs shares since the date of this prospectus in transactions exempt from or not subject to the registration requirements of the Securities Act. Information concerning the selling securityholders may change from time to time and, if necessary, we will amend or supplement this prospectus accordingly and as required.
| Common Shares Being Registered | ||||||||||||||||||||
| Shares | Shares Underlying Warrants | Total | Shares Being Registered | Common Shares Owned After Sale | ||||||||||||||||
| Stephen L. O'Bryan Declaration of Trust, 3-23-89 | 300,000 | 300,000 | 600,000 | 600,000 | 0 | |||||||||||||||
| AMB Financial, LLC | 200,000 | 200,000 | 400,000 | 400,000 | 0 | |||||||||||||||
| The Stephen D. Kleppe and Shirley R. Kleppe Trust Dated August 20, 2013 | 200,000 | 200,000 | 400,000 | 400,000 | 0 | |||||||||||||||
| Well of Oath, LLC | 125,000 | 125,000 | 250,000 | 250,000 | 0 | |||||||||||||||
| Dennis J. Loudermilk | 100,000 | 100,000 | 200,000 | 200,000 | 0 | |||||||||||||||
| Kelly & Barry Schmidt JTWRS | 93,750 | 93,750 | 187,500 | 187,500 | 0 | |||||||||||||||
| EA 2015 LLC | 75,000 | 75,000 | 150,000 | 150,000 | 0 | |||||||||||||||
| The Verna Mae Gift Trust | 71,250 | 71,250 | 142,500 | 142,500 | 0 | |||||||||||||||
| Matthews Family Revocable Trust | 65,000 | 65,000 | 130,000 | 130,000 | 0 | |||||||||||||||
| John C. Thompson | 65,000 | 65,000 | 130,000 | 130,000 | 0 | |||||||||||||||
| Lakeshore Capital, LLC | 62,500 | 62,500 | 125,000 | 125,000 | 0 | |||||||||||||||
| Buckner Family Trust | 62,500 | 62,500 | 125,000 | 125,000 | 0 | |||||||||||||||
| Roland and Lisa Emanuel | 62,500 | 62,500 | 125,000 | 125,000 | 0 | |||||||||||||||
| Greg Dollarhyde | 50,000 | 50,000 | 100,000 | 100,000 | 0 | |||||||||||||||
| Bryan S. Mick and Kelly S. Mick JTWRS | 50,000 | 50,000 | 100,000 | 100,000 | 0 | |||||||||||||||
| Bryan & Carrie McDermott | 50,000 | 50,000 | 100,000 | 100,000 | 0 | |||||||||||||||
| Kevin Olson | 50,000 | 50,000 | 100,000 | 100,000 | 0 | |||||||||||||||
| Betaroan, LLC | 50,000 | 50,000 | 100,000 | 100,000 | 0 | |||||||||||||||
| Laura Duke Revocable Trust | 50,000 | 50,000 | 100,000 | 100,000 | 0 | |||||||||||||||
| Hames Family Trust | 50,000 | 50,000 | 100,000 | 100,000 | 0 | |||||||||||||||
| MJ Strategies, LLC | 48,750 | 48,750 | 97,500 | 97,500 | 0 | |||||||||||||||
| Jeffrey L. Augspurgor Trust UAD 10-23-03 | 42,500 | 42,500 | 85,000 | 85,000 | 0 | |||||||||||||||
| LGMG, LLC | 37,500 | 37,500 | 75,000 | 75,000 | 0 | |||||||||||||||
| The Oreste & Marie Living Trust | 37,500 | 37,500 | 75,000 | 75,000 | 0 | |||||||||||||||
| Edward O. Battaglia TOD | 37,500 | 37,500 | 75,000 | 75,000 | 0 | |||||||||||||||
| David Tyner | 31,250 | 31,250 | 62,500 | 62,500 | 0 | |||||||||||||||
| Brian Brogger | 31,250 | 31,250 | 62,500 | 62,500 | 0 | |||||||||||||||
| Jeffrey Rockacy | 31,250 | 31,250 | 62,500 | 62,500 | 0 | |||||||||||||||
| Levlo Legacy, LLC | 30,000 | 30,000 | 60,000 | 60,000 | 0 | |||||||||||||||
| Jonathan Lane Jeanes | 30,000 | 30,000 | 60,000 | 60,000 | 0 | |||||||||||||||
| J & T Meadows Ltd | 30,000 | 30,000 | 60,000 | 60,000 | 0 | |||||||||||||||
| Baisch Revocable Living Trust | 27,000 | 27,000 | 54,000 | 54,000 | 0 | |||||||||||||||
| Marsh Revocable Trust | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Charles M. Beck Von Peccoz | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Giardino Family Trust | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| John Spadar & Julia Singer JTWRS | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Michael Schultz | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Richard Adler | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Deborah A. Harwood | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Jill J. McCracken | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| My voices, LLC | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| John P. Fitzgerald | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Philip Lee Keesling | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Patrick & Brneda Simpkins | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| William R. Taylor | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Timothy Doherty | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| IRA Services Trust Company FBO David Rourke Sr. | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| One Tree Hill Revocable Trust | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Richard G. Whittier | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Ling Family Trust 7-16-2009 | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Michael & Margo Hamsher | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Bowen Family Revocable Trust | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| W-Y Transport Inc. Profit Sharing Trust | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Lewis Yarborough | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| Parkhill Clinic For Women Profit Sharing Plan Acct #460695937 | 25,000 | 25,000 | 50,000 | 50,000 | 0 | |||||||||||||||
| David Scott Smith | 22,500 | 22,500 | 45,000 | 45,000 | 0 | |||||||||||||||
| Deborah A. Thomas | 20,000 | 20,000 | 40,000 | 40,000 | 0 | |||||||||||||||
| Gary D. Post & Mary H. Post | 20,000 | 20,000 | 40,000 | 40,000 | 0 | |||||||||||||||
| James & Mary Kate Dillon | 20,000 | 20,000 | 40,000 | 40,000 | 0 | |||||||||||||||
| IRA Services Trust Company FBO Jarrod Sherman | 20,000 | 20,000 | 40,000 | 40,000 | 0 | |||||||||||||||
| Common Shares Being Registered | ||||||||||||||||||||
| Shares | Shares Underlying Warrants | Total | Shares Being Registered | Common Shares Owned After Sale | ||||||||||||||||
| Kelly Lawson | 20,000 | 20,000 | 40,000 | 40,000 | 0 | |||||||||||||||
| Stephen & Colleen Blauer | 20,000 | 20,000 | 40,000 | 40,000 | 0 | |||||||||||||||
| Roger Kraig Kemp | 19,625 | 19,625 | 39,250 | 39,250 | 0 | |||||||||||||||
| Daniel & Julie Nelson | 18,750 | 18,750 | 37,500 | 37,500 | 0 | |||||||||||||||
| Henry Cleve Stubblefield | 18,750 | 18,750 | 37,500 | 37,500 | 0 | |||||||||||||||
| Monroe P. Guest | 18,750 | 18,750 | 37,500 | 37,500 | 0 | |||||||||||||||
| The Jere and Marian Chrispens CRUT | 18,750 | 18,750 | 37,500 | 37,500 | 0 | |||||||||||||||
| Zackery Holley | 18,750 | 18,750 | 37,500 | 37,500 | 0 | |||||||||||||||
| BF or Rebecca C. Gibbons | 15,000 | 15,000 | 30,000 | 30,000 | 0 | |||||||||||||||
| Closed Loop Waste, LLC | 13,750 | 13,750 | 27,500 | 27,500 | 0 | |||||||||||||||
| Joseph & Janet Spano JTWRS | 13,750 | 13,750 | 27,500 | 27,500 | 0 | |||||||||||||||
| Joseph L. Geierman Jr. and Joyce C. Geierman | 13,000 | 13,000 | 26,000 | 26,000 | 0 | |||||||||||||||
| The Hordynski Family Trust | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Todd & Jenny Laddusaw | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Mark Hancock | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Jerry D. Reed | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| James Peterson & Jennifer A. Peterson | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Kevin Nichols | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Andrea J. Morneau Family Trust 9-12-06 | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Piece O'Cake LLC | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Cerebral Output, LLC | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Nancy Coleman | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Dean F. Eisma | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| IRA Services Trust Company CFBO James E. Cassidy | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Jason Rex Rivers | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| David Matthew Wilkett Cynthia Wilkett JT TEN TOD DTD | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Stephen L. Kass | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Capital Plus, LLC | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Steven & Carolyn Taraborelli | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| DWC Consultants, Inc | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Leonard E. & Susan J. Hinton | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| KGKBKR Inc. | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Lawrence Edmund Krynski | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Larry D. Durham | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Neil Adcock | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Carabello Family LLC | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| RC Moore | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Dean I. Creviston and Brenda S. Creviston Trust UA 5-17-09 | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| William W Cutter Trust | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Smith Family Revocable Living Trust | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| James S. Hodson | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Common Shares Being Registered | ||||||||||||||||||||
| Shares | Shares Underlying Warrants | Total | Shares Being Registered | Common Shares Owned After Sale | ||||||||||||||||
| RWT Trust | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| David Harris | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| The Kasner Revocable Living Trust | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Ashley Erin Mason & George L. Mallory Joint Tentants JT TEN | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Andrew Clemons | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Matt L. Mawby | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Frank E. French Jr. 1994 Trust | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| RJM Ventures, LLC | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Paul W. Mullins | 12,500 | 12,500 | 25,000 | 25,000 | 0 | |||||||||||||||
| Darwin Jay McManus | 12,000 | 12,000 | 24,000 | 24,000 | 0 | |||||||||||||||
| Paul Hagen | 11,000 | 11,000 | 22,000 | 22,000 | 0 | |||||||||||||||
| The Diana Lyn Kietzman Living Trust UA 6-25-1998 | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Dawn Weerasinghe | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Barry Carter | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Millers Supermarket, Inc | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Jeffrey K. Latham | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Mark Breneman and Alyce Breneman | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Larry R. Thompson | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Shannon L. Clark | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Mark B. Schwanz | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Harlin F. or Lilla M. Hames | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Paul Reichert | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Don & Stacey Carter | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| Robert & Martha Buhler | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| P L J Investments, LLC | 10,000 | 10,000 | 20,000 | 20,000 | 0 | |||||||||||||||
| N. Lee Dillow | 8,000 | 8,000 | 16,000 | 16,000 | 0 | |||||||||||||||
| The JH Revocable Trust dated 1/14/2014 | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| Dustin Weaver | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| Kimberly R. Fairchild | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| Corey Eschweiler | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| Domenico Iriti | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| Thomas A. Erdmier | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| Oldham Properties Ltd. | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| Thomas Kent Kelsay | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| IRA Services Trust Company CFBO David Johnson IRA 346019 | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| Gerald David Adkisson and Joel Adkisson Joint Tenants in Common | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| William M. Wilson | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| Tim & Mari Maroushek | 7,500 | 7,500 | 15,000 | 15,000 | 0 | |||||||||||||||
| Marian L. Beck Von Peccoz | 7,000 | 7,000 | 14,000 | 14,000 | 0 | |||||||||||||||
| Michael A. Simons 2002 Rev Trust 5/11/2002 | 7,000 | 7,000 | 14,000 | 14,000 | 0 | |||||||||||||||
| Blue Oak Trust | 7,000 | 7,000 | 14,000 | 14,000 | 0 | |||||||||||||||
| Donald Lovering | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Timothy L. Shugrue | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Ryan Coleman | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Sandra G. Williams | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Juliet McIver | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Jeremy Sanders and Melanie Phipps Sanders | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Susan Sullivan | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| The Margaret J. Baurer Living Trust Dated 2/27/2013 | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| IRA Services Trust Company CFBO Phillip Kuehne | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Hyland Family Trust | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| IRA Services Trust Company CFBO Lawrence Kistler Roth IRA | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Dennis Bridges | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Marie Hayman | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Cathy L. Aust Trust DTD 10-14-13 | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Common Shares Being Registered | ||||||||||||||||||||
| Shares | Shares Underlying Warrants | Total | Shares Being Registered | Common Shares Owned After Sale | ||||||||||||||||
| Gail H. Van Kleek Rev. Trust | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Richard A. Mickelsen | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Kurt Bachmayer & Lisa Dalke JTWRS | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Jordan Sherman | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Ralph Viscomi | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Shell Family Trust | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| John P Gannon Trust | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Troy & Kathleen Miller JTWRS | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Robert Munson & Kathy Munson | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Terry A. Merritt | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Kirk R. Mickelsen | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Brian J. Leonard & Jennifer A. Leonard | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Derek M Guirand | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| James Horosky | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Peter & Laura Burke JTWRS | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Martha J Leiby Rev Trsut 6-14-2005 | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| The Nanni Investment Tust 10/10/2008 | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| B& E Family, LLC | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Tom Sheehan | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Charles R. Bauer | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Charlotte Roehr | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Thomas M. O'Neill | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Dwain L. Owens & Jill A. Owens | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Paul A. Cohen | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Thomas Ryan & Mary Ann Cugini JTWRS | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Ruth A. Lorsung Revocable Trust Dtd. 2-17-2006 | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| IRA Services Trust Company CFBO: Jay Oliphant IRA Account No. IRA544978 | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Patsy and Michael Cluatre Joint Tennants | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Evan Kass SEP FBO Evan Kass | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Charles A. Lundby & Nancy M. Olsen | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Ryan E. Lawrence | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| The Rick & Christine Williams Family Trust | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Phil A. Albrecht Jr. | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Mark Lenhart | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| PENSCO Trust Company LLC Custodian FBO: Robert M. Sherba | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Matthew C. Johnson | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Joel A. Adkisson | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Richard Bacchiocchi IRA FBO IRA Services Trust Company Custodian | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Steven R. Batchelor | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Joseph Guidi | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Joe Don & Jennifer Joyce Irrevocable Trust | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Stephen M. Ford | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| The Elias E. Aupperle Trust | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Brevived, LLC | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Kenneth Harpell | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Scott Clark and Leslie Clark JTWRS | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Raymond D. Saenz III | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Diane Sutch | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Raymond Bills | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Thomas Liberis | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Arthur C. Hoover | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Lombardo Family Trust 11-08-2005 | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Lorenz Finison & Carmen Fields JTWRS | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Gallagher Family Trust | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Paul Arema | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| IRA Services Trust Company CFBO Robin Tanner | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Savvy Capital, LLC | 6,250 | 6,250 | 12,500 | 12,500 | 0 | |||||||||||||||
| Gary Metzger (1) | 2,500 | 2,500 | 5,000 | 5,000 | 3,668,043 | |||||||||||||||
| Total | 4,336,625 | 4,336,625 | 8,673,250 | 8,673,250 | 3,668,043 | |||||||||||||||
(1) Gary Metzger is a director of the Ecoark Holdings and shall own 10.2% of Ecoark Holdings common stock before and after the sale of the shares registered for him in this registration statement.
DETERMINATION OF OFFERING PRICE
The selling securityholders will determine at what price they may sell the shares of common stock offered by this prospectus, and such sales may be made at prevailing market prices, at prices related to the prevailing market price or at privately negotiated prices.
hereof. We are registering (i) the shares of common stock issued pursuantunder no duty to the conversion of certain convertible promissory notes; and (ii) the shares of common stock issuable upon exercise of the warrants, in each case, issued in connection with the Private Offerings to permit the resaleupdate or revise any of these shares of common stock by the selling securityholders from time to timeforward-looking statements after the date of this prospectus. We willreport or to provide any assurance with respect to future performance or results. You are cautioned that any forward-looking statements are not receive anyguarantees of future performance and involve risks and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements and should read this report thoroughly with the understanding that the actual results may differ materially from those set forth in the forward-looking statements for many reasons, including, without limitation, unforeseen events beyond management’s control and assumptions that prove to be inaccurate or unfounded. The following list of examples, while not exclusive or exhaustive, includes some of the proceedsmany possible unforeseen developments that may cause actual results to differ from the sale by the selling securityholders of the shares of common stock. We will bear all fees and expenses incident to our obligation to register the shares of common stock.
The selling securityholders may sell allanticipated or a portion of the shares of common stock held by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the selling securityholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions, pursuant to one or more of the following methods:desired results:
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The selling securityholders may also sell shares of common stock under Rule 144 promulgated underYou should read this prospectus, including the Securities Act, if available, rather than under this prospectus. In addition,section titled “Risk Factors,” and the selling securityholders may transfer the shares of common stock by other means not describeddocuments that we reference elsewhere in this prospectus. If the selling securityholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling securityholders or commissions from purchasers of the shares of common stock for whom they may actprospectus and have filed as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved but, except as set forth in a supplement to this prospectus to the extent required, in the case of an agency transaction, will not be in excess of a customary brokerage commission in compliance with FINRA Rule 5110).
In connection with sales of the shares of common stock or otherwise, the selling securityholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling securityholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling securityholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.
The selling securityholders may pledge or grant a security interest in some or all of the warrants or shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending, if necessary, the list of selling securityholders to include the pledgee, transferee or other successors in interest as selling securityholders under this prospectus. The selling securityholders also may transfer and donate the shares of common stock in other circumstances as permitted by their respective Subscription Agreement, the warrants and all applicable law, in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
To the extent required by the Securities Act and the rules and regulations thereunder, the selling securityholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act. In such event, any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. Selling securityholders who are deemed to be “underwriters” under the Securities Act (if any) will be subject to the prospectus delivery requirements of the Securities Act and may be subject to certain statutory liabilities of, including but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act.
Each selling securityholder has informed us that it is not a registered broker-dealer and does not have any written or oral agreement or understanding, directly or indirectly, with any person to engage in a distribution of the common stock. Upon us being notified in writing by a selling securityholder that any material arrangement has been entered into with a broker-dealer for the distribution of common stock, a prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares of common stock being distributed and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling securityholders and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.
Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
Each selling securityholder may sell all, some or none of the shares of common stock registered pursuantexhibits to the registration statement, of which this prospectus formsis a part. If sold underpart, completely and with the registration statementunderstanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of whichthe significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus formsregardless of the time of delivery of this prospectus or any sale of our common stock. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a part,result of new information, future events or otherwise after the sharesdate of common stock registered hereunder will be freely tradablethis prospectus. All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the hands of persons other than our affiliates that acquire such shares.cautionary statements contained or referred to herein.
The selling securityholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling securityholders and any other participating person. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.
We will indemnify the selling shareholders against liabilities, including some liabilities under the Securities Act, in accordance with the applicable registration rights agreements to which they are a party, or the selling shareholders will be entitled to contribution. We may be indemnified by the selling shareholders against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling shareholder specifically for use in this prospectus, in accordance with the applicable registration rights agreement to which they are a party, or we may be entitled to contribution.
We will not receive proceeds from the sale of common stock underthe shares offered pursuant to this prospectus are solely for the accounts of the Selling Stockholders. Accordingly, we will not receive any of the proceeds from the sale of shares offered by this prospectus. We will, however, receive approximately $21,683 from the selling securityholders if they exercise all of the warrants (assuming, in each case, no adjustments are made to the exercise price or number of shares issuable upon exercise of the warrants), which we expect we would use primarily for working capital purposes. The Company did receive $17,347 from the initial offering to the selling securityholders which it is using for general working capital purposes.
The holders of the warrants may exercise their warrants at any time at their own discretion, if at all, in accordance with the terms thereof until their expiration. As a result, we cannot plan on receiving any proceeds from the exercise of any of the warrants, nor can we plan on any specific uses of any proceeds we may receive beyond the purposes described herein. We have agreed to bear the expense (other than any underwriting discounts or commissions or agent’s commissions)Warrants if and when they are exercised in connection with the registration of the common stock being offered hereby by the selling securityholders.
cash.
Our common stock, from April 22, 2016, is quoted on the OTCQB market maintained by the OTC Market Group Inc. under the symbol “EARK”. We filed an application for our common stock to be listed on the NASDAQ Capital Market. Our common stock was quoted on the over the counter market from September 5, 2008 through February 5, 2010 under the symbol MBSV.OB. From February 6, 2010 to April 21, 2016, our common stock has been listed on the over the counter market under the symbol MGLT. Prior to February 8, 2010, there was no active market for our common stock. The following table sets forth the high and low prices for our common stock for the periods indicated, as reported by the OTCQB. These prices have been retroactively adjusted for the reverse 1-for-250 stock split that occurred on March 18, 2016, in accordance with SAB Topic 4:C.
| 2016 | HIGH | LOW | ||||||
| First Quarter | $ | 25.025 | $ | 8.65 | ||||
| Second Quarter | $ | 22.00 | $ | 12.00 | ||||
| Third Quarter (through July 5, 2016) | $ | 18.00 | $ | 18.00 | ||||
| 2015 | HIGH | LOW | ||||||
| First Quarter | $ | 18.75 | $ | 6.25 | ||||
| Second Quarter | $ | 18.125 | $ | 7.50 | ||||
| Third Quarter | $ | 12.50 | $ | 3.75 | ||||
| Fourth Quarter | $ | 17.50 | $ | 2.50 | ||||
| FISCAL YEAR 2014 | HIGH | LOW | ||||||
| First Quarter | $ | 20.00 | $ | 6.75 | ||||
| Second Quarter | $ | 17.125 | $ | 6.25 | ||||
| Third Quarter | $ | 20.00 | $ | 7.875 | ||||
| Fourth Quarter | $ | 18.75 | $ | 3.75 | ||||
Holders
As of July 5, 2016, the last reported sales price reported on the OTC Markets Inc. for our common stock was $18.00 per share. As of the date of this prospectus, we had approximately 625 holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Island Stock Transfer, located at 15550 Roosevelt Boulevard, Suite 301, Clearwater, Florida 33760.
DividendsDIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. The payment of dividends on our common stock in the future will depend on our earnings, capital requirements, operating and financial condition and such other factors as our Board of Directors may consider appropriate. We currently expect to use all available funds to finance the future development and expansion of our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects, the requirements of current or then-existing debt instruments and other factors our board of directors may deem relevant.
Equity Compensation Plan InformationSELLING STOCKHOLDERS
The common stock being offered by the selling shareholders are those previously issued to the selling shareholders, and those issuable to the selling shareholders, upon conversion of preferred stock and exercise of the warrants. For additional information regarding the issuances of those shares of common stock and warrants, please refer to the description of the private placement and the description of the preferred stock and warrants that were issued in that private placement. We are registering the shares of common stock in order to permit the selling shareholders to offer the shares for resale from time to time. Except for the ownership of the shares of common stock, preferred stock and the warrants as well as prior investment transactions with certain selling shareholders, the selling shareholders have not had any material relationship with us within the past three years.
The table below lists the selling shareholders and other information regarding the beneficial ownership of the shares of common stock by each of the selling shareholders. The second column lists the number of shares of common stock beneficially owned by each selling shareholder, based on its ownership of the shares of common stock, preferred stock and warrants, as of September 23, 2019, assuming conversion of the preferred stock and exercise of the warrants held by the selling shareholders on that date, without regard to any limitations on conversion or exercises.
The following table sets forth equity compensation plan information asthird column lists the shares of December 31, 2015.common stock being offered by this prospectus by the selling shareholders.
| Plan Category | Number of securities to be issued upon exercise of outstanding options (a) | Weighted-average exercise price of outstanding options (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
| Equity compensation plans approved by security holders | 659,000 | $ | 2.50 | 4,838,142 | ||||||||
| Total | $ | |||||||||||
In accordance with the terms of a registration rights agreement with the selling shareholders, this prospectus generally covers the resale of the sum of (i) the number of shares of common stock issued or issuable to the selling shareholders upon conversion of the preferred stock issued in the private placement referenced above and (ii) the maximum number of shares of common stock issuable upon exercise of the related warrants, including the maximum additional number of shares of common stock issuable upon exercise of the related warrants if market price of our common stock was $0.25 on the 11-month anniversary of the closing date of the offering, all subject to adjustment as provided in the registration right agreement, without regard to any limitations on the exercise of the warrants. The fourth column assumes the sale of all of the shares offered by the selling shareholders pursuant to this prospectus.
Under the terms of the certificate of designations governing the terms of the preferred stock and the terms of the warrants, a selling shareholder may not convert the preferred stock or exercise the warrants to the extent such conversion or exercise would cause such selling shareholder, together with its affiliates and attribution parties, to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding common stock following such conversion or exercise, excluding for purposes of such determination shares of common stock issuable upon conversion of preferred stock or exercise of the warrants which have not been converted or exercised. The number of shares in the second column does not reflect these limitations. The selling shareholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.”
| Name of Selling Stockholder | Number of shares of Common Stock Owned Prior to Offering | Maximum Number of shares of Common Stock to be Sold Pursuant to this Prospectus | Number of shares of Common Stock Owned After Offering | |||||||||
| Empery Asset Master, LTD (1)(6) | 3,001,556 | 2,324,706 | 1,472,144 | |||||||||
| Empery Tax Efficient, LP (2)(6) | 814,790 | 453,020 | 516,750 | |||||||||
| Empery Tax Efficient II, LP (3)(6) | 3,050,054 | 3,183,059 | 955,936 | |||||||||
| Sabby Healthcare Master Fund, Ltd. (4)(6) | 5,730,208 | 2,980,393 | 2,749,816 | |||||||||
| Sabby Volatility Warrant Master Fund, Ltd. (5)(6) | 5,453,518 | 2,980,393 | 2,473,126 | |||||||||
| Empery Asset Management LP, the authorized agent of Empery Asset Master, LTD (“EAM”), has discretionary authority to vote and dispose of the shares held by EAM and may be deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting power over the shares held by EAM. EAM, Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares. |
| (2) | Empery Asset Management LP, the authorized agent of Empery Tax Efficient, LP (“ETE”), has discretionary authority to vote and dispose of the shares held by ETE and may be deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting over the shares held by ETE. ETE, Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares. |
| (3) | Empery Asset Management LP, the authorized agent of Empery Tax Efficient II, LP (“ETE II”), has discretionary authority to vote and dispose of the shares held by ETE II and may be deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting over the shares held by ETE II. ETE II, Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares. |
| (4) | Sabby Management, LLC serves as the investment manager of Sabby Healthcare Master Fund, Ltd. (“SHMF”). Hal Mintz is the manager of Sabby Management, LLC and has voting and investment control of the securities held by SHMF. Each of Sabby Management, LLC and Hal Mintz disclaims beneficial ownership over the securities beneficially owned by SHMF except to the extent of their respective pecuniary interest therein. |
| (5) | Sabby Management, LLC serves as the investment manager of Sabby Volatility Warrant Master Fund, Ltd. (“SVWMF”). Hal Mintz is the manager of Sabby Management, LLC and has voting and investment control of the securities held by SVWMF. Each of Sabby Management, LLC and Hal Mintz disclaims beneficial ownership over the securities beneficially owned by SVWMF except to the extent of their respective pecuniary interest therein. |
| (6) | Number of shares of common stock owned prior to offering includes shares of common stock, shares issuable upon conversion of preferred stock and shares issuable upon exercise of warrants. Number of shares of common stock owned prior to offering does not include shares issuable if the market price of our common stock on the 11-month anniversary of the closing date of the offering is less than $0.51. Each of the selling shareholders shall be entitled to receive additional shares of common stock based on the number of shares of common stock that would have been issuable upon conversion of the Series B Convertible Preferred Stock had the initial conversion price been equal to the market price at such time (but not less than $0.25) less the number of shares of common stock issued or issuable upon exercise of the Series B Convertible Preferred Stock based on the $0.51 conversion price. The preferred stock and the warrants owned by each of the selling shareholders have a beneficial ownership limitation such that the number of shares of common stock cannot exceed 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon the conversion of any preferred stock or the exercise of any warrant. Each selling shareholder may, individually, increase or decrease the beneficial ownership limitation provisions, provided that the beneficial ownership limitation shall, in no event, exceed 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon the conversion of preferred stock or the exercise of any warrant. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TheYou should read the following discussion of our financial condition and analysis should be readresults of operations in conjunction with the“Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. The information contained below may be subject to risk factors. We urge you to reviewThis discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Risk Factors“Cautionary Note Regarding Forward-Looking Statements and Industry and Market Data” in this prospectus.”
Overview
Ecoark Holdings is an innovative AgTech company focused on solutions that reduce food waste and improve delivered freshness and product margins for fresh and perishable foods for a more complete discussionwide range of organizations including growers, processors, distributors and retailers. Ecoark Holdings addresses this through its indirect wholly-owned subsidiary: Zest Labs, Inc. (“Zest Labs” or “Zest”). The Company committed to a plan to focus its business on Zest Labs and divested non-core assets in 2019 that included assets of Pioneer Products, LLC (“Pioneer Products” or “Pioneer”) and Magnolia Solar, Inc. (“Magnolia Solar”). Those assets are reported as held for sale and their operations are reported as discontinued operations in the consolidated financial statements. The subsidiary Eco3d, LLC (“Eco3d”) was sold on April 14, 2017 and is also reported as held for sale and discontinued operations in the consolidated financial statements. All discontinued operations have been sold or ceased operations by June 30, 2019, so there are no remaining assets or liabilities of the risksdiscontinued operations. The Company has 13 employees of continuing operations and no employees of discontinued operations as of the date of this filing.
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 (“Trend Holdings”) for the Company to acquire 100% of Trend Holdings pursuant to a merger of Trend Holdings with and into the Company (the “Merger”). The Merger was completed on the May 31, 2019 and as agreed in the Merger Agreement, the Company is the surviving entity in the Merger and the separate corporate existence of Trend Holdings has ceased to exist.
Trend Holding’s primary asset is Trend Discovery Capital Management. Trend Discovery Capital Management manages several entities including Trend Discovery LP and Trend Discovery SPV I. Trend Discovery LP is a hybrid hedge fund with a since inception track record of outperforming the S&P 500. Trend Discovery LP primarily invests in early-stage startups. In the near-term, Trend Discovery LP’s performance will be driven by its investment in Volans-i, a fully autonomous vertical takeoff and landing (“VTOL”) drone delivery platform. Trend Discovery LP currently owns approximately 1% of Volans-i, and has participation rights to future financings to maintain its ownership at 1% indefinitely. More information can be found at flyvoly.com.
Our principal executive offices are located at 5899 Preston Road #505, Frisco, Texas 75034, and our telephone number is (479) 259-2977. Our website address is http://zestlabs.com/. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in and are not considered part of this report.
Restatement
The financial statements and certain information within the notes to the financial statements have been restated to reflect corrections of misstatements described therein.
Description of Business
Zest Labs
Zest Labs offers freshness management solutions for fresh food growers, suppliers, processors, distributors, grocers and restaurants. Its Zest Fresh solution is a cloud-based post-harvest shelf-life and freshness management solution that improves delivered freshness of produce and protein and reduces post-harvest losses at the retailer due to temperature handling and processing by 50% or more by intelligently matching customer freshness requirements with actual product freshness. It focuses on four primary value propositions – operational efficiency, consistent food freshness, reduced waste, and improved food safety. Zest Fresh empowers workers with real-time analytic tools and alerts that improve efficiency while driving quality consistency through best practice adherence at a pallet level. Zest Labs also offers its Zest Delivery solution that provides real-time monitoring and control for prepared food delivery containers, helping delivery and dispatch personnel ensure the quality and safety of delivered food.
On June 6, 2019, Zest Labs announced a strategic collaboration between AgroFresh and Zest Labs to strengthen their end-to-end solutions. AgroFresh will incorporate Zest Labs’ Zest Fresh™ solution into its FreshCloud™ Transit Insights platform. The agreement will utilize both companies’ resources and strengths to provide customers with a comprehensive solution that improves operations, increases visibility into produce shelf-life and reduces food waste.
Zest Labs was previously known as Intelleflex Corporation. Effective on October 28, 2016, Intelleflex Corporation changed its name to Zest Labs, Inc. to align its corporate name with its mission and the brand name of its products and services.
The Zest Fresh value proposition is to reduce fresh food loss by improving quality consistency. In the U.S. produce market, it is reported that roughly 30% of post-harvest fresh food is lost or wasted and therefore not consumed. Both fresh food producers and retailers bear significant expense when harvested food is either rejected due to early spoilage or reduced in value due to early ripening. Zest Labs believes that a significant portion of this waste can be attributed to inconsistent quality or freshness based on variable post-harvest processing and handling. Fresh food producers and retailers manage food distribution and inventory based on the harvest date, with the assumption that all food harvested on the same day will have the same freshness. However, studies have shown that harvest conditions and post-harvest handling can have a significant effect on the actual remaining freshness and, if not properly accounted for, can result in food loss or spoilage ahead of expectations. Zest Fresh empowers fresh food producers and retailers to significantly reduce the post-harvest loss by providing real-time guidance to process adherence, intelligent distribution and best handling practices, with a goal of providing significant financial savings to fresh food producers and retailers.
Zest Labs has developed the industry’s first freshness metric called the Zest Intelligent Pallet Routing Code (“ZIPR Code”). The ZIPR Code has three main components: Harvest Quality which sets total freshness capacity (for example, 12 days for strawberries), Handling Impact which reflects aging acceleration due to improper handling, and Future Handling which accurately reflects how the product will be handled (for example, store shelf temperature may be 40 degrees Fahrenheit instead of the ideal 34 degrees Fahrenheit).
Zest Fresh is offered to fresh food producers, processors, distributors, restaurants and grocers with pricing based on the number of pallets managed by Zest Fresh, typically from the field harvest through retail grocery delivery. The Zest Fresh service includes a re-usable wireless Internet of Things (“IoT”) condition sensor that travels with the pallet of fresh food from the field or processor through retail delivery, continuously collecting product condition data. The collected pallet product data is analyzed, using artificial intelligence-based predictive analytics in real time by the Zest Fresh cloud-based solution, with the fresh food producers and retailers accessing data through Zest Fresh web and mobile applications. Zest Fresh provides workers with real-time feedback on the current handling or processing of each pallet, empowering best practice adherence to achieve maximum freshness. Zest Fresh also provides dynamic updates as to actual product freshness for each pallet, enabling intelligent routing and inventory management of each pallet in a manner that ensures optimum delivered freshness. Zest Fresh also includes integrated blockchain support to grower and shipper customers via the Zest Fresh platform.
Zest Labs’ Zest Delivery solution helps to manage prepared food delivery from the restaurant through to the customer. Zest Delivery manages the delivery container environment, both monitoring and controlling the product condition. The value of Zest Delivery is to manage prepared meals in an ideal state for consumption, while accommodating extended pre-staging or delivery times. Extended pre-staging times are associated with an investment“instant delivery” services of prepared meals, where the meals are often pre-staged in our securities. See “Special Notea delivery area ahead of demand. While pre-staging enables fast demand response time, it can result in prepared meals being staged for extended periods, which can potentially impact quality, value and safety. Zest Delivery monitors and controls the delivery container environment to preserve the prepared meal in ideal, ready to consume condition. Zest Delivery also provides the dispatcher with real-time remote visibility to the condition of available meals and confirming quality prior to dispatch. Zest Delivery provides automated, real-time visibility for a very distributed fleet of drivers, reflecting prepared meal food safety, quality and availability. Zest Delivery is offered to meal delivery companies based on Forward-Looking Statements.”the quantity of delivery containers and frequency of use.
We sellZest Labs currently holds rights to 67 U.S. patents (with additional patents pending), numerous related foreign patents, and U.S. copyrights relating to certain aspects of its Zest software, hardware devices including Radio-Frequency Identification (“RFID”) technology, software, and services. In addition, Zest Labs has registered, and/or has applied to register trademarks and service marks in the servicesU.S. and a number of foreign countries for “Intelleflex,” the Intelleflex logo, “Zest,” “Zest Data Services,” and the Zest, Zest Fresh and Zest Delivery logos, and numerous other trademarks and service marks. Many of Zest Labs’ products discussed underhave been designed to include licensed intellectual property obtained from third-parties. Laws and regulations related to wireless communications devices in the section of this prospectus entitled “Business.” jurisdictions in which Zest Labs operates and seeks to operate are extensive and subject to change. Wireless communication devices, such as RFID readers, are subject to certification and regulation by governmental and standardization bodies. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications or delays in product shipment dates.
RESULTS OF OPERATIONSAlthough most components essential to Zest Labs’ business are generally available from multiple sources, certain key components including, but not limited to, microprocessors, enclosures, certain RFID or other wireless custom integrated circuits, and application-specific integrated circuits are currently obtained by Zest Labs from single or limited sources, principally in Asia.
Zest Labs is part of a very competitive industry that markets solutions to fresh food supply chain users, such as fresh food growers, producers and retailers. Many other companies that are both more established and command much greater resources compete in this market. While Zest Fresh and Zest Delivery offer new technical approaches and new user value, it remains uncertain if Zest Labs will gain sufficient adoption of its products to make them viable in the market. Further, it is unclear what industry competitors are developing that might address similar user needs. Zest Labs’ products provide a new approach for industry participants, and as with any new approach, adoption is uncertain as many in the industry can be slow to embrace new technology and/or new approaches. These market challenges can lead to extended sales cycles that may include extended pilot testing often at Zest Labs’ expense, for which the outcome remains unclear until the completion of each test. For these reasons, and others, forecasting new business adoption and future revenue can be very difficult and volatile. However, the Company believes that Zest Fresh offers fresh food retailers, growers, shippers, processors and distributors an opportunity to differentiate their businesses in ways that the shipment of canned and boxed food products cannot, as competition in the agriculture, grocery, food service and restaurant markets continues to accelerate.
The acquisition of 440labs in May 2017 allowed Zest Labs to internally maintain its software development and information solutions for cloud, mobile, and IoT applications. 440labs had been a key development partner with Zest Labs for more than four years prior to the May 2017 acquisition, contributing its expertise in scalable enterprise cloud solutions and mobile applications.
Trend Discovery Holdings, Inc.
Trend Discovery Holdings, Inc. (“Trend Holdings”) is a holding company which earns management fees and whose primary asset is Trend Discovery Capital Management. Trend Discovery Capital Management manages several entities including Trend Discovery LP and Trend Discovery SPV I. Trend Discovery LP is a hybrid hedge fund. Trend Discovery LP primarily invests in early-stage startups.
Discontinued Operations:
Pioneer Products
Pioneer Products was located in Rogers, Arkansas and was involved in the selling of recycled plastic products and other products. It sold to the world’s largest retailer. Pioneer Products recovered plastic waste from retail supply chains and converted the reclaimed material into new consumer products which completed a closed loop and reduced waste sent to landfills. Pioneer Products was purchased by Ecoark in 2012. Pioneer Products acquired Sable Polymer Solutions, LLC (“Sable”) in a stock transaction on May 3, 2016. Since that date, Sable’s results have been included with Pioneer Products. In May 2018 the Ecoark Holdings Board of Directors (“Board”) approved a plan to sell Pioneer and Sable. Pioneer concluded operations in February 2019, and the sale of Sable assets was completed in March 2019. Relevant assets and liabilities are classified as held for sale and operations are classified as discontinued in the consolidated financial statements.
Magnolia Solar
Magnolia Solar was located in Albany, New York and was principally engaged in the development and commercialization of nanotechnology-based, high-efficiency, thin-film technology that can be deposited on a variety of substrates, including glass and flexible structures. Magnolia Solar was a subsidiary of Magnolia Solar Corporation that merged with Ecoark Inc. (“Ecoark”) on March 24, 2016 to create Ecoark Holdings and continued as a subsidiary of Ecoark Holdings. In May 2018 the Ecoark Holdings Board approved a plan to sell Magnolia Solar, and the sale was completed in May 2019. Relevant assets and liabilities were classified as held for sale and operations are classified as discontinued in the consolidated financial statements.
Competition
Zest Labs operates in markets for products and services that are highly competitive and face aggressive competition in all areas of their business.
The market for cloud-based, real-time supply chain analytic solutions—the market in which Zest Labs competes—is rapidly evolving. There are several competitors with competing technologies, including companies that have greater resources than Ecoark Holdings, which operate in this space. Some of these companies have brand recognition, established customer relationships, and own the manufacturing process.
Ecoark Holdings believes that, analyzing the competitive factors affecting the market for the solutions and services its subsidiaries provide, its products/services compete favorably by offering integrated solutions to their customers. The Company has incurred research and development expenses of $3,320 and $5,576 in the years ended March 31, 2019 and 2018, respectively, to develop its solutions and differentiate those solutions from competitive offerings. The Company has incurred research and development expenses of $897 and $870 in the three months ended June 30, 2019 and 2018.
Results of Operations
Results of Continuing Operations for the Three Months Ended March 31, 2016June 30, 2019 and 20152018
Revenues, Cost of Revenues and Margins
Revenues for the three months ended March 31, 2016June 30, 2019 were $1,964$35 as compared to $2,225$753 for the three months ended March 31, 2015. The 12% decrease was principally dueJune 30, 2018. Professional services revenues of $23 in 2019 were from management and other fees earned by Trend Holdings compared to lower shipments$750 for the three months ended June 30, 2018 from a project with a large retailer related to freshness solutions. Software as a Service (“SaaS”) revenues of recycled plastic trash cans by Pioneer Products, offset by sales of a new product, office chairs$12 in 2019 and a small increase$3 in service revenues. The lower shipments of plastic products2018 were principally due to a difference in the timing of shipments at year-end 2015 versus 2014. Sales of the office chairs introduced in 2016 partially offset the decrease in sales of plastic products. Revenue from services of $757 in 2016 increased 2% from $742 achieved in 2015. Expansion of the 3D mapping, modelingprojects with produce distributors and consulting business along with certain commission income drove the increase in service revenues.growers.
Cost of Revenues and Gross Profit
Cost of revenues for the quarterthree months ended March 31, 2016June 30, 2019 was $1,459$45 as compared to $1,641$430 for the quarterthree months ended March 31, 2015.June 30, 2018 resulting in gross loss of $10 in 2019 and gross profit of $323 in 2018. The decreasesignificant gross profit in 2018 was directly related to the decreasemargin in revenues.professional services from the project with a large retailer. The decreasegross loss in gross profit from $584 in 2015 to $505 in 20162019 was principally a result of lower margins on service revenues as Eco3D expanded its mix of projects, some of which were executed at lower margins. Services achieved a gross margin of 70% in 2015 and 63% in 2016, with the decrease partly due to the mix of new projects. Total gross margin for the Company was steady at 26% in both 2016 and 2015. Margins for products decreased from 5% in 2015 to 2% in 2016 dueprimarily to costs incurredto execute the SaaS projects and royalties for the introduction of the new products.cross license agreements on patents imbedded with Zest freshness solutions intellectual property.
Operating Expenses
Operating expenses for three months ended June 30, 2019 were $2,524 as compared to $3,270 for the three months ended June 30, 2018. The $746 decrease was due primarily to share-based non-cash compensation which decreased by $505 to $582 in the three months ended June 30, 2019 from $1,087 in the three months ended June 30, 2018. Operating expenses excluding share-based non-cash compensation for the three months ended June 30, 2019 decreased $241 from the three months ended June 30, 2018 due to decreases in depreciation and amortization, professional fees and consulting, and decreases in research and development expenditures.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended June 30, 2019 were $1,550 compared with $2,091 for the three months ended June 30, 2018. The $541 decrease was principally due to a $505 decrease in share-based non-cash compensation, a decrease in the use of consultants and efforts to control general and administrative costs including travel and travel-related expenses.
Salaries and related costs for the three months ended June 30, 2019 were $799, down $814 from $1,613 for the three months ended June 30, 2018. The Pioneer Products operational activities described above required relatively limited home office support. Therefore, mostdecrease resulted primarily from a $544 decrease in share-based non-cash compensation. A portion of the operating expenses below were allocatedthat cost was derived from estimates of stock option expense calculated using a Black-Scholes model which can vary based on assumptions utilized and share-based compensation expense from awards of stock grants. Additional information on that equity expense can be found in Note 11 to the services segment. The services segment includes activities relating to Intelleflex forcondensed consolidated financial statements, which the Company has invested considerable resources for support and funding.
Salaries and Salary Related Costs
Salaries for 2016 were $1,020, up 26% from $812complies with critical accounting policies driven by Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 718-10. Decreases in 2015. The increase was related to athe number of individuals who became employees compared with previous contractor status and related costs also contributed to the expansion of staff at each operation.
Professional Feesreduction in salaries and Consultingrelated costs.
Professional fees and consulting expenses for 2016the three months ended June 30, 2019 of $267$94, were down 64%$166 from $750$260 incurred in 2015for the three months ended June 30, 2018 as a resultthe engagement of consultants was significantly decreased during the conversion of contractors to employees and a decrease in consulting expense. The reduction in consulting expense was achieved despite a number of costs incurred associated with the Company becoming a public entity in 2016.current period.
GeneralDepreciation, Amortization and AdministrativeImpairment
Other general and administrative expenses in 2016 were $517 down from $590 in 2015, partially due to lower marketing expenditures.
Depreciation and Amortization
Depreciation, amortization and amortization expenseimpairment expenses for 2016 was $75,the three months ended June 30, 2019 were $77 compared to $416$309 for 2015.the three months ended June 30, 2018. The 82%$232 decrease primarily resulted from certain customer list intangibles becoming fully amortized in September 2015.impairments of the intangible assets and Zest hardware assets recorded as of March 31, 2019.
Research and Development
Research and development expenses were down slightly from $777expense increased $27 to $897 in 2015 to $752the three months ended June 30, 2019 compared with $870 during the same period in 2016.2018. The majority of these expensesexpense related primarily to the ZEST initiatives at Intelleflex.
Tabledevelopment of Contentsthe Zest Labs freshness solutions.
Interest Expense
Interest expense, net of interest income, for 2016the three months ended June 30, 2019 was $95$64 as compared to $206$11 for 2015.the three months ended June 30, 2018. The 54% decrease was a result of lowerincrease resulted from interest accruing on the credit facility and advances from related party debtparties in 2016 because of a decrease2019 and interest on convertible notes in interest rates and lower outstanding balances.2018.
Net Loss
Net loss for 2016the three months ended June 30, 2019 was $2,221$1,646 as compared to $2,967 in 2015.$3,227 for the three months ended June 30, 2018. The $746$1,581 decrease in net loss was primarily due to the $624 increase in other income from the change in fair value of warrant derivative liabilities, the absence of the $590 loss from discontinued operations incurred in 2018, the $505 decrease in non-cash share-based compensation, and the $232 decrease in depreciation and amortization expense, offset by lower gross profit from professional services.
Results of Discontinued Operations
Loss from discontinued operations for the three months ended June 30, 2018 was $590. Revenues from discontinued operations were $2,479, comprised of $2,419 for Pioneer and Sable and $60 for Magnolia Solar. Pioneer had a decrease in total operating expensessales of $714consumer trash cans made from recycled materials due to a unit price decrease and fewer promotions by a customer. Losses from discontinued operations were $558 for Pioneer and Sable and $32 for Magnolia Solar. Pioneer and Sable losses were driven by lower volumes and a unit price decrease in net interest expense of $111, offset by a decrease of $79 in gross profit.as previously described.
YearResults of Continuing Operations for the Years Ended DecemberMarch 31, 2015 Compared to the Year Ended December 31, 20142019 and 2018
Magnolia Solar Results of OperationsRevenues
Our revenues are derived from research and development grants and contracts awarded to the company by government and private sector.
Revenues
Currently we are in an early stage in our development and have recorded $160 of revenue for the year ended DecemberMarch 31, 20152019 were $1,062 as compared to $218 of revenue$558 for the year ended DecemberMarch 31, 20142018. Revenues of $1,000 and $500 for 2019 and 2018, respectively, were from a decreaseproject with Walmart related to freshness solutions. The SaaS revenues of $62 and $58 or 26.8%. We anticipate emergingin 2019 and 2018 were from the development stageprojects with grocers and produce growers and in fiscal 2017. The revenue recorded is2019 from research and development grants or contracts to develop solar cells using Magnolia’s technology.a precooling operation.
Cost of Revenues and Gross Profit
Cost of revenues for the year ended December 31, 2015 were $1022019 was $699 as compared to $135$243 for 2018. The significant increase was directly related to the higher revenues from the project with Walmart; however, after paying $1,000 for work on that project, Walmart did not pay the final $500. Gross margin decreased from 56% in 2018 to 34% in 2019 due to higher costs involved with executing the projects.
Operating Expenses
Operating expenses for 2019 were $14,511 as compared to $38,845 for 2018. The $24,334 decrease, or 63%, was due principally to share-based non-cash compensation which decreased by $21,874 to $3,078 in 2019 from $24,952 in 2018. Operating expenses excluding share-based non-cash compensation for 2019 decreased $2,460 from 2018 principally due to reductions in salaries and related costs and lower research and development expense offset by increases in depreciation and impairment.
Salaries and Salary Related Costs
Salaries and related costs for 2019 were $4,848, down $21,114 from $25,962 for 2018. The decrease resulted primarily from a $19,400 decrease in share-based compensation that did not require cash payments. A portion of that cost was derived from estimates of stock option expense calculated using a Black-Scholes model which can vary based on assumptions utilized and share-based compensation expense from awards of stock grants. Additional information on that equity expense can be found in Note 13 to the consolidated financial statements, which complies with critical accounting policies driven by ASC 718-10. In the third and fourth quarters of fiscal 2018, reductions in staff were implemented to reduce the cash expenditures of the Company after Walmart did not execute a significant multi-year contract that the Company was led to believe would occur.
Professional Fees and Consulting
Professional fees and consulting expenses for 2019 of $1,315, were down $3,497, or 73%, from $4,812 incurred for 2018.
Share-based non-cash compensation of $405 in 2019 was down $2,424 from $2,410 recorded in 2018. Advisors and consultants associated with compliance requirements of becoming a public entity and capital raising efforts were incurred in 2018, a number of which did not recur in 2019 as cost control measures were instituted. A portion of that share-based compensation cost was calculated using a Black-Scholes model which can vary based on assumptions utilized. Additional information on that equity expense can be found in Note 13 to the consolidated financial statements, which complies with critical accounting policies driven by ASC 505-50.
Selling, General and Administrative
Selling, general and administrative expenses for 2019 were $1,671 compared with $1,677 for 2018. Cost reduction initiatives were focused on salary related and professional fees costs. Spending in other areas included sales and business development efforts were not reduced.
Depreciation, Amortization and Impairment
Depreciation, amortization and impairment expenses for 2019 were $3,357 compared to $818 for 2018. The $2,539 increase resulted primarily from impairment of long-lived tangible and intangible assets related to Zest Labs following loss of the expected contract from Walmart and depreciation on assets that had been reclassified from inventory to fixed assets at March 31, 2018.
Research and Development
Research and development expense decreased 40% to $3,320 in 2019 compared with $5,576 in 2018. The $2,256 reduction in costs related primarily to the maturing of development of the Zest Labs freshness solutions and the termination of joint development efforts with Walmart that had been incurred in 2018.
Interest and Other Expense
Change in fair value of derivative liabilities for 2019 was $3,160 as compared to $9,316 for 2018. The $6,156 decrease was a result of less volatility in the stock price in 2019 compared to 2018.
Interest expense, net of interest income, for 2019 was $417 as compared to $55 for 2018. The $362 increase was a result of interest incurred on a $10,000 credit facility established in December 2018.
Net Loss
Net loss for the year ended DecemberMarch 31, 2014, a decrease of $33 or 24.6%. Cost of revenues2019 was comprised of direct labor, direct travel, materials, and subcontractors for the solar cell development. The decrease in cost of revenues for this period was attributable$13,650 as compared to reductions in direct labor due to work on some contracts being completed.
Operating Expenses
Indirect and Administrative Labor
Indirect and administrative labor expense$32,836 for the year ended DecemberMarch 31, 20152018. The $19,186 decrease in net loss was $160primarily due to the $25,342 decrease in operating expenses described above offset by an increase of $48 in gross profit, a decrease of $6,156 in the change in the fair value of derivative liabilities and the increase in net interest expense of $362. As described in Note 15 to the consolidated financial statements, the Company has a net operating loss carryforward for income tax purposes totaling approximately $98,293 at March 31, 2019 that can be utilized to reduce future income taxes. A valuation allowance has been estimated such that no deferred tax assets have been recognized in the financial statements.
Results of Discontinued Operations
On April 14, 2017, the Company sold the assets, liabilities and membership interests in Eco3d to a group led by executives of Eco3d after the Company’s Board concluded that Eco3d did not fit the future strategic direction of the Company. In accordance with ASC 205-20, and having met the criteria for “held for sale”, the Company had reflected amounts relating to Eco3d as compareda disposal group classified as held for sale at March 31, 2017 and has included amounts relating to $199Eco3d as part of discontinued operations. In addition, as a result of receiving letters of intent for the sale of key assets of Sable, Pioneer and Magnolia Solar, and the approval by the Company’s Board to sell the assets, those assets are included in assets held for sale and their operations included in discontinued operations.
Loss from discontinued operations for the year ended DecemberMarch 31, 2014,2019 was $2,300, an improvement from the loss of $4,181 incurred in 2018. Revenues from discontinued operations were $9,883, up slightly from $9,541 in 2018. Sable increased revenues by 20% due to a decrease of $39 or 19.3%. Indirect labor10% increase in shipments and benefits were comprised of wages for the administrative staff, payroll taxes, health insurance, disability insurance, indirect travel, other administrative expenses, provision for vacation time, and stock compensation expense. Theachieving higher selling prices per pound. Pioneer had a 30% decrease in indirect and administrative expenses for this period was primarily attributablesales due to a 23% decrease in indirect labor, benefitsshipments and travel costs.a lower price per unit.
Professional Fees
Professional fees for the year ended December 31, 2015 were $150 as compared to $138 for the year ended December 31, 2014, an increase of $12 or 8.6%. Professional fees were comprised of accounting, business services, public relations, audit, and legal fees. The increase in professional fees for this period was attributable primarily to an increase in legal counsel costs incurred with the Ecoark transaction.
Depreciation and Amortization Expense
Depreciation and amortization expense for the year ended December 31, 2015 was $36 as compared to $36 for the year ended December 31, 2014, representing no increase or decrease. Depreciation and amortization expense was comprised of amortization of the license fee paid for the technology license, amortization of the debt issue, and depreciation on the property and equipment.
General and Administrative
General and administrative expense for the year ended December 31, 2015 was $37 as compared to $44 for the year ended December 31, 2014, a decrease of $7 or 14.9%. General and administrative expense was comprised of expenses for office lease, computer, office supplies, dues and subscriptions, worker’s compensation, disability insurance, printing, telephone, business meals, repairs and maintenance, public relations, advertising, state taxes, business gifts and other miscellaneous items. The decrease in general and administrative expense for this period was attributable to general costs cuts, offset by bad debts expenses incurred.
Interest Expense
Interest expense for the year ended December 31, 2015 was $240 as compared to $240 for the year ended December 31, 2014. Interest expense was comprised of interest incurred on outstanding long-term debt.
Net Loss
As a result of the aforesaid, our net loss was $566 for the year ended December 31, 2015, as compared to a loss of $574 for the year ended December 31, 2014, a decrease of $8 or 1.4%.
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.
To date we have financed our operations through government grants, the sale of our common stock and the issuance of debt.
At December 31, 2015 and December 31, 2014 we had cash of $46 and $25, respectively, and working capital deficit of $3,026 and $2,767, respectively. The decrease in working capital was due to decrease in accounts receivable and an increase in accrued expenses. The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2015 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions.
Net cash provided by operating activities was $21 for the year ended December 31, 2015, as compared to net cash used in operating activities of $93 for the year ended December 31, 2014. The increase in net cash provided by operating activities was attributable to a decrease in accounts receivable and an increase in accounts payable.
There were no investing activities for the year ended December 31, 2015 or December 31, 2014. There was no cash used in investing activities because we did not add to plant and equipment.
There were no financing activities for the year ended December 31, 2015 or December 31, 2014. There were no capital raising transactions during the reporting period.
Since our inception, we have experienced negative cash flow from operations and expect to experience significant negative cash flow from operations in the future. In addition, we have $2,400 of original issue discount senior secured convertible notes that originally matured on December 31, 2014. On January 29, 2016, the Company entered into an agreement with holders of the notes to extend the maturity to June 30, 2016. Also on January 29, 2016, we entered into a Merger Agreement with Ecoark providing, among other things, for the acquisition of Ecoark by the Company in a share for share exchange pursuant to which it is contemplated that, immediately following the closing, Ecoark shareholders owned approximately 95% of the outstanding shares of the Company. The Company filed a 14A Proxy Statement to hold a shareholder meeting to vote on certain proposals to amend the Articles of Incorporation to increase of the authorized shares of common stock to 100,000,000 shares, to effect the creation of 5,000,000 shares of "blank check" preferred stock, to approve a reverse stock split of the common stock 1 for 250, and to change the name of the corporation to “Ecoark Holdings Inc.” After receiving the approval of the Company’s shareholders, the Merger was completed in March 2016. Under the January 29, 2016 agreement with their holders, the notes were converted to equity after the Merger was completed.
We will need to raise additional funds in the future so that we can expand our operations and repay our indebtedness due under the original issue senior secured notes. Therefore our continuation as a going concern is dependent on our ability to obtain necessary equity funding to continue operations. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, government grants or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our development plans and possibly cease our operations altogether.
The following management’s discussion and analysis addresses the financial condition and results of operations of Ecoark, Inc. and its consolidated subsidiaries. Consistent with the financial statements included in Section F below, no amounts relating to Magnolia Solar are included.
Ecoark Results of Continuing Operations
Revenues
Net sales for the year ended December 31, 2015 were $7,868 as compared to $6,017 for the year ended December 31, 2014. The 31% increase was related to expanded operations, including a significant increase in service revenues and product sales. Product sales of $5,167 in 2015 increased 18% from the $4,378 achieved in 2014. The increase was principally due to increased sales of Pioneer Products’ plastic products manufactured from recycled and other material. Revenue from services of $2,701 in 2015 increased 65% from the $1,639 recorded in 2014. Expansion of the 3D mapping, modeling and consulting business drove the increase in service revenues as Eco3D increased the number of employees and projects completed for customers.
Cost of Revenues and Gross Profit
Cost of revenues for the year ended December 31, 2015 was $6,138 as compared to $5,024 for the year ended December 31, 2014. The increase was directly related to the increase in revenues. The improvement in gross profit from $993 in 2014 to $1,730 was principally achieved as a result of higher margin service revenues. Services achieved a gross margin of 56% in both 2015 and 2014. The increase in those revenues resulted in an increase in total gross margin from 17% in 2014 to 22% in 2015. Margins for products were 4% or less.
Operating Expenses
The Pioneer Products operational activities described above required relatively limited home office support. Therefore, most of the operating expenses below were allocated to the services segment. The services segment includes activities relating to Intelleflex for which the Company has invested considerable resources for support and funding.
Salaries and Salary Related Costs
Salaries for the year ended December 31, 2015 were $3,791, up 34% from $2,836 for the year ended December 31, 2014. The increase was related to the expanded operations referred to above regarding the increase in sales and an increase in stock based compensation. In addition, a number of individuals became employees compared with previous contractor status.
Professional Fees and Consulting
Professional fees and consulting expenses for the year ended December 31, 2015 of $3,651, were down 31% from $5,311 incurred for the year ended December 31, 2014 as a result of the conversion of contractors to employees and a decrease in consulting expense.
General and Administrative
Other general and administrative expenses for the year ended December 31, 2015 were $1,636 in line with $1,630 for the year ended December 31, 2014.
Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31, 2015 was $1,226, compared to $1,708 for the year ended December 31, 2014. The 28% decrease resulted from certain customer list intangibles relating to Pioneer Products becoming fully amortized in September 2015 while 2014 included a full year of amortization.
Interest Expense
Interest expense, net of interest income, for the year ended December 31, 2015 was $785 as compared to $1,270 for the year ended December 31, 2014. The 38% decrease was a result of lower interest accruing on the related party debt in 2015 because of a decrease in interest rates.
Net Loss
Net loss for the year ended December 31, 2015 was $10,473 as compared to $14,264 for the year ended December 31, 2014. The $3,791 decrease in net loss was primarily from an increase of $737 in gross profit, a decrease in total operating expenses of $1,120, a decrease in interest expense of $485 and the $1,449 loss from discontinued operations in 2014 that did not exist in 2015.
In November 2014, Ecoark sold its subsidiary, SA Concepts. In the sale, Ecoark sold the net assets in exchange for 2,000,000 Class A shares of stock. The value of the treasury stock in this transaction of $616 was equal to the value of the net assets of SA Concepts sold. Therefore, there was no gain or loss attributable to the disposal of this subsidiary. The operations of SA Concepts are reflected as loss from discontinued operations in the consolidated statements of operations.
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.
To date we have financed our operations through sales of common stock and the issuance of debt.
At DecemberJune 30, 2019 and March 31, 2015 and December 31, 20142019, we had cash of $1,962$34 and $2,220,$244, respectively, and working capital deficitdeficits of $2,153$6,018 at June 30, 2019 and $6,636, respectively.$5,045 at March 31, 2019. The increase in working capital was principally due to the decrease in the current portion of long-term debt-related parties resulting from the conversion of debt to equity. EcoarkCompany is dependent upon raising additional capital from future financing transactions.
For the Three Months Ended June 30, 2019 and June 30, 2018
Net cash used byin operating activities was $7,671$973 for the yearthree months ended December 31, 2015,June 30, 2019, as compared to net cash used in operating activities of $8,012$1,913 for the yearthree months ended December 31, 2014.June 30, 2018. Cash used in operating activities is related to Ecoark’sthe Company’s net loss partially offset by non-cash expenses.expenses, including share-based compensation and depreciation, amortization and impairments.
Net cash provided by investing activities was $5 for the three months ended June 30, 2019, as compared to net cash used in investing activities of $46 for the three months ended June 30, 2018
Net cash provided by financing activities in 2019 were $758 and used in financing activities in 20152018 was $7,388, including $8,461$23. Cash provided by financing in 2019 includes $460 draw on the credit facility and $298 advanced from related parties.
At June 30, 2019, $500 of Ecoark Holdings’ convertible notes payable were due in July 2018 and were paid on July 2, 2018. Future minimum lease payments required under operating leases of continuing operations are $113.
Since our inception, the Company has experienced negative cash flow from operations and may experience significant negative cash flow from operations in the future. We will need to raise additional funds in the future to continue to expand the Company’s operations and meet its obligations. The inability to obtain additional capital may restrict our ability to grow and may reduce the ability to continue to conduct business operations as a going concern.
For the Years Ended March 31, 2019 and March 31, 2018
At March 31, 2019 and 2018 we had cash of $244 and $3,730, respectively, and a working capital deficit of $5,045 in 2019 compared with a working capital deficit of $433 at the end of 2018. The decrease in working capital is the result of the net cash used in operating activities, offset by the cash flows from financing activities and a reduction resulting from the issuancereclassification of common stock lessZest Labs inventory to property and equipment. The Company is dependent upon raising additional capital from future financing transactions.
Net cash used in operating activities was $9,040 for the year ended March 31, 2019, as compared to net repaymentscash used in operating activities of long-term debt$17,643 for the year ended March 31, 2018. Cash used in operating activities is related to the Company’s net loss partially offset by non-cash expenses, including share-based compensation and depreciation, amortization and impairments. The decrease in operating cash burn was impacted favorably by collections of $1,073. In 2014, $5,143receivables and lower cash used by discontinued operations as a result of concerted efforts to improve those operations prior to sale.
Net cash provided by investing activities was received$536 for the year ended March 31, 2019, as compared to $1,752 net cash provided for the year ended March 31, 2018. Net cash provided by investing activities in 2019 related to proceeds from the sale of commonSable assets and for 2018 related to the proceeds from the sale of Eco3d. Both 2019 and 2018 uses are related to purchases of property and equipment.
Net cash provided by financing activities in 2019 was $5,018 that included $4,221 (net of fees) raised via issuance of stock, $1,350 provided through the credit facility, offset by a $500 repayment of debt and $5,034 from net issuancespurchases of long-term debt. treasury shares of $53. This compared with 2018 amounts of $10,975 provided by financing, including $12,693 (net of fees) raised in private placement offerings, offset by purchases of treasury shares of $1,618 and repayment of debt to related parties of $100.
At March 31, 2019, $1,350 related to the $10,000 credit facility was due. Other commitments and contingencies are disclosed in Note 14 to the consolidated financial statements.
Since our inception, Ecoarkthe Company has experienced negative cash flow from operations and expects to experience significant negative cash flow from operations in the future. ItWe will need to raise additional funds in the future so that itwe can continue to expand its operations and repay its indebtedness. The inability to obtain additional capital may restrict itsour ability to grow and may reduce itsthe ability to continue to conduct business operations.
At December 31, 2015 maturities of Ecoark’s long-term debt-related parties and long-term debt of $4,504 are due in 2016 and thus are included in current liabilities.
From March 28, 2016 to April 28, 2016, we sold 4,336,625 shares to 214 accredited investors through the Private Offering, which raised a total of $17,347 which it is using to retire debt, make capital investments and for general working capital purposes.
Off-Balance Sheet Arrangements
As of DecemberJune 30, 2019, and March 31, 2015,2019, we had no off-balance sheet arrangements.
Recently IssuedCritical Accounting StandardsPolicies, Estimates and Assumptions
For information regarding the impact ofThere were updates recently issued which represent technical corrections to the accounting standards, seeliterature or application to specific industries or transactions that are not expected to have a material impact, if any impact, on the Company’s financial position, results of operations or cash flows.
Going Concern
In reading and understanding the Company’s discussion of results of operations, liquidity and capital resources, and the audited financial statements that follow, one should be aware of key policies, judgments and assumptions that are important to the portrayal of financial conditions and results. The Company’s continuing operations have not generated sufficient revenues and related cash flows to date to fund the Company’s operations. That raises a question as to whether we are a “going concern”. Because we have been successful at raising capital and have a substantial credit facility in place, we assume that we will continue operations and thus have not used liquidation accounting which would assume that liquidation was imminent.
The Company has experienced losses from operations resulting in an accumulated deficit of $117,532 since inception. The accumulated deficit together with losses of $1,646 for the three months ended June 30, 2019, and net cash used in operating activities in the three months ended June 30, 2019 of $973, have resulted in the uncertainty of the Company’s ability to continue as a going concern.
The Company has raised additional capital through various offerings in addition to a credit facility. The Company’s ability to raise additional capital through future equity and debt securities issuances is unknown. Obtaining additional financing and the successful development of the Company’s strategic plan to achieve profitability are necessary for the Company to continue operations. There can be no assurance that such capital will be available or on terms acceptable to the Company. The Company intends to further develop its product offerings and customer bases and has opportunities from the Trend Holdings acquisition. The Company’s plans to achieve profitability include evaluating the cost structure and processes of its operations, both at the margin and operating expense levels, as well as pursuing additional strategic acquisitions and dispositions. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern as determined by management. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the uncertainties.
Principles of Consolidation
The consolidated financial statements include the accounts of Ecoark Holdings and its direct and indirect subsidiaries, collectively referred to as “the Company”. All significant intercompany accounts and transactions have been eliminated in consolidation. Ecoark Holdings is a holding company that holds 100% of Ecoark and Magnolia Solar. Ecoark holds 100% of Eco360, Pioneer Products (which owned 100% of Sable), Zest Labs and, until April 2017, Eco3d. In March 2017 the Ecoark Holdings Board approved a plan to sell Eco3d, and the sale was completed in April 2017. Ecoark previously owned 65% of Eco3d and the remaining 35% interest was owned by executives of Eco3d until September 2016 when the executives’ 35% interest was acquired in exchange for 525 shares of Ecoark Holdings stock. In conjunction with the sale of Eco3d in April 2017, the 525 shares were reacquired by the Company and canceled.
In May 2018 the Ecoark Holdings Board approved a plan to sell key assets of Pioneer (including the assets of Sable) and Magnolia Solar. Relevant assets and liabilities were classified as held for sale and operations as discontinued in the consolidated financial statements. See Note 1 of the Company’s Condensed Consolidated Financial Statements for the Three Months Ended June 30, 2019.
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 (“Trend Holdings”) for the Company to ouracquire 100% of Trend Holdings pursuant to a merger of Trend Holdings with and into the Company (the “Merger”). The Merger was completed, and Trend Holdings is now included in the consolidated financial statements.
The Company applies the guidance of Topic 810 Consolidation of the 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.
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 September 2016, the 35% noncontrolling interest of Eco3d was acquired in exchange for 525 shares of Ecoark Holdings stock which eliminated the noncontrolling interest. On April 14, 2017, the Company sold the assets, liabilities and membership interests in Eco3d, and the 525 shares of Ecoark Holdings were returned as part of the sales proceeds and were subsequently canceled.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “Commission” or the “SEC”). It is management’s opinion that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.
Reclassification
The Company has reclassified certain amounts in the June 30, 2018 condensed consolidated financial statements to be consistent with the June 30, 2019 presentation. Reclassifications relating to the discontinued operations are described in Note 2. The reclassifications had no impact on net loss or net cash flows for the three months ended June 30, 2018.
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, 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.
Cash
Cash consists of cash, demand deposits and money market funds with an original maturity of three months or less. The Company holds no cash equivalents as of June 30, 2019. The Company occasionally maintains cash balances in excess of the FDIC insured limit. The Company does not consider this risk to be material.
Inventory
Inventory was stated at the lower of cost or market. Inventory cost was determined on average cost and at standard cost, which approximates average costs in accordance with ASC 330-10-30-12. Provisions were made to reduce slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values. The Company established reserves for this purpose. As of March 31, 2018, the inventory of Sable was included in assets held for sale. Effective April 1, 2017, the Company changed its inventory costing method at Sable from first-in first-out (“FIFO”) to average cost. FIFO costs approximated average cost. The change was made in conjunction with a system conversion that enabled the Company to move from a periodic to a perpetual inventory system. In accordance with ASC 250-10-45-11 through 45-13, management determined that the change was preferable because it provides better operational control and visibility into inventory levels and costs, and it facilitates cost analysis at a batch level that was not available previously. The effect of the change was not material to the Company’s consolidated financial statements for the yearperiod ended DecemberMarch 31, 2015,2018. As of March 31, 2018, the inventory of Zest Labs consisting of tags, readers, antenna, etc. was reclassified to property and equipment to reflect the use of the assets in the SaaS revenue model.
Property and Equipment and Long-Lived Assets
Property and equipment is stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to ten years for all classes of property and equipment, except leasehold improvements which are depreciated over the term of the lease, which is shorter than the estimated useful life of the improvements.
ASC 360 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has early adopted Accounting Standard Update (���ASU”) 2017-04 Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment effective April 1, 2017. The adoption of this ASU did not have a material impact on our consolidated financial statements.
The Company reviews recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets.
ASC 360-10 addresses criteria to be considered for long-lived assets expected to be disposed of by sale. Six criteria are listed in ASC 360-10-45-9 that must be met in order for assets to be classified as held for sale. Once the criteria are met, long-lived assets classified as held for sale are to be measured at the lower of carrying amount or fair value less costs to sell. The Company did consider it necessary to record impairment charges for equipment acquired as part of the Sable acquisition. As of June30, 2019 and March 31, 2019, the property and equipment of Sable was reclassified as assets held for sale and accordingly depreciation expense for Sable through May 2018 was included in this prospectus.the loss from discontinued operations. See Note 5 of the Company’s Condensed Consolidated Financial Statements (Unaudited) for the Three Months Ended June 30, 2019.
Intangible assets with definite useful lives are stated at cost less accumulated amortization and impairment. Intangible assets capitalized as of June 30, 2019 and March 31, 2019 represent goodwill, the valuation of the Company-owned patents, outsourced vendor relationships and non-compete agreements. See Note 6 of the Company’s Condensed Consolidated Financial Statements (Unaudited) for the Three Months Ended June 30, 2019.
These intangible assets were being amortized on a straight-line basis over their estimated average useful lives of thirteen and a half years for the patents, three years for outsourced vendor relationships and two years for non-compete agreements. Expenditures on intangible assets through the Company’s filing of patent and trademark protection for Company-owned inventions are expensed as incurred.
The Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers to be important which could trigger an impairment review include the following:
1. Significant underperformance relative to expected historical or projected future operating results;
2. Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and
3. Significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows. The Company tested the carrying value of its long-lived assets for recoverability during the three months ended June 30, 2019, and impairments were recorded during this period.
Advertising Expense
The Company expenses advertising costs, as incurred. Advertising expenses for the three months ended June 30, 2019 and 2018, which were nominal, are included in other general and administrative costs.
Software Costs
The Company accounts for software development costs in accordance with ASC 985-730 Software Research and Development, and ASC 985-20 Costs of Software to be Sold, Leased or Marketed. ASC 985-20 requires that costs related to the development of the Company’s productsbe capitalized as an asset when incurred subsequent to the point at which technological feasibility of the enhancement is established and prior to when a product is available for general release to customers. ASC 985-20 specifies that technological feasibility can be established by the completion of a detailed program design. Costs incurred prior to achieving technological feasibility are expensed. The Company does utilize detailed program designs; however, the Company’s products are released soon after technological feasibility has been established and as a result software development costs have been expensed as incurred.
Research and Development Costs
Research and development costs are expensed as incurred. These costs include internal salaries and related costs and professional fees for activities related to development. These costs relate to the Zest Data Services platform, Zest Fresh and Zest Delivery.
Subsequent Events
Subsequent events were evaluated through the date the consolidated financial statements were filed.
Shipping and Handling Costs
The Company reports shipping and handling revenues and their associated costs in revenue and cost of revenue, respectively. Shipping revenues and costs for the three months ended June 30, 2019 and 2018, were nominal and included in cost of product sales.
Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company early adopted effective April 1, 2017. No cumulative adjustment to accumulated deficit was required as a result of this adoption, and the early adoption did not have a material impact on our consolidated financial statements as no material arrangements prior to the adoption were impacted under the new pronouncement.
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 at a point in time depending on the evaluation of when the customer obtains control of the promised goods or services over the term of the agreement. For agreements where the software requires continuous updates to provide the intended functionality, revenue is recognized over the term of the agreement. For SaaS contracts that include multiple performance obligations, including hardware, perpetual software licenses, subscriptions, term licenses, maintenance 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. Contracts are typically on thirty-day payment terms from when the Company satisfies the performance obligation in the contract. In fiscal 2019 and the three months ended June 30, 2019, the Company did not have significant revenue from software license agreements.
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 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 incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained.
Revenue Recognition – Discontinued Operations
Product revenue for discontinued operations which is netted in loss from discontinued operations consists primarily of the sale of recycled plastics products by Pioneer and Sable. Contracts for products are for products held in inventory and typically are on thirty-day payment terms. Management’s evaluation of credit risk involves judgement and may include securing insurance coverage on the recoverability of the receivables. Revenues are recognized when obligations under the terms of a contract with the customer are satisfied and when control of the promised goods are transferred to the customer, typically when products are shipped to the customer. Expected costs of standard warranties and claims are recognized as expense.
For discontinued operations of Magnolia Solar, services contracts include research contracts for the government. The contracts define delivery dates for which the performance obligation will be satisfied over time. Revenue is recognized over time based on the output method to measure the Company’s progress toward complete satisfaction of a performance obligation.
Accounts Receivable and Concentration of Credit Risk
The Company considers accounts receivable, net of allowance for returns and 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.
Uncertain Tax Positions
The Company follows ASC 740-10 Accounting for Uncertainty in Income Taxes. This requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates their tax positions on an annual basis.
The Company files income tax returns in the U.S. federal tax jurisdiction and various state tax jurisdictions. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed.
Vacation and Paid-Time-Off Compensation
The Company follows ASC 710-10 Compensation – General. The Company records liabilities and expense when obligations are attributable to services already rendered, will be paid even if an employee is terminated, payment is probable, and the amount can be estimated.
Share-Based Compensation
The Company follows ASC 718 Compensation – Stock Compensation and has early adopted ASU 2017-09 Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting as of July 1, 2017. The Company calculates compensation expense for all awards granted, but not yet vested, based on the grant-date fair values. Share-based compensation expense for all awards granted is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate. The Company facilitates payment of the employee tax withholdings resulting from the issuances of these awards by remitting the employee taxes and recovering the resulting amounts due from the employee either via payments from employees or from the sale of shares issued sufficient to cover the amounts due the Company.
The Company measured compensation expense for its non-employee share-based compensation under ASC 505-50 Equity-Based Payments to Non-Employeesthrough March 31, 2019. The fair value of the options and shares issued is used to measure the transactions, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to expense, or to a prepaid expense if shares of common stock are issued in advance of services being rendered, and additional paid-in capital.
The Company adopted ASU 2016-09 Improvements to Employee Share-Based Payment Accounting effective April 1, 2017. Cash paid when shares were directly withheld for tax withholding purposes is classified as a financing activity in the statement of cash flows. There were no other impacts from this adoption.
In June 2018, the FASB issued ASU 2018-07 Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. The Company adopted ASU 2018-07 effective April 1, 2019. The adoption did not have a material impact on our consolidated financial statements.
Fair Value of Financial Instruments
ASC 825 Financial Instruments requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments: The carrying amount of cash, accounts receivable, prepaid and other current assets, accounts payable and accrued liabilities, and amounts payable to related parties, approximate fair value because of the short-term maturity of those instruments. The Company does not utilize derivative instruments. The carrying amount of the Company’s debt instruments also approximates fair value.
Leases
The Company followed ASC 840 Leases in accounting for leased properties through March 31, 2019. Effective April 1, 2019, the Company adopted ASC 842Leases.
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 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 basic weighted average number of common shares are used in the computations.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Management evaluates all of the Company’s financial instruments, including warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company generally uses a Black-Scholes model, as applicable, to value the derivative instruments at inception and subsequent valuation dates when needed. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is remeasured at the end of each reporting period. The Black-Scholes model is used to estimate the fair value of the derivative liabilities. Applying this accounting policy resulted in restatements of prior periods as more fully described in Note 3 of the Company’s Condensed Consolidated Financial Statements (Unaudited) for the Three Months Ended June 30, 2019.
Fair Value Measurements
ASC 820 Fair Value Measurements defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosure about fair value measurements. ASC 820 classifies these inputs into the following hierarchy:
Level 1 inputs: Quoted prices for identical instruments in active markets.
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.
Related-Party Transactions
Parties are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal stockholders of the Company, its management, members of the immediate families of principal stockholders of the Company and its management and other parties with which the Company may deal where one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all material related-party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as compensation or distribution to related parties depending on the transaction.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02 and later updated with ASU 2019-01 in March 2019 Leases (Topic 842). The ASU’s change the accounting for leased assets, principally by requiring balance sheet recognition of assets under lease arrangements. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. On adoption, the Company recognized additional operating liabilities of approximately $99, with corresponding right of use assets of $99 based on the present value of the remaining minimum rental payments under leasing standards for existing operating leases.
In June 2018, the FASB issued ASU 2018-07 Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent accounting for employee share-based compensation. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. The Company adopted ASU 2018-07 effective April 1, 2019. The adoption did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
There were updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
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 now consist of two segments, Trend Holdings and Zest Labs.
JOBS Act
Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
For as long as we remain an emerging growth company under the recently enacted JOBS Act, we will, among other things:
| be permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure; | ||
| ● | be entitled to rely on an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act; | |
| ● | be entitled to reduced disclosure obligations about executive compensation arrangements in our periodic reports, registration statements and proxy statements; and | |
| ● | be exempt from the requirements to seek non-binding advisory votes on executive compensation or golden parachute arrangements. |
Although we are still evaluating the JOBS Act, we currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company,” except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be materially and adversely affected.
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Ecoark Holdings, Inc.
Ecoark Holdings Inc. (“Ecoark Holdings”) is a Nevada corporation incorporated on November 19, 2007. Ecoark Holdings is an innovative emerging growthAgTech company focused on the developmentsolutions that reduce food waste and deploymentimprove delivered freshness and product margins for fresh and perishable foods for a wide range of business solutionsorganizations including growers, processors, distributors and products to the retail, agriculture, food service, commercial real estate and architecture, engineering and construction end markets.retailers. Ecoark Holdings has assembled a team and portfolio of proprietary, patented technologies to address the waste in operations, logistics and supply chain. Ecoark Holdings accomplishesaddresses this through twoits indirect wholly-owned operating subsidiaries, Ecoark,subsidiary: Zest Labs, Inc. (“Ecoark”Zest Labs” or “Zest”). The Company committed to a plan to focus its business on Zest Labs and divested non-core assets in 2019 that included assets of Pioneer Products, LLC (“Pioneer Products” or “Pioneer”) and Magnolia Solar, Inc. (“Magnolia Solar”). Further, EcoarkThose assets are reported as held for sale and their operations are reported as discontinued operations in the consolidated financial statements. The subsidiary Eco3d, LLC (“Eco3d”) was sold on April 14, 2017 and is also reported as held for sale and discontinued operations in the consolidated financial statements. All discontinued operations have been sold or ceased operations by June 30, 2019, so there are no remaining assets or liabilities of the discontinued operations. The Company has three operating entities: Intelleflex, Eco3D and Pioneer Products.13 employees of continuing operations as of the date of this filing.
Our principal executive officesOn September 26, 2017, the Company announced that its Board of Directors unanimously approved a new corporate strategy. The Company has transitioned from a diversified holding company into a company focused on its Zest Labs asset. The Company has divested all non-core holdings. In May 2018, the Ecoark Holdings Board approved a plan to sell key assets of Pioneer (including the assets of Sable) and Magnolia Solar. The sales were completed in 2019. Relevant assets and liabilities are located at 3333 Pinnacle Hills Parkway, Suite 220, Rogers, Arkansas 72758,classified as held for sale and our telephone number is (479) 259-2979. Our website address is http://ecoarkusa.com/. Our websiteoperations are classified as discontinued in the consolidated financial statements. The Company will be focusing on three separate areas: the primary focus will continue to be the commercialization of the Zest Fresh solution across the country and abroad. The next area will be on licensing, partnerships, or joint ventures to apply a branding of the information contained on,Zest Fresh certification to various perishable consumer goods and products. The final area will be to identify any bolt-on technologies or operations that can be accessed through, our website will not be deemedacquired to be incorporated by reference in,open up new sales and are not considered part of, this prospectus. You should not rely on any such information in making your decision to purchase our common stock.distribution channels for the Zest solution.
On DecemberMay 31, 2009, Ecoark Holdings, originally known as Mobilis Relocation Services, Inc. (“Mobilis”), entered into an Agreement of Merger and Plan of Reorganization with Magnolia Solar, Inc., a Delaware corporation and Magnolia Solar Acquisition Corp. Upon closing of2019, the transaction, under the Agreement of Merger and Plan of Reorganization, Magnolia Solar, Inc. became a wholly-owned subsidiary of Mobilis. Thereafter, Mobilis changed its name to Magnolia Solar Corporation. The name was later changed to Ecoark Holdings, Inc. as described below.
Acquisition of Ecoark, Inc.
Prior to the acquisition of Ecoark, Ecoark Holdings’ operations were through Magnolia Solar which operations are described below.
On January 29, 2016, Ecoark HoldingsCompany entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ecoark. PursuantTrend Discovery Holdings Inc., a Delaware corporation (“Trend Holdings”) for the Company to acquire 100% of Trend Holdings pursuant to a merger of Trend Holdings with and into the Company (the “Merger”). The Merger was completed on the May 31, 2019 and as agreed in the Merger Agreement, Ecoark merged with and into a subsidiary of Ecoark Holdings (the “Merger”). Ecoark and Magnolia Solar, Inc. continue as the subsidiaries and businesses of Ecoark Holdings.
Prior toCompany is the completion of the Merger on March 24, 2016,surviving entity in a special shareholder meeting on March 18, 2016, the following actions to amend the Articles of Incorporation were undertaken by Ecoark Holdings to:
After giving effect to the Merger and the issuanceseparate corporate existence of common stockTrend Holdings has ceased to the shareholders of Ecoark, the shareholders of Ecoark received 95.34% of the shares of Ecoark Holding’s common stock (27,696,066 shares out of 29,047,062 shares).exist.
TableTrend Holding’s primary asset is Trend Discovery Capital Management. Trend Discovery Capital Management manages several entities including Trend Discovery LP and Trend Discovery SPV I. Trend Discovery LP is a hybrid hedge fund with a since inception track record of Contentsoutperforming the S&P 500. Trend Discovery LP primarily invests in early-stage startups. In the near-term, Trend Discovery LP’s performance will be driven by its investment in Volans-i, a fully autonomous vertical takeoff and landing (“VTOL”) drone delivery platform. Trend Discovery LP currently owns approximately 1% of Volans-i, and has participation rights to future financings to maintain its ownership at 1% indefinitely. More information can be found at flyvoly.com.
Description of Business
Business ModelZest Labs
Ecoark Holdings
Ecoark Holdings operates through four subsidiaries:
Intelleflex®
Intelleflex's ZEST Data ServicesZest Labs offers freshness management solutions for fresh food growers, suppliers, processors, distributors, grocers and restaurants. Its Zest Fresh solution is a secure, multi-tenant cloud-based data collection platform for aggregatingpost-harvest shelf-life and real-time permission-based sharing and analysis of information. ZEST Fresh, a fresh foodfreshness management solution that utilizesimproves delivered freshness of produce and protein and reduces post-harvest losses at the ZEST Data Service platform,retailer due to temperature handling and processing by 50% or more by intelligently matching customer freshness requirements with actual product freshness. It focuses on threefour primary value propositions – operational efficiency, consistent food quality,freshness, reduced waste, and improved food safety. ZESTZest Fresh empowers workers with real-time analytic tools and alerts that improve efficiency while driving quality consistency through best practice adherence on everyat a pallet of delivered fresh food. ZESTlevel. Zest Labs also offers its Zest Delivery solution that provides real-time monitoring and control for prepared food delivery containers, helping delivery and dispatch personnel ensure the quality and safety of delivered food.
Zest Labs was previously known as Intelleflex Corporation. Effective on October 28, 2016, Intelleflex Corporation changed its name to Zest Labs, Inc. to align its corporate name with its mission and the brand name of its products and services.
The ZESTZest Fresh value proposition is to reduce fresh food loss by improving quality consistency. In the US groceryU.S. produce market, it is reported that roughly 30% of post-harvest fresh food is lost or wasted and therefore not consumed. Both fresh food producers and retailers bear significant expense when harvested food is either rejected due to early spoilage or reduced in value due to early ripening. IntelleflexZest Labs believes that a significant portion of this waste can be attributed to inconsistent quality or freshness based on variable post-harvest processing and handling. Fresh food producers and retailers manage food distribution and inventory based on the harvest date, with the assumption that all food harvested on the same day will have the same freshness. However, studies have shown that harvest conditions and post-harvest handling can have a significant effect on the actual remaining freshness and, if not properly accounted for, can result in food loss or spoilage ahead of expectations. ZESTZest Fresh empowers fresh food producers and retailers to significantly reduce the post-harvest loss by providing real timereal-time guidance to process adherence, intelligent distribution and best handling practices, therebywith a goal of providing significant financial savings to fresh food producers and retailers.
Zest Labs has developed the industry’s first freshness metric called the Zest Intelligent Pallet Routing Code (“ZIPR Code”). The ZIPR Code has three main components: Harvest Quality which sets total freshness capacity (for example, 12 days for strawberries), Handling Impact which reflects aging acceleration due to improper handling, and Future Handling which accurately reflects how the product will be handled (for example, store shelf temperature may be 40 degrees Fahrenheit instead of the ideal 34 degrees Fahrenheit).
ZESTZest Fresh is offered to fresh food producers, processors, distributors, restaurants and retailersgrocers with pricing based on the number of pallets managed by ZEST,Zest Fresh, typically from the field harvest through retail grocery delivery. The ZESTZest Fresh service includes a re-usable wireless Internet of Things (“IoT”) condition sensor device that travels with the pallet of fresh food from the field or processor through retail delivery, continuously collecting product condition data. The collected pallet product data is analyzed, using artificial intelligence-based predictive analytics in real time by the ZESTZest Fresh cloud application,cloud-based solution, with the fresh food producers and retailers accessing data through ZESTZest Fresh web and mobile applications. ZESTZest Fresh provides workers with real timereal-time feedback on the current handling or processing of each pallet, empowering best practice adherence to achieve maximum freshness. ZESTZest Fresh also provides real timedynamic updates as to actual product freshness for each pallet, enabling intelligent routing and inventory management of each pallet in a manner that ensures optimum delivered freshness. Zest Fresh also includes integrated blockchain support to grower and shipper customers via the Zest Fresh platform.
ZESTZest Labs’ Zest Delivery managessolution helps to manage prepared food delivery from the restaurant through to the customer. ZESTZest Delivery manages the delivery container environment, both monitoring and controlling the product condition. The value of ZESTZest Delivery is to manage prepared meals in an ideal state for consumption, while accommodating extended pre-staging or delivery times. Extended pre-staging times are associated with “instant delivery” services of prepared meals, where the meals are often pre-staged in a delivery area ahead of demand. While pre-staging enables fast demand response time, it can result in prepared meals being staged for extended periods. ZESTperiods, which can potentially impact quality, value and safety. Zest Delivery monitors and controls the delivery container environment to preserve the prepared meal in ideal, ready to consume condition. ZESTZest Delivery also provides the dispatcher with real timereal-time remote visibility to the condition of available meals and confirming quality prior to dispatch. ZESTZest Delivery provides automated, real timereal-time visibility for a very distributed fleet of drivers, reflecting prepared meal food safety, quality and availability. ZESTZest Delivery is offered to meal delivery companies based on the quantity of delivery containers and frequency of use.
Zest Labs currently holds rights to 67 U.S. patents (with additional patents pending), numerous related foreign patents, and U.S. copyrights relating to certain aspects of its Zest software, hardware devices including Radio-Frequency Identification (“RFID”) technology, software, and services. In addition, Zest Labs has registered, and/or has applied to register trademarks and service marks in the U.S. and a number of foreign countries for “Intelleflex,” the Intelleflex logo, “Zest,” “Zest Data Services,” and the Zest, Zest Fresh and Zest Delivery logos, and numerous other trademarks and service marks. Many of Zest Labs’ products have been designed to include licensed intellectual property obtained from third-parties. Laws and regulations related to wireless communications devices in the jurisdictions in which Zest Labs operates and seeks to operate are extensive and subject to change. Wireless communication devices, such as RFID readers, are subject to certification and regulation by governmental and standardization bodies. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications or delays in product shipment dates.
Although most components essential to Zest Labs’ business are generally available from multiple sources, certain key components including, but not limited to, microprocessors, enclosures, certain RFID or other wireless custom integrated circuits, and application-specific integrated circuits are currently obtained by Zest Labs from single or limited sources, principally in Asia.
Zest Labs is part of a very competitive industry that markets solutions to fresh food supply chain users, such as fresh food growers, producers and retailers. Many other companies that are both more established and command much greater resources compete in this market. While Zest Fresh and Zest Delivery offer new technical approaches and new user value, it remains uncertain if Zest Labs will gain sufficient adoption of its products to make them viable in the market. Further, it is unclear what industry competitors are developing that might address similar user needs. Zest Labs’ products provide a new approach for industry participants, and as with any new approach, adoption is uncertain as many in the industry can be slow to embrace new technology and/or new approaches. These market challenges can lead to extended sales cycles that may include extended pilot testing often at Zest Labs’ expense, for which the outcome remains unclear until the completion of each test. For these reasons, and others, forecasting new business adoption and future revenue can be very difficult and volatile. However, the Company believes that Zest Fresh offers fresh food retailers, growers, shippers, processors and distributors an opportunity to differentiate their businesses in ways that the shipment of canned and boxed food products cannot, as competition in the agriculture, grocery, food service and restaurant markets continues to accelerate.
Eco3D™Acquisition of 440 Labs
Eco3dOn May 18, 2017, the Company entered into an exchange agreement (the “Exchange Agreement”) with Zest Labs, 440labs, Inc., a Massachusetts corporation (“440labs”), SphereIt, LLC, a Massachusetts limited liability company (“SphereIt”) and three of 440labs’ executive employees. Pursuant to the Exchange Agreement, on May 23, 2017 the Company acquired all of the shares of 440labs in exchange for 300 shares of the Company’s common stock issued to SphereIt. 440labs is a services based company that utilizes LiDAR laser scanning technology fromcloud and mobile software developer which is now a subsidiary of Zest Labs. 440labs’ three executive employees signed employment agreements pursuant to capture existing conditions from natural or man-made structures by creating a 3d data point cloud. These point clouds represent highly accurate dimensional data clearly identifying the X, Y, and Z location from the scanner that emitted millions of points of light from a single position. Eco3d then scans the same subject area from different positions to provide even more 3d data. The raw data is registered/meshed together to create a federated data set that is then used to create 2d deliverables or 3d models.
This process literally represents the fastest and most accurate form of non-contact 3d measurement known to man-kind. The value proposition that Eco3d provides it utilizing this technology to ultimately save money on labor and materials expense as it relates to project costs. Secondary, but significant additional propositions include measuring at a distance to maintain the safetywhich each of the workforce; helping QA/QC the structure for overall asset management over the lifethree executive employees received 100 shares of the project; providing meta-dataCompany’s common stock and became employed by Zest Labs. One of those employees resigned, and that position was filled with a new employee.
The acquisition of 440labs in May 2017 allowed Zest Labs to be usedinternally maintain its software development and information solutions for cloud, mobile, and IoT applications. 440labs had been a key development partner with Zest Labs for more than four years prior to the May 2017 acquisition, contributing its expertise in the maintenance of the structure; providing virtual design validation;scalable enterprise cloud solutions and communicating the existing conditions to allow for prototype solutions.
Eco3d provides this measuring service throughout North America to any client who wants to improve their short term and long term operational efficiency. The primary markets are construction, manufacturing, real estate, retail, oil/gas, energy, high purity, and healthcare. All of these industries are at their infancy of utilizing this technology which also makes Eco3d, as the largest provider in America, their consultant on the integration of this new technology and proprietary processes. The revenue sources from these existing and target industries represent trillion dollar plus market opportunity. Furthermore, this technology will form the basis for the upcoming democratization of augmented reality and virtual reality. The opportunities for integration know no boundaries geographically, politically, or economically. As human beings we live in a 3 dimensional world and this is the fastest, least expensive, form or digitizing/computerizing technology.mobile applications.
Pioneer ProductsTrend Discovery Holdings, Inc.
Pioneer Products beganOn May 31, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Trend Discovery Holdings Inc., a Delaware corporation (“Trend Holdings”) for the Company to acquire 100% of Trend Holdings pursuant to a merger of Trend Holdings with and into the Company (the “Merger”). The Merger was completed as agreed in the Merger Agreement, the Company is the surviving entity in the Merger and the separate corporate existence of Trend Holdings has ceased to exist. Pursuant to the Merger, each of the 1,000 issued and outstanding shares of common stock of Trend Holdings was converted into 5,500 shares of the Company’s common stock. No cash was paid relating to the acquisition.
Discontinued Operations
Significant transactions related to discontinued operations include the following transactions.
Sale of Eco3d
On April 14, 2017, the Company sold the assets, liabilities and membership interests in Eco3d to a group led by creating new consumer products using plastic reclaimed from post-consumerexecutives of Eco3d after the Company’s Board concluded that Eco3d did not fit the future strategic direction of the Company. The Company received $2,029 in cash and retailer’s waste streams. One560 shares of these products is Pioneer Products’ “close looped” 45-gallon trash can. Pioneer Products generates revenue fromthe Company’s common stock that were held by executives of Eco3d, which shares were canceled. In accordance with ASC 205-20 and having met the criteria for “held for sale”, the Company reflected amounts relating to Eco3d as a disposal group classified as held for sale at March 31, 2017 and included them as part of discontinued operations for the all periods presented. There was no significant continuing involvement with Eco3d following the sale. Gain on the sale of products such as plastic trash cans to 3,700 retail stores, including the largest retailers$636 was recognized in the continental U.S. Pioneer Products’ competitors include large consumer products companies such as Rubbermaid and Hefty. A new product, office chairs, was introduced in 2016.Company’s quarter ended June 30, 2017.
Building on a platform of proven retail success, Pioneer Products now leverages its solidified reputation and strategic network by acting as a broker for other products and companies that fit into its brand portfolio. Pioneer owns direct vendor relationships and vendor numbers with some of the largest retailers in the U.S. This vendor number facilitates introduction of a new product to a retailer. Pioneer Products recently announced a new strategic alliance with a large distributor of family brands that strengthens its platform. Additionally, Pioneer’s offerings enable Ecoark to play a key role in supporting and making good on some of the world’s largest retailer’s goals of retail-level sustainability: reduction of waste within its supply chain and operations.Sable
On May 3, 2016, the Company entered into a share exchange agreement by and among the Company, Pioneer Products, Sable Polymer Solutions, LLC, was acquired by Ecoark Holdingsan Arkansas limited liability company (“Sable”), and Pioneer Products for 2,000,000the holder of all of Sable’s membership interests. The Company issued 2,000 shares of Ecoark Holdingsthe Company’s common stock.stock in exchange for all of Sable’s membership interests. Sable Polymer Solutions, LLC ishas since been a wholly-owned subsidiary of Pioneer Products. Sable Polymer Solutions specializes in In May 2018 the sale, purchaseEcoark Holdings Board approved a plan to sell Pioneer and processing of quality post-consumer and post-industrial plastic materials. It provides services to a variety of suppliers and customers throughout the plastics processing industry, from small extruders, molders and scrap collectors to multinational corporations. It has a reputation of consistent quality and service in the market place today.Sable.
Magnolia Solar Inc.On March 12, 2019 Sable sold substantially all of its assets other than cash and receivables to Kal-Polymers Americas, LLC (“Kal”) for $1,553, $825 of which was paid at closing and $726 was paid subsequent to March 31, 2019. Kal assumed the lease obligations of Sable, and the Company agreed to perform certain transition services for Kal for up to six months, principally accounting and systems support. That support has now been completed.
Magnolia Solar Inc. is principally engaged in the development and commercialization of its nanotechnology-based, high-efficiency, thin-film technology that can be deposited on a variety of substrates, including glass and flexible structures. Magnolia Solar believes that this technology has the potential to capture a larger part of the solar spectrum to produce high-efficiency solar cells, and incorporates a unique nanostructure-based antireflection coating technology to possibly further increase the solar cell's performance. If these goals are met, there is the potential of significantly reducing the cost per watt. Since its inception, Magnolia Solar, Inc. has not generated material revenues or earnings as a result of its activities.
Description ofIn May 2018 the Ecoark Holdings Board approved a plan to sell Magnolia Solar, Inc.and the sale was completed in May 2019.
Magnolia Solar Inc.’s (“Magnolia Solar”) mission is to commercialize its nanotechnology-based, high efficiency, thin film solar cell technology that can be deposited on glass and other flexible substrates to convert sun’s energy to electricity. This photovoltaic (PV) technology has the ability to capture a larger part of the solar spectrum to produce high efficiency solar cells, and incorporates a unique nanostructure-based antireflection coating technology to further increase the solar cell’s efficiency thereby reducing the cost per watt.
In addition to these developmental activities, Magnolia Solar also benefits from the critical technologies being developed by Magnolia Optical Technologies, Inc. (“Magnolia Optical”), a company controlled by two executive officers Ashok Sood and Yash Puri. Magnolia Optical has been at the forefront of pioneering the development of thin film, optical, and advanced solar cell technologies for high efficiency solar cells using nano-materials and technologies to use Ultraviolet, Visible and Infrared part of the electromagnetic spectrum for imaging sensors and solar cell applications for Defense and Terrestrial Application. Magnolia Optical Technologies, Inc., a Delaware Corporation, has been in business since May 2000 and is a government-approved contractor for advanced technology developments. Magnolia Optical has, to date, received over $13 million of funding support from Defense Advanced Research Projects Agency (DARPA) and other Department of Defense (DOD) agencies, NASA and NSF to fund the development of the advanced nanostructure-based technologies for optical and solar cell applications.Competition
Magnolia Solar currently licenses core technology underThe Company operates in markets for products and services that are highly competitive and face aggressive competition in all areas of their business.
The market for cloud-based, real-time supply chain analytic solutions—the market in which Zest Labs competes—is rapidly evolving. There are several new competitors with competing technologies, including companies that have greater resources than Ecoark Holdings, which operate in this space. Some of these companies are subsidiaries of large publicly traded companies that have brand recognition, established relationships with retailers, and own the manufacturing process.
Sales and Marketing
We sell our products and services principally through direct sales efforts and the utilization of third-party agents. Zest Labs has marketing operations and programs for demand generation, public relations, and branding/messaging.
Research and Development
We have devoted a substantial amount of our resources to software and hardware development from Magnolia Optical. Under the license, Magnolia Solar has been granted an exclusive, fully paid, royalty free, worldwide license to use the intellectual property of Magnolia Optical relating to the design and fabrication of thin-film solar photovoltaic solar cellsactivities in recent years, principally for the manufactureZest Labs initiatives. Ecoark Holdings believes that, analyzing the competitive factors affecting the market for the solutions and sale of thin-film photovoltaic solar cellservices its subsidiaries provide, its products and services. In consideration for the license grant, Magnolia Optical shareholders received, after giving effectservices compete favorably by offering integrated solutions to the Reverse Merger and Forward Split, 28,520 shares of common stock.customers. The licenseCompany has an initial term of ten years ending April 30, 2018 and shall automatically continue in effect thereafter unless terminated by either party. The license may be terminated for cause by either party.
Technology
Magnolia Solar has developed thin-film photovoltaic technology that includes the use of nanotechnology-based components to substantially enhance solar cell efficiency. This technology utilizes higher absorption of the solar spectrum to produce high-efficiency solar cells. The goal is to increase solar cell efficiency while using lower cost processes to minimize future production costs, with a goal of reaching less than one dollar per watt. Magnolia Solar plans to use low-cost substrates for solar cell fabrication that are substantially cheaper than conventional silicon substrates. Magnolia Solar plans to use either glass or polymer-based flexible substrates that are low cost and are available in large sizes, thereby bringing down the cost of thin film solar cells compared to those with silicon substrates.
Magnolia Solar has filed a series of U.S. utility and provisional patent applications. The utility patent applications claim the benefits of previously filed provisional applications. The utility and provisional patent applications filed over the past year detail a number of photovoltaic solar cell device designs and methods of manufacturing. The technologies related to these patent filings address the fundamental performance limitations in existing thin-film solar cells. The engineering employed in patent-pending technology is designed to increase the photovoltaic operating voltage while capturing a larger part of the solar spectrum, and the unique nanostructure-based optical coatings minimize reflection losses which enhances the light trapping within the photovoltaic devices. These technologies result in higher solar electric conversion efficiency by increasing both the voltage and current output of thin-film solar cells.
Government funding of some ofincurred research and development efforts imposed certain restrictions on the ability to commercialize resultsexpenses of $897 and could grant commercialization rights to the government. In some funding awards, the government is entitled to intellectual property rights arising from the related research. Such rights include a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced each subject invention developed under an award throughout the world by or on behalf of the government. Other rights include the right to require us to grant a license to the developed technology or products to a third party or, in some cases, if Magnolia Solar refuses, the government may grant the license itself, if the government determines that action is necessary because Magnolia Solar fails to achieve practical application of the technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give the United States industry preference. Accepting government funding can also require that manufacturing of products developed with federal funding be conducted$870 in the United States.three months ended June 30, 2019 and 2018, respectively, to develop its solutions and differentiate those solutions from competitive offerings. We incurred no capitalized software development costs in the three months ended June 30, 2019 and 2018.
Industry Overview and Market Opportunity
Solar electric power or photovoltaic (PV) technology is the conversion of sunlight directly into electricity. The solar cells available today use semiconducting materials (similar to those used in computer chips and flat panel displays) such as silicon. These cells are the basic building blocks of complete systems. To provide useful amounts of power, the cells are wired together in varying numbers to create solar modules (also called solar panels).
A typical rooftop residential system may have one or two dozen modules. PV converts sunlight into electricity, with no moving parts, consuming no fuel, and creating no pollution. It is a distributed energy resource that can improve grid reliability, lower distribution and transmission costs, and be sited at the point of use with minimal or no environmental impact. In 2012, the worldwide solar PV module production was slightly below 30 GW. About 85% of these are made from silicon.
Magnolia Solar Cell and Anti-Reflection Coating Approach
Energetic radiation from the sun, reaching the Earth’s surface, includes ultra-violet, infrared and visible light. Our thin film solar cell design is being designed to enhance absorption in the UV spectrum and will be able to provide electricity more efficiently in hazy weather and very hot days using IR energy. Magnolia Solar is developing high-efficiency, thin-film solar cells employing nanostructured-based materials that can be used for producing high performance solar panels. The proprietary technology incorporates nano-materials and technologies that were developed under sponsorship by NYSERDA, DARPA, NASA, and the US Department of Defense. Magnolia Solar utilizes a nanostructure-based approach in the development of high-efficiency thin film solar cells. The technology is designed to permit absorption across a broad spectrum of light.
Optical reflection losses limit the performance of a wide variety of photonic and photovoltaic devices. Magnolia Solar has demonstrated nanostructured optical coatings that can reduce reflection losses and enhance the performance of solar cells. Nanostructured optical coatings can be applied to the top surface of semiconductor solar cells to reduce reflection losses over a wide range of wavelengths and incident angles. Anti-reflection (AR) coatings are an indispensable component of solar cell devices to reduce or suppress reflection losses, thus increasing the amount of light entering the solar cells device and enhancing the power conversion efficiency. Magnolia Solar demonstrated antireflection coatings comprised of step-graded, nanostructured SiO2 have been shown to significantly increase the transmittance through the optical glass windows. The double-sided, nanostructured SiO2 coatings outperform conventional MgF2 coatings, achieving average transmittance values in excess of 98% over a broad spectrum and wide range of incident angles. The demonstrated ultra-high broadband performance of nanostructured SiO2 anti-reflection coatings can benefit high performance single- and multi-junction solar cells.
Light trapping can dramatically improve solar cell performance by increasing the optical path length of photons within the thin film absorber layers. To further enhance the performance of the thin film solar cell, the bottom contact should also reflect unabsorbed light back into the CIGS thin film solar cell. Internal reflectors and light trapping structures on the underside of a semiconductor structure can improve the performance of a variety of photovoltaic devices and thin-film solar cells. By incorporating a high-performance back reflector, unabsorbed photons can be recycled and scattered back into the active region of a solar cell device. Magnolia Solar is developing a conductive omnidirectional back reflector employing nanostructured indium tin oxide (ITO). This is intended to diffuse the light as well, maximize the optical path length in the absorber layers.
Magnolia Solar is developing next generation nanostructure based CIGS thin film solar cells. Our cell design takes advantage of quantum structures such as quantum dots to enhance the solar cell efficiency beyond what is achievable today in CIGS thin film solar cells. Conventional solar cell modules are both heavy and rigid, typically employing fragile silicon wafers and thick panes of protective glass. While these panels are suitable for fixed installations on rooftops and fields, flexible photovoltaic modules can provide a mobile source of electrical power for a wide variety of emerging applications in both terrestrial and space environments. Magnolia Solar is developing flexible solar cell technologies for mobile and portable power applications. The goal is to demonstrate solar cell efficiency in flexible CIGS greater than 20 percent.
Intellectual PropertySales and Marketing
Success depends,We sell our products and services principally through direct sales efforts and the utilization of third-party agents. Zest Labs has marketing operations and programs for demand generation, public relations, and branding/messaging.
Research and Development
We have devoted a substantial amount of our resources to software and hardware development activities in part, onrecent years, principally for the abilityZest Labs initiatives. Ecoark Holdings believes that, analyzing the competitive factors affecting the market for the solutions and services its subsidiaries provide, its products and services compete favorably by offering integrated solutions to maintain and protect proprietary technology and to conduct business without infringing on the proprietary rights of others. Magnolia Solar relies primarily on a combination of patents and trade secrets, as well as associate and third party confidentiality agreements, to safeguard intellectual property. Since January 2010 Magnolia Solarcustomers. The Company has filed several patent applications to protect inventions arising fromincurred research and development expenses of $897 and are currently pursuing patent applications$870 in the U.S. Five patents have been issued bythree months ended June 30, 2019 and 2018, respectively, to develop its solutions and differentiate those solutions from competitive offerings. We incurred no capitalized software development costs in the United States Patent Office. These patents are listed below:three months ended June 30, 2019 and 2018.
Remaining patent applications and any future patent applications might not result in a patent being issued with the scope of the claims Magnolia Solar seeks, or at all, and any patents Magnolia Solar may receive or have received may be challenged, invalidated, or declared unenforceable.
With respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, Magnolia Solar relies on, among other things, trade secret protection and confidentiality agreements to safeguard our interests. Magnolia Solar believes that many elements of the PV technology involve proprietary know-how, technology, or data that are not covered by patents or patent applications, including technical processes, equipment designs, algorithms, and procedures. Magnolia Solar has taken security measures to protect these elements. All research and development personnel have entered into confidentiality and proprietary information agreements with us. Magnolia Solar also requires business partners to enter into confidentiality agreements before Magnolia Solar discloses any sensitive aspects of our technology or business plans.
Magnolia Solar has not been subject to any material intellectual property claims.
Competition
Magnolia Solar is currently in the development stage and does not sell a finished product. Since the end product will provide an energy source to convert the renewable solar energy to electricity, Magnolia Solar will face competition from all forms of renewable energy technologies, including wind, hydropower, geothermal, biomass, and tidal technologies, as well as from other approaches to convert sun light to electricity. There is intense competition in the renewable energy market, specifically in the solar photovoltaic sector. There are already many established companies that sell solar cells and modules. During 2015, Magnolia Solar estimates that there were several hundred manufacturers of solar cells and modules with aggregate installed capacity exceeding global demand. This had the result of a significant drop in the prices of solar modules throughout the year. One of the principal drivers of competition is price per watt, which is a function of the underlying technology and production capacity. In addition, some sovereign nations actively support competitors located in those countries. This allows competitors from those countries to sometimes price finished products below their costs. While some countries are taking steps to offset these subsidies by imposing tariffs on imports, the global competition remains very intense. Success in this highly competitive environment will depend on attaining high efficiencies at low costs, without the use of sustained government subsidies.
Customers
Magnolia Solar is still in the development stage and does not presently have any customers. Magnolia Solar has used samples of anti-reflection coatings for evaluation. Magnolia Solar continues to pursue establishing relationships with various companies and explore collaborations with them. As Magnolia Solar exits the development stage, which is expected to occur in 2016, and commence the production of solar cells and/or anti-reflective coatings, Magnolia Solar expects to target federal civilian and military agencies and commercial customers including large corporations, non-governmental organizations, universities and solar powered electric generating stations.
Raw Materials
Magnolia Solar is developing high efficiency solar cells for defense and commercial applications. Under the Air Force Small Business Innovative Research (SBIR) Programs it has demonstrated thin film flexible solar cells using GaAs (Gallium Arsenide) based technology with very high efficiencies. Magnolia Solar is also developing nanostructured optical coating technology to improve the solar cell performance. The raw materials for this effort are glass, quartz, silicon wafers and nitrogen gas. The raw materials for growth and fabrication of these solar cells and the nanostructured optical coatings are also commonly used in the semiconductor industry and there are several suppliers of these materials and gases in the United States and overseas.
Environmental, Health and Safety Regulations
Solar Energy Industry
Magnolia Solar believes that economic and national security issues, technological advances, environmental regulations seeking to limit emissions by fossil fuel, air pollution regulations restricting the release of greenhouse gasses, aging electricity transmission infrastructure and depletion and limited supply of fossil fuels, has made reliance on traditional sources of fuel for generating electricity less attractive. Government policies, in the form of both regulation and incentives, have accelerated the adoption of solar technologies by businesses and consumers. For example, in the U.S., California now requires that 33% of the retail demand for electricity provided by utilities must be procured from renewable energy sources by 2020.
Government Subsidies and Incentives
Various subsidies and tax incentive programs exist at the federal and state level to encourage the adoption of solar power including capital cost rebates, performance-based incentives, feed-in tariffs, tax credits and net metering. Capital cost rebates provide funds to customers based on the cost of size of a customer's solar power system. Performance-based incentives provide funding to a customer based on the energy produced by their solar system. Under a feed-in tariff subsidy, the government sets prices that regulated utilities are required to pay for renewable electricity generated by end-users. The prices are set above market rates and may be differentiated based on system size or application. Feed-in tariffs pay customers for solar power system generation based on kilowatt-hours produced, at a rate generally guaranteed for a period of time. Tax credits reduce a customer's taxes at the time the taxes are due. Under net metering programs, a customer can generate more energy than used, during which periods the electricity meter will spin backwards. During these periods, the customer “lends” electricity to the grid, retrieving an equal amount of power at a later time. Net metering programs enable end-users to sell excess solar electricity to their local utility in exchange for a credit against their utility bills. Net metering programs are usually combined with rebates, and do not provide cash payments if delivered solar electricity exceeds their utility bills. In addition, several states have adopted renewable portfolio standards, which mandate that a certain portion of electricity delivered to customers come from a set of eligible renewable energy resources. Under a renewable portfolio standard, the government requires regulated utilities to supply a portion of their total electricity in the form of renewable electricity. Some programs further specify that a portion of the renewable energy quota must be from solar electricity. Since Magnolia Solar is still in the development stage, and products are not yet ready to benefit from any of these programs.
Despite the benefits of solar power, there are also certain risks and challenges faced by solar power. Solar power is heavily dependent on government subsidies to promote acceptance by mass markets. Magnolia Solar believes that the near-term growth in the solar energy industry depends significantly on the availability and size of these government subsidies and on the ability of the industry to reduce the cost of generating solar electricity. The market for solar energy products is, and will continue to be, heavily dependent on public policies that support growth of solar energy. There can be no assurances that such policies will continue. Decrease in the level of rebates, incentives or other governmental support for solar energy would have an adverse effect on the ability to sell products.
Description of Ecoark
Sales and Marketing
We sell our products and services principally through direct sales efforts and indirectly through distributorsthe utilization of third-party agents. Zest Labs has marketing operations and resellers. Virtually all of our sales to-date have been derived from our direct sales efforts. However, we continue our efforts to establish a network of indirect sales channels.programs for demand generation, public relations, and branding/messaging.
Research and Development
We have devoted a substantial amount of our resources to software and hardware development activities in recent years. Total research and development expensesyears, principally for the years ended December 31, 2015 and 2014 were $1,114 and $1,053, respectively, and $752 in the first quarter of 2016. We incurred no capitalized software development costs in the years ended December 31, 2015 and 2014 nor in 2016 to date.
Competition
The market for cloud-based, real-time supply chain analytic solutions is rapidly evolving with new competitors with competing technologies, including companies that have greater resources than Ecoark. Some of these companies have brand recognition, established relationships with retailers, and own the manufacturing process. There are currently hundreds of sustainability programs available in the market. These programs are offered through retailers, manufacturers, and service providers.Zest Labs initiatives. Ecoark Holdings believes that, analyzing the competitive factors affecting the market for the solutions and services its solutions,subsidiaries provide, its products and services compete favorably by offering an integrated supply chain solution, with other companies offering real-time supply chain analytic solutions.
solutions to customers. The Company has incurred research and development expenses of $897 and $870 in the three months ended June 30, 2019 and 2018, respectively, to develop its solutions and differentiate those solutions from competitive offerings. We incurred no capitalized software development costs in the three months ended June 30, 2019 and 2018.
Intellectual Property
Ecoark and its subsidiaries haveZest Labs has had 6267 patents issued by the United States Patent and Trademark Office, with anand additional 17 patent applications are currently pending.
EmployeesAdditional information on our services and products is discussed under the section of this report entitled “Business.”
We had 91 full-time employees as of July 1, 2016, a substantial majority of whom are non-management personnel. None of our employees are represented by a labor union. We have not experienced any work stoppages and believe that we have satisfactory employee relations. BOARD OF DIRECTORS
| Name | Age | Positions Held with the Company | Company Since | |||
| Randy S. May | 55 | Chairman of the Board and Chief Executive Officer | 2016* | |||
| John P. Cahill | 64 | Director | 2016 | |||
| Peter Mehring | 57 | President, CEO and President of Zest Labs, Inc. and Director | 2017 | |||
| Gary Metzger | 67 | Lead Director | 2016* | |||
| Steven K. Nelson | 61 | Director | 2017 | |||
| Michael Green | 64 | Director | 2017 |
| * | Messrs. May and Metzger served on the board of directors of Ecoark, Inc. from 2011 and 2013, respectively, until it effected a reverse acquisition of Ecoark Holdings, Inc. (“Ecoark” or “the Company”, formerly known as Magnolia Solar Corporation) on March 24, 2016. Messrs. May and Metzger joined the Board effective on April 11, 2016. |
Government Regulation
The Company is subject to lawsAll directors shall serve until the 2019 annual meeting of stockholders and regulations affecting its operations in a numberuntil successors are duly elected or until the earliest of areas. These U.S. and foreign laws and regulations affect the Company’s activities including, but not limited to, in areas of labor, advertising, digital content, consumer protection, real estate, billing, e- commerce, promotions, quality of services, telecommunications, wireless communications and media, television, intellectual property ownership and infringement, tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, environmental, health and safety.
By way of example, laws and regulations related to wireless communications in the many jurisdictions in which the Company operates are extensive and subject to change. Such changes could include, among others, restrictions on the production, manufacture, distribution and use of devices. These devices are also subject to certification and regulation by governmental and standardization bodies. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications,their removal or delays in product shipment dates, or could preclude the Company from selling certain products.
Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation, could individually or in the aggregate make the Company’s products and services less attractive to the Company’s customers, delay the introduction of new products in one or more regions, or cause the Company to change or limit its business practices. The Company has implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Company’s employees, contractors, or agents will not violate such laws and regulations or the Company’s policies and procedures.
Magnolia Solar leases its Woburn, Massachusetts headquarters. Ecoark does not own any properties. It currently leases office and production space at the following locations: Rogers, Arkansas; Phoenix, Arizona; Salt Lake City, Utah; Flowery Branch, Georgia; Albany, New York and San Jose, California. The current property leases are considered adequate for its operations.
Ecoark Holdings, Ecoark and Magnolia Solar, Inc. are not parties to any lawsuit or administrative proceeding as of the date hereof. Its management is not aware of any lawsuits or administrative proceedings that are threatened or anticipated, and we are not considering the institution or prosecution of any legal proceeding as of the date hereof.
Directors and Executive Officers
The following table sets forth the name, age and position of each of our directors and executive officers as of July 1, 2016.
| Name | Age | Position | Year First Elected Director | |||
| Directors | ||||||
| Randy May | 52 | Chief Executive Officer and Chairman of the Board | 2016 | |||
| Yash Puri | 68 | Chief Financial Officer and Director | 2009 | |||
| Greg Landis | 54 | Secretary and Director | 2016 | |||
| Gary Metzger | 64 | Director | 2016 | |||
| John P. Cahill | 57 | Director | 2016 | |||
| Terrence D. Matthews | 57 | Director | 2016 | |||
| Charles Rateliff | 63 | Director | 2016 |
The following includes a brief biography for each of our directors and executive officers, with each director biography including information regarding the experiences, qualifications, attributes or skills that caused our Board of Directors to determine that each member of our Board of Directors should serve as a director as of the date of this prospectus.resignation. There are no family relationships among any of ourthe directors or executive officers.
Directors
Randy S. May, Chief Executive Officer and Chairman of the BoardMay.
Ecoark, Inc. was incorporated on November 28, 2011. Since then, Randy Mr. May has served as CEO and Chairman of the Board of Ecoark Holdings, Inc. As CEO, Randy leads a strong management team that is workingsince March 2016 and served as Chief Executive Officer of the Company from March 2016 through March 28, 2017 and then from September 21, 2017 to deliver Ecoark’s missionthe present. He previously served as chairman of sustainable solutions throughthe board of directors and as chief executive officer of Ecoark, Inc. from its subsidiaries and strategic partners. Under his leadership, Ecoark has completed three strategic acquisitions since 2012. Randyincorporation until its reverse acquisition with Magnolia Solar in March 2016. Mr. May is a 25-year retail and supply-chain veteran with extensive experience in marketing, operational and executive roles.
Prior to Ecoark, RandyMr. May held a number of roles with Wal-Mart Stores, Inc. (“Walmart”), the world'sworld’s largest retailer based in Bentonville, Arkansas. From 1998-2004 Randy1998 to 2004, Mr. May served as Divisional Manager for half the United States for one of such company’sWalmart’s specialty divisions. There,divisions, where he was responsible for all aspects of strategic planning, finance, and operations for more than 18001,800 stores. He had complete P&Lprofit and loss responsibility for more than $4 billion dollars of sales at the time. Under Randy’sMr. May’s leadership, the business grew sales and market share in a strong competitive market. As founder of EcoarkMr. May’s qualifications and Ecoark’s primary innovator, it is essentialbackground that qualify him to have Mr. Mayserve on the Board include his strong managerial and leadership experience, his extensive knowledge of Directors.
Dr. Yash R. Puri, Chief Financial Officerstrategic planning, finance and Director
Dr. Yash R. Puri was appointed our Executive Vice President, Chief Financial Officer and as a Director on December 31, 2009. He brings many years of photovoltaic technology and applications experience both in the private sector and in academia. Dr. Puri brings experience in startup environment and growth management to the Magnolia team.
Previously from 1997 until 1999 Dr. Puri was VP of Finance for GT Equipment Technologies, Inc., (presently known as GT Advanced Technologies, Inc., NASDAQ: GTAT), equipment manufacturer serving the semiconductor and the photovoltaic industries. He helped this high technology startup, formed in 1994, to grow to revenue of about $20 million. The company won many rewards and much recognition; it was a New England finalist in the Ernst & Young Entrepreneur of the Year award. In this position, he was actively involved in running a high-technology business, and he successfully negotiated a $3.5 million line of credit with a major bank, established an audit relationship with one of the big-five accounting firms, established a foreign sales corporation, implemented a R&D credit program to reduce tax liabilities, and established company-wide management software to integrate manufacturing and financial operations. Near the end of his term there, he also successfully negotiated the company’s first subordinated debt issue.
Until recently, Dr. Puri was also a Professor of Finance and Chairman of the Finance Department at the University of Massachusetts Lowell. Dr. Puri was Principal Investigator of a photovoltaic commercialization projectoperations, as well as several other grants, and has been a director of a technology commercialization program for engineering students, Chairman ofhis ability to guide the Management and Finance Department, and acting Associate Dean. In these positions, he successfully managed several externally funded projects and developed many years of experience in technology and growth management.
Dr. Puri holds a B.S. in Physics, a M.S. in Solid State Physics, and a M.B.A. from the University of Delhi. He also holds a M.B.A. in Finance and a D.B.A. in International Business from Indiana University, Bloomington. He has published many papers and has made numerous conference presentations.
As a co-founder of our subsidiary, Magnolia Solar, and many years of financial expertise in the photovoltaic industry, Dr. Puri’s experience and qualifications are essential to the Board of Directors.Company.
Greg Landis:John P. Cahill.
Mr. LandisCahill has served on the Board of Directors of Ecoark since 2011. Mr. Landis is a Certified Public Accountant and, since August 2009, has served as the principal of the accounting firm of Landis & Associates, PLLC in Bentonville, Arkansas. Mr. Landis is licensed as a CPA in Arkansas and is a member of the American Institute of Certified Public Accountants and the Arkansas Society of Certified Public Accountants. Previously, Mr. Landis has served as the Chief Financial Officer of banks in Kansas, Arkansas and Texas including organizations with over $2 billion in assets. Prior to these positions, he was a manager in the largest CPA firm in Kansas. Mr. Landis graduated from Wichita State University in 1985 with a Bachelor’s degree in Business Administration and a major in Accounting.
Gary Metzger:
Mr. Metzger has served on the Board of Directors of Ecoark since 2013. Mr. Metzger offers 40 years of product development, strategic planning, management, business development, and operational expertise. He had served as an executive at Amco International, Inc. and Amco Plastics Materials, Inc., where in 1986 he was named President for 24 years until Amco was sold to resin distribution giant Ravago Americas in December of 2011 at which time, he retired until joining the board of Ecoark. Mr. Metzger was co-owner of Amco Plastics Materials, Inc.
Mr. Metzger leadership and knowledge of manufacturing companies are an asset to the Board of Directors. In addition to his leadership functions, Mr. Metzger spearheaded research and development for recycled polymers, new alloy and bio-based polymer development, and introducing fragrance into polymer applications. He also developed encrypted item level bar code identification technology, anti-counterfeiting technologies, and antimicrobial technologies.
John P. Cahill:
May 2016. Mr. Cahill is currently Chief of Staff and Special Counsel to the Archbishop of New York. He has held this position since April of 2019. Previously he was Senior Counsel at the law firm of Norton Rose Fulbright (formerly Chadbourne & Parke LLPLLP) and has served in that capacity fromsince 2007. He is also a Principalprincipal at the Pataki-Cahill Group LLC, a strategic consulting firm focusing on the economic and policy implications of domestic energy needs, which he co-founded in March 2007. He served in various capacities in the administration of the Governor of New York, George E. Pataki (fromfrom 1997 to 2006),2006, including Secretary and Chief of Staff to the Governor (2002from 2002 to 2006).2006. He also serves on the board of directors of Sterling Bancorp, Inc., a bank holding company tradedlisted on the New York Stock Exchange. HisExchange (“NYSE”). Mr. Cahill’s extensive experience as an attorney in government and in business, as well as his extensive knowledge of and high-level experience in energy and economic policy, qualifies him as a member of the board.Board.
Terrence D. Matthews:Peter Mehring.
Mr. MatthewsMehring has beenserved as the Chief Executive Vice President of JB Hunt Transport Services Inc.Officer and President of their Intermodal segmentEcoark’s subsidiary, Zest Labs, Inc. since January 1, 2012. Mr. Matthews started with JB Hunt in 1986 where he was instrumental in the start-up of the Automotive Division. In 1989, he was responsible for the formation of the International Division overseeing operations in Canada2009 and Mexico. From 1994 to 1996, he was appointed President of TMM/Hunt in Mexico City overseeing J.B. Hunt's Mexican joint venture. Returning to J.B. Hunt's corporate office in Lowell, Arkansas in 1996, Mr. Matthews was appointed to positions of increasing responsibility until appointed to the position he now holds. Mr. Matthew’s expertise in the logistics and the supply chain qualifies him to serve asbecame a member of the board.
Charles Rateliff:
Mr. Rateliff retiredDirectors in 2005 from Walmart Stores Inc., as a Senior Vice President after a twenty-five year career. Since then, he has been an independent consultant for private investment firms. After receiving an MBA from the University of Arkansas, Mr. RateliffJanuary 2017. He was hired as an internal auditor for Walmart and within five years was promoted to assistant treasurer and treasurer. Over the course of Mr. Rateliff’s career at Walmart he worked across different departments including compliance, risk management, profit sharing and associate benefits. His financial expertise and broad business knowledge highly qualify him as a board member for our Company.
Significant Employees
Dr. Ashok K. Sood, President
Dr. Ashok Sood held the roles of President, Chief Executive Officer and as a Director of Magnolia Solar since its inception. Prior to joining Magnolia Solar, Dr. Sood had over 35-years’ experience in developing and managing solar cells, optical, and optoelectronics technology and products for a start-up company and several major corporations, including Lockheed-Martin, BAE Systems, Loral, Honeywell, and Mobil-Tyco Solar Energy Corporation ( Joint Venture between Mobil Oil and Tyco). Dr. Sood was instrumental in development and managed optical and optoelectronics technology/ Programs.
Recently, Dr. Sood has managed the development of new technologies for anti-reflective coatings for solar cells and defense applications. He has also been actively engaged in working with several solar cell technologies that broaden the solar spectrum absorption and improve both voltage and current output of the cells to enhance their efficiency. Previously, he has been leading design and development of optoelectronics devices using CdS, CdTe, HgCdTe, GaN, AlGaN, InGaN and ZnO for various defense applications, solar cells for space, and commercial applications. Dr. Sood has led many efforts resulting in DoD/NASA programs developing the technology / products and supporting their transition to manufacturing. He also led various industry and university teams bridging centers of excellence across the United States with industry led programs.
Since joining Magnolia, Dr. Sood has focused his efforts on using nanotechnology for developing high performance thin film detectors and solar cells. His understanding of technology and funding opportunities is an asset to Magnolia Solar.
Dr. Sood received his Ph.D. and M.S. in Engineering from the University of Pennsylvania and has an M.S. and a B.S. in Physics (Honors) from Delhi University in India. At the University of Pennsylvania, he attended Physics courses given by two Nobel Laureates. His Ph.D. dissertation was on the study of optoelectronic properties of PbS/CdS for detector and laser applications in the visible to near infrared spectral bands. Dr. Sood has also taken several management courses and also attended professional development programs organized by the Wharton School at the University of Pennsylvania.
Dr. Sood is a member of IEEE and the SPIE. He has chaired sessions on optical and nanotechnology at conferences of those organizations. He has also been on several expert panels for future direction of thin-film solar cells.
Roshan Weerasinghe – Chief Operations Officer
Mr. Weerasinghe started with Ecoark in 2014 and was promoted to Chief Operations Officer in 2015. He has experience that spans over 18 years at Wal-Mart, Ingersoll Rand Asia Pacific and Climate Control Technologies. Prior to joining Ecoark, he was the Senior Director of Compliance and Food Safety for Walmart China, working out of an office in Shenzhen, China. In 2011 and 2012, Mr. Weerasinghe had his own consulting business advising big box and small regional retailers.
He is an innovative, assertive and goal oriented executive who offers a distinguished background of successfully propelling quality programs and initiatives that spur operational growth and profitability. Mr. Weerasinghe has excellent cross-cultural communication skills honed through years of experience operating in diverse countries including United States, China, Brazil, India, Thailand, Malaysia, Mexico, and Vietnam.
Troy Richards – Chief Administrative Officer
Mr. Richards has served as an advisor to the Company since 2013. He became an employee in June 2016 serving as Chief Administrative Officer. Mr. Richards has extensive management and systems experience which includes 25 years as a franchisee of the Wendy’s Company. At the height of the business, Richard had over 400 employees throughout the state of Arizona and owned and operated over 30 restaurants.
Mr. Richards actively serves on the foundation board of the Translational Genomics Research Institute (“TGen”) and has been involved in TGen’s growth in many areas, including advanced adrenal cancer research and institution-wide marketing. Mr. Richards received the Karl Eller Fellowship Business Award at the University of Arizona. Other past recipients include the current governor of Arizona.
Peter Mehring - President, Intelleflex
Mr. Mehring serves aselected President of Intelleflex Corporation since July 2009. PeterEcoark on September 25, 2017. Mr. Mehring brings extensive experience in engineering, operations and general management at emerging companies and large enterprises. As PresidentChief Executive Officer of Intelleflex,Zest Labs, Inc., he has led the company’sCompany’s efforts in pioneering on-demand data visibility and condition monitoring solutions for the fresh produce and pharmaceutical markets.
Hemarket. Prior to joining Zest Labs, Inc., from 2004 to 2006, Mr. Mehring was formerlythe Vice President of Macintosh hardware group at Apple Computer, Senior Vice President of Engineering at Echelon, and founder, General Manager and Vice President of R&D at UMAX. Mr. Mehring held Engineering Management positions at Radius, Power Computing Corporation, Sun Microsystems and Wang Laboratories. Mr. Mehring’s knowledge and experience in engineering, operations, management, product and service development and technological innovation are among the many qualifications that have led to the conclusion that Mr. Mehring is qualified to serve on the Board.
Ken Smerz –Gary Metzger. Mr. Metzger has served on the Board of Directors since March 2016 and served on the Board of Directors of Ecoark, Inc. from 2013 until its reverse acquisition with Magnolia Solar in March 2016. Mr. Metzger offers 40 years of product development, strategic planning, management, business development and operational expertise to the Board. He served as an executive at Amco International, Inc. and Amco Plastics Materials, Inc., where in 1986 he was named President Eco3Dand served in such role for 24 years until Amco was sold to global resin distribution company, Ravago Americas, in December 2011, where he remains a product developer and product manager. Mr. Metzger was co-owner of Amco Plastics Materials, Inc. and Amco International. Mr. Metzger’s leadership and knowledge of manufacturing companies, product development, strategic planning, management and business development are an asset to the Board of Directors. In addition to his leadership functions, Mr. Metzger spearheaded research and development for recycled polymers, new alloy and bio-based polymer development, and introduced fragrance into polymer applications. He also developed encrypted item level bar code identification technology, anti-counterfeiting technologies, and antimicrobial technologies. Taken together, these are among the many qualifications and the significant experience that have led to the conclusion that Mr. Metzger is qualified to serve on the Board.
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Steven K. Nelson. Mr. Nelson has served on the Board of Directors since April 2017. Since 2015, Mr. Nelson has been a lecturer for the Department of Accounting at the University of Central Arkansas. In 2015, Mr. Nelson retired as Vice-President, Controller of Dillard’s, Inc., where he was responsible for administering all aspects of financial accounting and reporting. Mr. Nelson began his career in 1980 as a staff accountant for Ernst & Young and attained the title of audit manager by the time he left the firm in 1984. Mr. Nelson maintains an active license as a Certified Public Accountant (“CPA”) in the State of Arkansas. Mr. Nelson’s 35-year career as a CPA and his extensive experience as controller of a publicly traded company qualify him to serve on the Board and its Audit Committee. His broad experience as the former controller of a public company uniquely qualifies Mr. Nelson to advise Ecoark not only on general accounting and financial matters but also on various technical accounting, corporate governance and risk management matters that the Board may address from time to time. He possesses key insight on financial reporting processes and external reporting issues. The Board has determined that Mr. Nelson qualifies as an “audit committee financial expert,” as defined by the rules of the SEC.
Michael Green.Mr. SmerzGreen retired in June 2015 as the vice president for IBM’s Strategic Services North America and continued to serve as a consultant to IBM through April 2017. Mr. Green served in several leadership roles over his 35-year career at IBM, including serving as the general manager of IBM North America’s strategic outsourcing services; vice president of healthcare and insurance for IBM global services; and vice president of strategic services for Latin America, among other roles. Mr. Green’s extensive leadership experience at IBM, including his work with IBM’s blockchain technology, are among the many attributes that uniquely qualify Mr. Green to serve as a member of the Board.
EXECUTIVE OFFICERS AND MANAGEMENT
Set forth below is biographical information with respect to each current executive officer of the Company. Mr. May and Mr. Mehring also serve as directors of the Company. Officers are elected by the board of directors to hold office until their successors are elected and qualified.
| Name | Age | Positions Held with the Company | ||
| Randy S. May | 55 | Chairman of the Board and Chief Executive Officer | ||
| Peter Mehring | 57 | President, CEO and President of Zest Labs, Inc. and Director | ||
| William B. Hoagland | 37 | Principal Financial Officer |
Jay Oliphant resigned as Principal Financial Officer and Principal Accounting Officer on May 15, 2019. Pursuant to a Separation Agreement with the Company (the “Separation Agreement”), Mr. Oliphant received his normal monthly salary through May 15, 2019. In connection with his resignation, Mr. Oliphant entered into a consulting agreement with the Company for a term of six months beginning May 16, 2019. Under the consulting agreement, Mr. Oliphant has agreed to assist the Company with financial reporting and related matters. William B. Hoagland was appointed as the Principal Financial Officer to succeed Mr. Oliphant. Mr. Hoagland has served as Presidentthe Managing Member of Eco 3DTrend Discovery Capital Management, an investment fund, since December 2013.2011.
There are no family relationships among any of the directors or executive officers.
Executive Officers
Randy May. See “—Board of Directors” above for Mr. May’s biographical information.
Peter Mehring. See “—Board of Directors” above for Mr. Mehring’s biographical information.
William B. Hoagland. Mr. Hoagland is Principal Financial Officer of the Company. Immediately prior to joining Ecoark, Inc. in 2019, Mr. Hoagland spent the previous eight years as Managing Member of Trend Discovery Capital Management (“Trend Discovery”), a hybrid hedge fund since inception with a track record of outperforming the S&P 500. Prior to this appointment as President of Eco3D, he served as President of Precision 3D from December 2009 to November 2013.founding Trend Discovery in 2011, Mr. Smerz has worked successfully the past 26Hoagland spent six years within the commercial/industrial construction industry as a contractorSenior Associate at Prudential Global Investment Management (PGIM), working in both PGIM’s Newark, NJ and business executive throughout the western U.S. His ability to build a strong team and provide outstanding leadership has been the cornerstone to his success.London, England offices. He has also continually identified new business opportunitiesa Bachelor in Economics degree from Bucknell University. Mr. Hoagland holds the Chartered Financial Analyst designation and utilizing his entrepreneurial spirit, he’s injected new bolt-on opportunities to his existing business platforms.is a Level III candidate in the Chartered Market Technician Program.
Family Relationships
CORPORATE GOVERNANCEThere are no family relationships between or among any of the current directors or executive officers. There are no family relationships among our officers and directors and those of our subsidiaries and affiliated companies.
Board of Directors and CommitteesComposition
Our business and affairs are organized under the direction of our board of directors, which currently consists of six members. Our directors hold office until the earlier of their death, resignation, removal or disqualification, or until their successors have been elected and qualified. Our board of directors does not have a formal policy on whether the roles of a Chief Executive Officer and Chairman of our board of directors should be separate. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. Our board of directors meets on a regular basis. Our bylaws will be amended and restated to provide that the authorized number of directors may be changed only by resolution of the board of directors.
We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.
At each annual meeting of stockholders to be held after the initial classification, the successors to directors whose terms then expire will serve until the third annual meeting following their election and until their successors are duly elected and qualified. The authorized size of our board of directors is currently six members. The authorized number of directors may be changed only by resolution of the board of directors.
Director Independence
While our common stock is not listed on a national securities exchange that requires our independent board members, a majority of our directors and each member of our audit, compensation and nominating and governance committees are independent. A director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
After reviewing all relevant relationships, the Board of Directors currently consists of seven members. Members of our Board of Directors are elected annually and serve until a successor has been elected and qualified or their earlier death, resignation or removal. Our Board of Directors has determinedconcluded that each of Messrs. Cahill, Matthews,Green, Metzger, and RateliffNelson are “independent," as defined byindependent under the SEC rules adopted pursuant to the requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and in accordance with Rule 4200(a)(15)NYSE Corporate Governance Rules. No director or executive officer of the Marketplace RulesCompany is related to any other director or executive officer of the NASDAQ Stock Market, Inc. Company by blood, marriage or adoption. In making its independence determination, the Board considered all relevant transactions, relationships, or arrangements, including those disclosed under the section titled “Certain Relationships and Related Transactions.”
Board Leadership Structure. The Board of Directors has no fixed policy with respect to the separation of the offices of Chairman of the Board and Chief Executive Officer. The Board retains the discretion to determine, at any time, whether to combine or separate the positions as it deems to be in the best interests of the Company and its stockholders. The roles of the Chairman of the Board and Chief Executive Officer are currently performed by one individual.
Our Board of Directors established an audit committee, a compensation committee, and a nominating committee, each of which operates pursuant to a separate charter adopted by our Board of Directors. Members serve on these committees until their resignation or until otherwise determined by our Board of Directors, and those committees are chaired by “independent directors”.
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Furthermore, for our audit committee, Charles Rateliff shall serve as an “audit committee financial expert” as defined underbylaws provide that the applicable rulesChairman of the SEC and he has the requisite financial sophistication as defined under the applicable rules and regulations of the NASDAQ Stock Market, Inc. We have also establishedBoard may be elected by a corporate governance committee on our board of directors.
Audit Committee
The Audit Committee is currently comprised of “independent," directors as defined by SEC rules adopted pursuant to the requirements of the Sarbanes-Oxley Act of 2002 (“SOX”).
The duties and responsibilities of the Audit Committee are set forth in the Audit Committee’s charter. The Audit Committee oversees the financial reporting process for the Company on behalfmajority vote of the Board of Directors and has other duties and functions as described in its charter.
The Company’s management hasshall serve until the primary responsibility for the Company’s financial statements and the reporting process. The Company’s independent registered public accounting firm is responsible for auditing the Company’s financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States.
Our Audit Committee serves to monitor our financial reporting process and internal control system; retains and pre-approves audit and any non-audit services to be performed by our independent registered accounting firm; directly consults with our independent registered public accounting firm; reviews and appraises the efforts of our independent registered public accounting firm; and provides an open avenue of communication among our independent registered public accounting firm, financial and senior management and the Board of Directors.
As of June 30, 2016 the Company’s unaffiliated market capitalization as defined by SEC Rule 12b-2 exceeded $75,000. As such the Company now has accelerated filer status beginning with its annual report to be filed on Form 10-K by March 16, 2017. In addition the Company is now subject to additional requirements of SOX section 404 which addresses internal controls over financial reporting (“ICFR”). The additional requirements include attestation by an independent auditor with respect to the Company’s ICFR.
Item 308 of SEC Regulation S-K addresses the SOX requirements described above including the responsibility of management to report on the effectiveness of ICFR. Management has undertaken several initiatives to improve its ICFR including implementation of a standard chart of accounts and a centralized, cloud-based accounting and Enterprise Resource Planning (“ERP”) system from NetSuite. That system was implemented at six Company entities in the first half of 2016 and is currently being implemented at the new subsidiary Sable Polymer Solutions.
In addition to the implementation of NetSuite, the Company hired additional experienced accounting staff and has scheduled a specific program to ensure compliance with SOX section 404 and further strengthen ICFR. The Company will more formally document risks relating to ICFR, design additional controls to address those risks, document the execution of the controls and have this tested by its independent registered public accounting firm. These activities will take place in the second half of 2016 with reporting to the Audit Committee.
Compensation Committee
The Compensation Committee is currently comprised of “independent," directors as defined by SEC rules adopted pursuant to the requirements of the Sarbanes-Oxley Act of 2002.
The duties and responsibilities of the Compensation Committee are set forth in the Compensation Committee’s charter adopted by the Board of Directors.
Among its duties, our Compensation Committee determines the compensation and benefits paid to our executive officers, including our President, Chief Executive Officer and our Executive Chairman. Our Compensation Committee reviews and determines salaries, bonuses and other forms of compensation paid to our executive officers and management, approves recipients of stock option awards and establishes the number of shares and other terms applicable to such awards. Our Compensation Committee also determines the compensation paid to our Board of Directors, including equity-based awards. More information about the compensation of our non-employee directors is set forth in the section of this annual report titled “Director Compensation.”
Nominating Committee
The Nominating Committee is currently comprised of “independent," directors as defined by SEC rules adopted pursuant to the requirements of the Sarbanes-Oxley Act of 2002.
The duties and responsibilities of the Nominating Committee are set forth in the Nominating Committee’s charter adopted by the Board of Directors.
Our Nominating Committee is charged with recommending the slate of director nominees for election to the Board of Directors, identifying and recommending candidates to fill vacancies on the Board of Directors. Among its duties and responsibilities, the Nominating Committee periodically evaluates and assesses the performancemeeting of the Board of Directors; reviewsfollowing the qualifications of candidates for director positions; assists in identifying, interviewing and recruiting candidates for the Board of Directors; reviews the composition of each committee of the Board of Directors and presents recommendations for committee memberships; and reviews and recommends changes to the charter of the Nominating Committee and to the charters of other Board of Director committees.
The process followed by the Nominating Committee to identify and evaluate candidates includes (i) requests to Board of Director members, our Chief Executive Officer, and others for recommendations; (ii) meetings from time to time to evaluate biographical information and background material relating to potential candidates and their qualifications; and (iii) interviews of selected candidates. The Nominating Committee also considers recommendations for nomination to the Board of Directors submitted by shareholders.
In evaluating the suitability of candidates to serve on the Board of Directors, including shareholder nominees, the Nominating Committee seeks candidates who are “independent," as defined by SEC rules adopted pursuant to the requirements of the Sarbanes-Oxley Act of 2002 and who meet certain selection criteria established by the Nominating Committee.
Board Attendance
Our Board held four meetings during the fiscal year ended December 31, 2015. All of our directors attended at least 75% of the meetings of our Board held in 2015. We encourage each of our directors to attend eachnext annual meeting of stockholders at which such Chairman is re-elected. The Chairman of the Board shall preside at all meetings. Otherwise, the Company’s Corporate Governance Guidelines (the “Guidelines”) provide that a lead director selected by the non-management directors (the “Lead Director”) shall preside at meetings of the Board at which the Chairman of the Board is not present. The Guidelines require that the Lead Director shall preside at executive sessions of the non-management directors. The non-management directors will meet in executive session, no less frequently than quarterly, as determined by the Lead Director, or when such meetings are held. We did not hold an annual meetinga director makes a request of stockholders in 2015.the Lead Director. Gary Metzger currently serves as the Lead Director.
The Board believes that maintaining a healthy mix of qualified independent and management directors on the Board is an integral part of effective corporate governance and management of the Company. The Board also believes that the current leadership structure strikes an appropriate balance between independent directors and directors, which allows the Board to effectively represent the best interests of the Company’s entire stockholder base.
Role of the Board in Risk Oversight
We face a number of risks, including those described under the caption “Risk FactorsOversight.” contained elsewhere in this prospectus. Our The Board of Directors believes that risk management is an important part of establishing, updating and executing on our business strategy. OurThe Board of Directors has oversight responsibility relating to risks that could affect the corporate strategy, business objectives, compliance, operations, and the financial condition and performance of the company. Our Board of DirectorsCompany, and focuses its oversight on the most significant risks facing us and, on our processes, to identify, prioritize, assess, manage and mitigate those risks. OurThe Board of Directors receives regular reports from members of the company’sCompany’s senior management on areas of material risk to us, including strategic, operational, financial, legal and regulatory risks. While ourthe Board of Directors has an oversight role, management is principally tasked with direct responsibility for management and assessment of risks and the implementation of processes and controls to mitigate their effects on us.
Stockholder Communications with34
Corporate Governance and Nominating Committee (“Nominating Committee”). The duties and responsibilities of the Board
Stockholders and other interested parties may make their concerns known confidentiallyNominating Committee are set forth in the charter of the Nominating Committee adopted by the Board. The Nominating Committee is responsible for identifying individuals qualified to serve on the Board of Directors or the independent directors by sending an email to Brad Hoagland, CFA at bhoagland@ecoarkusa.com. Each communication should specify the applicable addressee or addresseesand recommending individuals to be contactednominated by the Board for election by stockholders or appointed by the Board to fill vacancies. Among its duties and responsibilities, the Nominating Committee is responsible for shaping corporate governance, reviewing and assessing the Guidelines, recommending Board compensation, and overseeing the annual evaluation of the Board. The Nominating Committee has the authority to retain compensation or other consultants as well as search firms for director candidates. In accordance with its charter, the general topic of the communication. The Company will initially receive and process communications before forwarding them to the addressee. The Company generally will not forward to the directors a communication thatNominating Committee meets as often as it determines to be primarily commercial in nature or related to an improper or irrelevant topic, or that requests general information about the Company.necessary, but at least four times each year.
CodeThe Nominating Committee currently consists of Ethics
All Company employeesMessrs. Cahill, as chair, Metzger, Nelson and directors, includingGreen. The process followed by the Nominating Committee to identify and evaluate candidates includes (i) requesting recommendations from the Board, the Chief Executive Officer, and other parties, (ii) meeting to evaluate biographical information and background material relating to potential candidates and their qualifications, and (iii) interviewing selected candidates. The Nominating Committee also considers recommendations for nomination to the Chief Financial Officer,Board submitted by stockholders. A stockholder who desires to recommend a prospective nominee for the Board should notify the Secretary of the Company or any member of the Nominating Committee in writing with supporting material the stockholder considers appropriate. The Nominating Committee has the authority and ability to retain compensation or other consultants and search firms to identify or evaluate director candidates.
In evaluating the suitability of candidates to serve on the Board, including stockholder nominees, the Nominating Committee seeks candidates who are required to abideindependent, as defined by the Company’s Sarbanes-Oxley Act, related SEC rules and NYSE listing standards, and who meet certain selection criteria established by the Nominating Committee. The selection criteria include many factors, including a candidate’s general understanding of elements relevant to the success of a publicly traded company in the current business environment, understanding of our business, and educational and professional background. The Nominating Committee also considers a candidate’s judgment, competence, anticipated participation in Board activities, experience, geographic location and special talents or personal attributes. The guidelines provide that the composition of the Board should encompass a broad range of skills, expertise, industry knowledge, diversity, and contacts relevant to our business. Moreover, with respect to incumbent directors, the Nominating Committee also considers past performance, including attendance at meetings and participation in and contributions to the activities of the Board, and the director’s ability to make contributions after any significant change in circumstances (including changes in employment or professional status).
Board Leadership Structure
Our board of directors is free to select the Chairman of the board of directors and a Chief Executive Officer in a manner that it considers to be in the best interests of our company at the time of selection. Currently, Randy May serves as our Chief Executive Officer and Chairman of the board of directors. Our board of directors, as a whole and also at the committee level, plays an active role overseeing the overall management of our risks. Our Audit Committee reviews risks related to financial and operational items with our management and our independent registered public accounting firm. Our board of directors is in regular contact with our Chief Executive Officer, who reports directly to our board of directors, and Principal Financial Officer.
Board Committees
Our board of directors has established three standing committees—audit, compensation, and nominating and corporate governance—each of which operates under a charter that has been approved by our board of directors. Prior to the completion of this offering, copies of each committee’s charter will be posted on the Investors section of our website, which is located at www.zestlabs.com. Each committee has the composition and responsibilities described below. Our board of directors may from time to time establish other committees.
Audit Committee
The current members of our Audit Committee are Messrs. Nelson, as chair, Cahill, Metzger and Green, each of whom is a non-employee member of our board of directors. Mr. Nelson is our audit committee chairman and financial expert, as that term is defined under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002, and possesses financial sophistication, as defined under the rules of The Nasdaq Global Select Market.
The duties and responsibilities of the Audit Committee are set forth in the charter of the Audit Committee adopted by the Board. The Audit Committee generally assists the Board in its oversight of the relationship with our independent registered public accounting firm, financial statement and disclosure matters, the internal audit function, and our compliance with legal and regulatory requirements. In accordance with its charter, the Audit Committee meets as often as it determines necessary, and at least four times each year.
Management has the primary responsibility for our financial statements and the reporting process, and our independent registered public accounting firm is responsible for auditing the financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States. The Audit Committee also monitors our financial reporting process and internal control system, retains and pre-approves audit and any non-audit services to be performed by our independent registered accounting firm, directly consults with our independent registered public accounting firm, reviews and appraises the efforts of our independent registered public accounting firm, and provides an open avenue of communication among our independent registered public accounting firm, financial and senior management and the Board. The Audit Committee has the authority to retain independent legal, accounting, and other advisors.
The Board has determined that each member of the Audit Committee qualifies as an independent director under the Sarbanes-Oxley Act, related SEC rules and NASDAQ listing standards related to audit committees, and that each satisfies all other applicable standards for service on the Audit Committee. The Board has determined that Mr. Nelson meets the requirements adopted by the SEC for qualification as an audit committee financial expert. The identification of a person as an audit committee financial expert does not impose on such person any duties, obligations or liability that are greater than those that are imposed on such person as a member of the Audit Committee and the Board in the absence of such identification. Moreover, the identification of a person as an audit committee financial expert for purposes of the regulations of the SEC does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board. Finally, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for purposes of Section 11 of the Securities Act of 1933.
The Audit Committee held nine meetings in fiscal 2019. The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act and operates under a written charter that satisfies the applicable standards of the SEC A copy of the audit committee charter is available on our website at https://www.zestlabs.com/downloads/Audit-Commitee.pdf.
Code of Conduct
We have a Code of Ethics as defined in Item 406 of Regulation S-K, which code applies to ensure thatall of our directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. All directors, officers, and other employees are expected to be familiar with the Company’s business is conducted in a consistently legalCode of Ethics and ethical manner.to adhere to the principles and procedures set forth therein. The Code of ConductEthics forms the foundation of a comprehensive program that requires compliance with all corporate policies and procedures and seeks to foster an open relationship among colleagues that contributes to good business conduct and an abiding belief in the integrity of our employees. The Company’sOur policies and procedures cover all areas of professional conduct, including employment policies, conflicts of interest, intellectual property, and the protection of confidential information, as well as strict adherence to all laws and regulations applicable to the conduct of the Company’sour business.
EmployeesDirectors, officers, and other employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Code of Conduct.Ethics. The full text of the Code of Ethics is available on our website at www.ecoarkusa.com.https://www.zestlabs.com/downloads/Code-of-Ethics-2016.pdf. We intend to satisfy the disclosure requirements of Form 8-K regarding any amendment to, or a waiver from, any provision of our Code of Ethics by posting such amendment or waiver on our website.
Corporate Governance GuidelinesRole of Board in Risk Oversight Process
We face a number of risks, including those described under the caption “Risk Factors” contained elsewhere in this prospectus. Our board of directors believes that risk management is an important part of establishing, updating and executing on our business strategy. Our board of directors has oversight responsibility relating to risks that could affect the corporate governance guidelines are designed to help ensure effective corporate governance. Our corporate governance guidelines cover topics including, but not limited to, director qualification criteria, director responsibilities, director compensation, director orientation and continuing education, communications from stockholders to the board, succession planningstrategy, business objectives, compliance, operations, and the annual evaluations of the boardfinancial condition and its committees. Our corporate governance guidelines are reviewed by the corporate governance committeeperformance of our company. Our board of directors focuses its oversight on the most significant risks facing us and revised when appropriate. The full texton our processes to identify, prioritize, assess, manage and mitigate those risks. Our board of directors receives regular reports from members of our Corporate Governance Policysenior management on areas of material risk to us, including strategic, operational, financial, legal and regulatory risks. While our board of directors has an oversight role, management is availableprincipally tasked with direct responsibility for management and assessment of risks and the implementation of processes and controls to mitigate their effects on our website at www.ecoarkusa.com.us.
The following table provides information regarding the compensation of our named executive officers during the fiscal years ended March 31, 2019 and 2018.
| Name and Principal Position | Year | Salary(1) | Stock Awards(2) | Option Awards(2) | Total | ||||||||||||||
| Randy S. May(3) | 2019 | $ | 200,000 | $ | - | $ | - | $ | 200,000 | ||||||||||
| Chairman of the Board and | 2018 | $ | 100,000 | $ | - | $ | - | $ | 100,000 | ||||||||||
| Chief Executive Officer | |||||||||||||||||||
| Peter Mehring | 2019 | $ | 200,000 | $ | - | $ | - | $ | 200,000 | ||||||||||
| President, Chief Executive Officer and | 2018 | $ | 276,677 | $ | 759,500 | $ | 2,414,948 | $ | 3,451,115 | ||||||||||
| President of Zest Labs, Inc. | |||||||||||||||||||
| Jay Oliphant | 2019 | $ | 170,000 | $ | - | $ | - | $ | 170,000 | ||||||||||
| Former Principal Financial Officer | 2018 | $ | 170,000 | $ | 152,459 | $ | 238,155 | $ | 560,614 | ||||||||||
| (1) | |
| (2) | Stock and option awards are based on the grant date fair values and are calculated utilizing the provisions of Accounting Standards Codification 718 “Compensation — Stock Compensation.” See Notes 1 and 13 to the consolidated financial statements of the Company contained in Item 8 of the Company’s Annual Report on Form 10-K for the year ended March 31, 2019 for further information regarding assumptions underlying valuation of equity awards. |
| (3) | Mr. May served as Chief Executive Officer of Ecoark from March 2016 through March 28, 2017 and then from September 21, 2017 to the present. |
Employment, Severance, Separation and Change in Control Agreements
Executive Employment Arrangements
Summary Compensation TablePeter Mehring
The table below setsterms of Mr. Mehring’s employment with Ecoark are set forth in an offer letter accepted on August 15, 2013. Pursuant to the offer letter, Mr. Mehring received an annual base salary of $300,000 (subsequently adjusted and accepted) and is eligible to participate in regular health insurance, bonus, and other employee benefit plans established by Ecoark. The offer letter also includes standard confidentiality and non-complete obligations. The parties are permitted to terminate employment for any reason, at any time, with or without notice and without cause. The offer letter also contains severance benefit provisions in the last two fiscal years,event that Mr. Mehring’s employment is terminated without “Cause” (as defined in the compensation earned by eachoffer letter) or Mr. Mehring terminates his employment for “Good Reason” within 12 months following a “Change in Control” (as defined in the offer letter). If Mr. Mehring is terminated without “Cause,” then he is entitled to receive an amount equal to six months base salary. If he terminates his employment for “Good Reason” within 12 months following a “Change in Control,” then Mr. Mehring is entitled to receive an amount equal to six months base salary and accelerated vesting of our principal executive officera portion of the non-vested options or shares. In order to receive severance benefits under the offer letter, Mr. Mehring is required to sign a release and principal financial officers duringwaiver of all claims. Finally, Ecoark reserves the last fiscal year (“named executive officers”). No other executive officer had annual compensationright to change or otherwise modify, in excessits sole discretion, the terms of $100,000 during the last fiscal year.offer letter.
| Option | All Other | |||||||||||||||||||||||
| Salary | Bonus | Awards | Compensation | Total | ||||||||||||||||||||
| Name and Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||
| Dr. Ashok K. Sood | 2015 | 17,850 | 44,850 | (1) | 62,700 | |||||||||||||||||||
| President | 2014 | 43,160 | 37,550 | (1) | 80,710 | |||||||||||||||||||
| Dr. Yash R. Puri, | 2015 | 17,850 | 44,850 | (1) | 62,700 | |||||||||||||||||||
| CFO | 2014 | 33,920 | 45,310 | (1) | 78,230 | |||||||||||||||||||
Randy May | 2015 | 207,692 | 207,692 | |||||||||||||||||||||
| Chief Executive Officer | 2014 | 200,000 | 200,000 | |||||||||||||||||||||
Greg Landis | 2015 | 20,192 | 173,000 | (2) | 192,192 | |||||||||||||||||||
| Corporate Secretary | 2014 | - | 245,000 | (2) | 245,000 | |||||||||||||||||||
Potential Payments Upon Change of Control
We have no liabilities under termination or change in control conditions. We do not have a formal policy to determine executive severance benefits. Each executive severance arrangement is negotiated on an individual basis.
Option Grants and Outstanding Equity Awards at Fiscal Year-EndMarch 31, 2019
ThereEffective October 13, 2017, the Compensation Committee issued new options awards (the “Replacement Options”) in replacement of existing restricted stock and restricted stock unit awards (the “Existing Awards”) previously granted to Peter Mehring and Jay Oliphant. In addition, the Committee approved new option awards to Messrs. Mehring and Oliphant that vest over a four-year period (the “New Options”) to induce them to accept the Replacement Options; to compensate them for diminution in value of their Existing Awards as compared to the Replacement Options; and in consideration of a number of other factors, including each individual’s role and responsibility with the Company, their years of service to the Company, and market precedents and standards for modification of equity awards.
The Replacement Options and New Options are designed to better align Messrs. Mehring and Oliphant’s potentially realizable equity compensation with Company performance. Because the incentive value of stock options is tied to future appreciation in stock price, the Committee believes stock option grants will better align our executive officers and employees’ interests with those of the Company and its stockholders and, as a result, the Compensation Committee intends to continue to utilize options to a greater extent in our equity compensation program on a going forward basis.
With respect to the Replacement Options, Messrs. Mehring and Oliphant have agreed to forfeit Existing Awards covering 1,345,000 and 132,640 shares of the Company’s common stock, respectively, and each was granted Replacement Options to purchase an equal number of shares of Company common stock. The exercise price for the Replacement Options was set at 100% of the fair market value of the Company’s stock price on the effective date of the grants (October 13, 2017). In consideration of Messrs. Mehring and Oliphant’s agreements to forfeit their Existing Awards, the Committee, after careful deliberation, determined that (i) 100% of Mr. Mehring’s Replacement Options would vest immediately upon grant, and (ii) 50% of Mr. Oliphant’s Replacement Options would vest immediately upon grant. The remaining portion of Mr. Oliphant’s Replacement Options will vest in 12 equal installments, with the first installment vesting on January 15, 2018, and additional installments vesting on the last day of each of the eleven successive three-month periods, subject to Mr. Oliphant’s continued employment by the Company. The Replacement Options were no outstanding unexercisedissued under the Company’s 2017 Omnibus Incentive Plan or 2013 Incentive Stock Plan to correspond with the plan under which the Existing Awards were issued.
With respect to the New Options, Messrs. Mehring and Oliphant were granted options unvestedto purchase 2,017,500 and 66,320 shares of Company common stock, and/orrespectively, that vest at a rate of 25% per year on October 13th of each year from 2018 to 2021, subject to Messrs. Mehring and Oliphant’s continued employment by the Company. As with the Replacement Options, the New Options have an exercise price set at 100% of the fair market value of the Company’s stock price on the effective date of the grant. The New Options were not granted under any of the Company’s existing equity incentive plancompensation plans.
The following table presents information concerning equity awards issued toheld by our named executive officers as of DecemberMarch 31, 2015.2019.
Number of Securities | Number of Securities | Option Awards | ||||||||||||||
| Name | Vesting Commencement Date | Underlying Options (#) Exercisable | Underlying Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | |||||||||||
| Peter Mehring | 10/13/2017 | 1,345,000 | (1) | — | 2.60 | 10/23/2027 | ||||||||||
| 10/13/2018 | — | 2,017,500 | (2) | 2.60 | 10/23/2027 | |||||||||||
| Jay Oliphant | 10/13/2017 | 71,796 | (3) | 60,844 | (3) | 2.60 | 10/23/2027 | |||||||||
| 10/13/2018 | — | 66,320 | (4) | 2.60 | 10/23/2027 | |||||||||||
| (1) | This option was fully vested on October 13, 2017. |
| (2) | This option vests at a rate of 25% per year on October 13th of each year from 2018 to 2021. |
| (3) | 50% of this option vested immediately upon grant. The remaining portion vests in 12 equal installments, with the first installment vesting on January 15, 2018, and additional installments vesting on the last day of each of the eleven successive three-month periods. |
| (4) | This option vests at a rate of 25% per year on October 13th of each year from 2018 to 2021. |
| (5) | The options in (3) and (4) above were replaced by options exercisable for 198,960 shares immediately vested and exercisable through December 31, 2020. |
2018 Director Compensation Table
Employment Contracts, Termination of Employment and Change in Control
None of the principal executive officers listed above are under employment contracts.
Director Compensation
Our directors did not receive monetary compensation for their service on the Board of Directors for the fiscal years ended December 31, 2015 and 2014. Directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. Beginning with the quarter ended June 30, 2018, directors will receive each quarter a stock option with a Black-Scholes value of $25,000. Options will be granted with an exercise price equal to the fair market value of Ecoark’s common stock.
The following table sets forth the compensation paid to our non-employee directors for service during the year ended March 31, 2019:
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Total ($) | |||||||||
| John P. Cahill | 16,000 | 100,000 | 100,000 | |||||||||
| Gary Metzger | 19,000 | 100,000 | 100,000 | |||||||||
| Steven K. Nelson | 17,000 | 100,000 | 100,000 | |||||||||
| Michael Green | 14,000 | 100,000 | 100,000 | |||||||||
See additional information on compensation above in Summary Compensation Table for directors Randy May and Peter Mehring.
Compensation Committee Interlocks and Insider Participation
Our Compensation Committee consists of four directors, each of whom is a non-employee director: Messrs. Green, as chair, Cahill, Metzger and Nelson. None of the aforementioned individuals was an officer or employee of ours, was formerly an officer of ours or had any relationship requiring disclosure by us under Item 404 of Regulation S-K. No interlocking relationship as described in Item 407(e)(4) of Regulation S-K exists between any of our executive officers or Compensation Committee members, on the one hand, and the executive officers or compensation committee members of any other entity, on the other hand, nor has any such interlocking relationship existed in the past.
Employee Benefit Plans
Securities Authorized for Issuance Under Equity Compensation Plans
2013 Incentive Stock Plan
The 2013 Incentive Stock Plan of Ecoark Holdings (previously Magnolia Solar Corporation) (the “2013 Incentive Stock Plan”) was registered on February 7, 2013. Under the 2013 Incentive Stock Plan, the Company may grant incentive stock in the form of Stock Options, Stock Awards and Stock Purchase Offers of up to 5,500,000 shares of common stock to Company employees, officers, directors, consultants and advisors. The type of grant, vesting provisions, exercise price and expiration dates are to be established by the Board at the date of grant.
2017 Omnibus Incentive Plan
The 2017 Ecoark Holdings Omnibus Incentive Plan (“2017 Omnibus Incentive Plan”) was registered on June 14, 2017. Under the 2017 Omnibus Incentive Plan, the Company may grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other awards. Awards of up to 4,000,000 shares of common stock to Company employees, officers, directors, consultants and advisors are available under the 2017 Omnibus Incentive Plan. The type of grant, vesting provisions, exercise price and expiration dates are to be established by the Board at the date of grant.
Equity Compensation Plan Information
The following table contains information about the 2013 Incentive Stock Plan and the 2017 Omnibus Incentive Plan as of March 31, 2019:
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants | Weighted- exercise price of outstanding options, warrants and rights | Number of securities available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by stockholders: | ||||||||||||
| 2013 Incentive Stock Plan | 2,353,000 | $ | 2.52 | 454,000 | ||||||||
| 2017 Omnibus Incentive Plan | 1,870,000 | $ | 1.54 | 1,615,000 | ||||||||
| Equity compensation not approved by stockholders | 2,916,000 | (1) | $ | 2.60 | - | |||||||
| Total | 7,139,000 | $ | 2.30 | 2,069,000 | ||||||||
| Represents non-qualified stock options not granted under any existing equity compensation plans. |
Limitation on liability of officers and directors
Nevada law provides that subject to certain very limited statutory exceptions, a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer, unless it is proven that the act or failure to act constituted a breach of his or her fiduciary duties as a director or officer and such breach of those duties involved intentional misconduct, fraud or a knowing violation of law. The statutory standard of liability established by NRS Section 78.138 controls even if there is a provision in the corporation’s articles of incorporation unless a provision in the corporation’s articles of incorporation provides for greater individual liability.
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Indemnification
Nevada law permits broad provisions for indemnification of Contentsofficers and directors.
Our bylaws provide that each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any threatened, pending, or completed action, suit or proceeding, whether formal or informal, civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she is or was a director of or who is or was serving at our request as a director, officer, employee or agent of this or another corporation or of a partnership, joint venture, trust, other enterprise, or employee benefit plan (a “covered person”), whether the basis of such proceeding is alleged action in an official capacity as a covered person shall be indemnified and held harmless by us to the fullest extent permitted by applicable law, as then in effect, against all expense, liability and loss (including attorneys’ fees, costs, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who ceased to be a covered person and shall inure to the benefit of his or her heirs, executors and administrators.
However, no indemnification shall be provided hereunder to any covered person to the extent that such indemnification would be prohibited by Nevada state law or other applicable law as then in effect, nor, with respect to proceedings seeking to enforce rights to indemnification, shall we indemnify any covered person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person except where such proceeding (or part thereof) was authorized by our board of directors, nor shall we indemnify any covered person who shall be adjudged in any action, suit or proceeding for which indemnification is sought, to be liable for any negligence or intentional misconduct in the performance of a duty.
SEC Policy on Indemnification for Securities Act liabilities
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONSPRINCIPAL STOCKHOLDERS
We do not believe any of our non-employee directors has a material relationship with us that could interfere with his ability to exercise independent judgment in carrying out his responsibilities. The Company’s Board of Directors has reviewed and approved of each of the following transactions. The Company’s Code of Conduct governs the Board’s consideration of transactions which could give rise to a conflict of interest, mandating that each director disclose any potential conflict of interest and permitting the Board to determine that such director may not participate in deliberations relating to the consideration of the transaction giving rise to such conflict of interest. The full text of the Code of Conduct is available on our website at www.ecoarkusa.com.
The following is a summary of long-term debt with Randy May, the Chief Executive Officer, and entities he controls, as of December 31, 2015 and 2014:
| 2015 | 2014 | |||||||||||
| Promissory note #1 – CEO | (a) | 62 | 227 | |||||||||
| Promissory note #2 – CEO | (b) | – | 2,500 | |||||||||
| Promissory note #3 – CEO | (c) | 1,217 | – | |||||||||
| Note payable – Goldenhawk | (d) | – | 3,674 | |||||||||
| Note payable - other | (e) | – | 1,600 | |||||||||
| 1,279 | 8,001 | |||||||||||
The highest balance of these notes during the 2015 fiscal year was $9,097.
(a) Note payable to the Company’s Chief Executive Officer (CEO), Randy May. In 2013 and 2014 the note was accruing interest at the rate of 10% through November 16, 2014. On November 16, 2014, the then outstanding principal of $1,174 and the accrued interest of $493 were combined with the outstanding balances of other shareholder notes in the principal amount of $1,100 and accrued interest of $908 (see note (a)) to create a new note with a related company “Goldenhawk” referred to below. The new note payable from November 17, 2014 through December 31, 2014 was an unsecured note bearing interest at a rate of 6% per annum, maturing in November 2015. On November 30, 2015, after monthly payments were being made, and additional amounts funded in March 2015 and May 2015 totaling $600, the Company along with the $2,500 note, combined these amounts into a new one year promissory note in the amount of $3,197 due November 30, 2016. Payments of $30 were made on this note in the first quarter of 2016.
(b) Unsecured note payable with the Company’s CEO, bearing interest at 6% per annum. Quarterly interest payments were due commencing February 2015, with the note maturing in November 2015. Note was the result of the value of the 5,000 Class A Common Shares re-acquired on November 16, 2014 from the CEO in an effort to raise capital without further dilution to the current shareholders. See (c) above for details on the extension of this note.
(c) Note payable with the Company’s CEO commencing November 30, 2015 at an interest rate of 6% per annum (see note c). The beginning principal balance of $3,197 was reduced by $1,980 on December 31, 2015 in exchange for 550 shares of Series A General Common Shares that were Treasury Shares owned by the Company. The remaining principal balance matures in November 2016.
(d) Commencing November 16, 2014, this note had interest at the rate of 6% per annum, unsecured, with quarterly interest payments due commencing February 2015 and the note maturing in November 2015. Interest on this note was paid for the first 6 months, then the accrued interest was added to the principal and a new note was entered into on November 18, 2015, for a period of one year. This note along with the balance in the note referenced in (j) was converted to 1,503 shares of Series A General Common Shares that were Treasury Shares owned by the Company on December 31, 2015.
(e) Unsecured advances from related party Goldenhawk. This note was converted to Series A General Common Shares that were Treasury Shares owned by the Company (see (h)) on December 31, 2015.
During the years ended December 31, 2015 and 2014, Ecoark outsourced the accounting and finance function to Landis & Associates PLLC. Landis & Associates PLLC (“Landis PLLC”) is a professional limited liability company which is licensed as an Arkansas certified public accounting firm and is wholly owned by Greg Landis, our director and secretary. All payments to Landis PLLC were for accounting and finance work performed for Ecoark and its subsidiaries. In December 2015, Ecoark hired additional accounting staff and discontinued using the services provided by Landis PLLC.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and persons who beneficially own more than ten percent (10%) of a registered class of our equity securities to file reports of ownership and changes in ownership of our common stock and other equity securities with the SEC on a timely basis. Based solely upon a review of Forms 3, 4 and 5 and amendments to these forms furnished to us, we believe all parties subject to the reporting requirements of Section 16(a) of the Exchange Act filed on a timely basis all such required reports during and with respect to our 2015 fiscal year.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of July 1, 2016,September 23, 2019, concerning beneficial ownership of our capital stock held by (1) each of our directors, (2) each of our named executive officers, (3) all of our current directors and executive officers as a group, and (4) each group, person or entity known by us to beneficially own more than 5% of any class of our voting securities, (2) each of our directors, (3) each of our named executive officers, and (4) all of our current directors and executive officers as a group.securities. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Percentages are calculated based on 36,021,21062,648,301 shares of our common stock outstanding on July 1, 2016. The address for our officers and directors is 3333 Pinnacle Hills Parkway, Suite 220, Rogers, Arkansas 72758.as of September 23, 2019.
| Beneficial Owner | Beneficial Ownership | Percentage Voting Power | ||||||
| Randy S. May | 5,500,000 | 15.3 | % | |||||
| Greg Landis | 505,248 | 1.4 | % | |||||
| Gary Metzger (1) | 3,673,043 | 10.2 | % | |||||
| Dr. Ashok Sood (2) | 128,428 | * | ||||||
| Dr. Yash R. Puri | 140,540 | * | ||||||
| Terrence D. Matthews (3) | 130,000 | * | ||||||
| John P. Cahill | - | * | ||||||
| Charles Rateliff | - | * | ||||||
| Total Directors and Officers (8 persons) | 10,077,259 | 27.9 | % | |||||
| 5% Holders | ||||||||
| The Hames Family Trust (4) | 2,050,000 | 5.7 | % | |||||
| Total | 12,127,259 | 33.6 | % | |||||
(1) Includes 2,500 warrants with an exercise priceThe amounts and percentages of $5.00 per share.
(2) Includes 126,606common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares owned by Dr. Sood and 1,822 shares owned by his wife.
(3) Consists“voting power,” which includes the power to vote or to direct the voting of the security, or “investment power,” which includes the power to dispose of or to direct the disposition of the security. A person is also deemed to be a beneficial owner of any securities held by the Matthews Family Revocable Trust. Includes 65,000 warrants with an exercise price of $5.00 per share.
(4) Danny R. Hames is the trusteewhich that person has a right to acquire beneficial ownership within 60 days of The Hames Family Trust, theSeptember 23, 2019. Under these rules, more than one person may be deemed a beneficial owner of the securities.same securities and a person may be deemed to be a beneficial owner of securities as to which that person has no economic interest.
Except as otherwise noted, the persons and entities listed in the table below have sole voting and investing power with respect to all of the shares of our common stock beneficially owned by them, subject to community property laws where applicable. Except as otherwise set forth below, the address of the beneficial owner is c/o Ecoark Holdings, Inc., 5899 Preston Road #505, Frisco, Texas, 75034.
Security Ownership of 5% or Greater Beneficial Owners
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent | ||||||
| Nepsis Capital Management, Inc. (4) | 13,976,688 | 22.4 | % | |||||
| Sabby Volatility Warrant Master Fund, Ltd. (5) | 3,410,800 | 5.4 | % | |||||
| Strategic Planning Group, Inc. (6) | 4,523,919 | 7.3 | % | |||||
* Less
Security Ownership of Directors and Executive Officers
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent | ||||||
| Randy S. May | 3,050,000 | 4.9 | % | |||||
| John P. Cahill (1) | 179,566 | 0.3 | % | |||||
| Peter Mehring (2) | 1,441,254 | 2.3 | % | |||||
| Gary Metzger (3) | 3,966,002 | 6.4 | % | |||||
| Steven K. Nelson (3) | 163,031 | 0.3 | % | |||||
| Michael Green (3) | 149,932 | 0.2 | % | |||||
| William B. Hoagland | 2,750,000 | 4.4 | % | |||||
| Directors & Executive Officers as a Group (7 persons) | 11,699,785 | 18.8 | % | |||||
| (1) | Includes 4,591 shares held by the Pataki-Cahill Group, LLC and options to purchase 127,281 shares. |
| (2) | Includes options to purchase 1,345,000 shares. |
| (3) | Includes options to purchase 127,281 shares. |
| (4) | The address to this shareholder is 8692 Eagle Creek Circle, Minneapolis, MN 55378. Based solely upon the information contained in a Schedule 13D filed on January 24, 2019. According to that Schedule 13D, Nepsis Capital Management, Inc. disclaims all dispositive power and voting power over all reported shares. |
| (5) | Sabby Management, LLC serves as the investment manager of Sabby Healthcare Master Fund, Ltd. (“SHMF”) and Sabby Volatility Warrant Master Fund, Ltd. (“SVWMF”). Hal Mintz is the manager of Sabby Management, LLC and has voting and investment control of the securities held by SHMF and SVWMF. Each of Sabby Management, LLC and Hal Mintz disclaims beneficial ownership over the securities beneficially owned by SHMF and SVWMF except to the extent of their respective pecuniary interest therein. The address of SHMF and SVWMF is c/o Sabby Mgt. LLC, 10 Mountainview Rd., Suite 205, Upper Saddle River, NJ 07458. Includes 1,530,800 shares owned by SHMF and 1,880,000 shares owned by SVWMF. Additionally, SHMF and SVWMF own preferred shares that can be converted into 980,393 and 980,393 common shares, respectively; and warrants that can be converted into 980,393 and 980,393 common shares, respectively. The beneficial ownership limitation shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of the warrants and preferred shares. |
| (6) | The address to this shareholder is 57 River Street Suite 306, Wellesley, MA 02481. Based solely upon the information contained in a Schedule 13G filed on January 24, 2019. According to that Schedule 13G, Strategic Planning Group, Inc. has sole dispositive power, but no voting power, over all reported shares. |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Board of Directors has adopted a written policy regarding the review and approval of any related party transaction required to be disclosed under SEC rules. The Audit Committee of the Board of Directors is responsible for the review and approval of transactions covered by the policy. As provided in the policy, in reviewing the proposed transaction, the Audit Committee will consider all relevant facts and circumstances, including without limitation the commercial reasonableness of the terms, the benefit and perceived benefit, or lack thereof, to the Company, opportunity costs of alternate transactions, the materiality and character of the related party’s direct or indirect interest, and the actual or apparent conflict of interest of the related party.
The Audit Committee will not approve or ratify a related party transaction unless it will have determined that, upon consideration of all relevant information, the proposed transaction is in, or not inconsistent with, the best interests of the Company and its shareholders. Except as noted below, there were no commercial transactions between related parties and the Company that required disclosure in this Proxy Statement.
There were no transactions occurring since April 1, 2018, or that are currently proposed, (i) in which the Company was or is to be a participant, (ii) where the amount involved exceeds $120,000, and (iii) in which the Company’s executive officers, directors, principal stockholders and other related parties had a direct or indirect material interest.
Other Transactions
We have entered into employment agreements with our executive officers that, among other things, provide for certain severance and change of control benefits. For a description of these agreements, see “Executive Compensation—Executive Employment Arrangements.”
We have granted stock options to our executive officers. Pursuant to our outside director compensation policy, we have paid cash compensation and granted restricted stock units to our non-employee directors. For a description of these arrangements, see “Executive Compensation.”
We have entered into indemnification agreements with our directors and executive officers.
Policies and Procedures for Related Party Transactions
All future transactions between us and our officers, directors or five percent stockholders, and respective affiliates will be on terms no less favorable than 1%.could be obtained from unaffiliated third parties and will be approved by a majority of our independent directors who do not have an interest in the transactions and who had access, at our expense, to our legal counsel or independent legal counsel.
The following is a summary of the rights of our capital stock, certain provisions of our amended and restated certificate of incorporation and our amended and restated bylaws as they became in effect upon completion of our initial public offering and applicable law. This summary does not purport to be complete and is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and amended and restated bylaws, copies of which have been filed as exhibits to the registration statement and are incorporated by reference to our registration statement, of which this prospectus forms a part.
Capital Stock
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.001 per share, and 5,000 shares of undesignated preferred stock, par value $0.001 per share.
We currently have two classes of outstanding equity securities, as more fully described below.
Common Stock
Holders
As the date of this prospectus, there are 62,648,301 shares of common stock issued and outstanding. In addition, there were [*] shares of common stock issuable upon exercise of outstanding warrants, and [*] shares of common stock issuable upon exercise of outstanding stock options.
Under the terms of our amended and restated certificate of incorporation, holders of our common stock are entitled to: (i)to one vote perfor each share held on all matters requiringsubmitted to a shareholder vote; (ii) a ratable distributionvote of stockholders, including the election of directors, and do not have cumulative voting rights. The holders of outstanding shares of common stock are entitled to receive dividends out of assets or funds legally available for the payment of dividends ifof such times and when, declared byin such amounts as our Boardboard of Directors;directors from time to time may determine. Our common stock is not entitled to pre-emptive rights and (iii) in the event of ais not subject to conversion or redemption. Upon liquidation, dissolution or winding up of Ecoark Holdings,our company, the assets legally available for distribution to share ratable in all assets remaining after all of our indebtedness has been provided for or satisfied. Holders of Common Stock do not have preemptive rights to acquire any of our additional, unissued or treasury shares or our securities convertible into or carrying a right to subscribe for or acquire our shares of capital stock. Holders of Common Stockstockholders are not entitled to cumulative voting.
As of July 1, 2016, 36,021,210 sharesdistributable ratably among the holders of our common stock were issuedafter payment of liquidation preferences, if any, on any outstanding payment of other claims of creditors. The rights, preferences and outstanding.privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
Preferred Stock
On August 21, 2019 (the “Effective Date”), the Company and two accredited investors (each an “Investor” and, collectively, the “Investors”) entered into a securities purchase agreement (the “Securities Purchase Agreement”) pursuant to which the Company sold and issued to the Investors an aggregate of 2,000 shares of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”), at a price of $1,000 per share (the “Private Placement”). Each share of the Series B Preferred Stock has a par value of $0.001 per share and a stated value equal to $1,000 (the “Stated Value”) and is convertible at any time at the option of the holder into the number of shares of Common Stock determined by dividing the stated value by the conversion price of $0.51, subject to certain limitations and adjustments (the “Conversion Price”).
Our authorized capital also consistsboard of 5,000,000directors may, among other rights, determine, without further vote or action by our stockholders:
| ● | the number of shares constituting the series and the distinctive designation of the series; | |
| ● | the dividend rate on the shares of the series, whether dividends will be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series; | |
| ● | whether the series will have voting rights in addition to the voting rights provided by law and, if so, the terms of the voting rights; | |
| ● | whether the series will have conversion privileges and, if so, the terms and conditions of conversion; | |
| ● | whether or not the shares of the series will be redeemable or exchangeable, and, if so, the dates, terms and conditions of redemption or exchange, as the case may be; | |
| ● | whether the series will have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of the sinking fund; and | |
| ● | the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series. |
Although we presently have no plans to issue any shares of preferred stock par value $0.001. The unissuedupon completion of the offering, any future issuance of shares of preferred stock, may be issued from timeor the issuance of rights to time in onepurchase preferred shares, could, among other things, decrease the amount of earnings and assets available for distribution to the holders of common stock or more series, and our Board of Directors is authorized to issue such stock in one or more series and to fix from time to timecould adversely affect the number of shares to be included in any series and the designations, powers, preferences and relative, participating, option or other special rights and qualifications, limitations or restrictions thereof,powers, including voting rights, of all sharesthe holders of such series.the common stock.
Options
As of July 1, 2016, there areSeptember 23, 2019, we had outstanding options outstanding that have been issued to our officers, directors, employees and independent contractors to purchase 659,000an aggregate of [*] shares of our common stock, pursuant to the Ecoark, Inc. 2013 Stock Option Plan.with a weighted-average exercise price of $[*] per share.
Registration RightsTransfer Agent and Registrar
The transfer agent of our common stock is Philadelphia Stock Transfer, located at 2320 Haverford Road, Suite 230, Ardmore, Pennsylvania 19003.
43
Each Selling Stockholder (the “Selling Stockholders”) of the securities and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their securities covered hereby on the principal Trading Market or any other stock exchange, market or trading facility on which the securities are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods when selling securities:
| · | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| · | block trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| · | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| · | an exchange distribution in accordance with the rules of the applicable exchange; |
| · | privately negotiated transactions; |
| · | settlement of short sales; |
| · | in transactions through broker-dealers that agree with the Selling Stockholders to sell a specified number of such securities at a stipulated price per security; |
| · | through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; |
| · | a combination of any such methods of sale; or |
| · | any other method permitted pursuant to applicable law. |
The Selling Stockholders may also sell securities under Rule 144 or any other exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.
In connection with the Private Offering, we granted registration rights tosale of the purchaserssecurities or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of ourthe securities in the Private Offering. Pursuantcourse of hedging the positions they assume. The Selling Stockholders may also sell securities short and deliver these securities to close out their short positions, or loan or pledge the securities to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are involved in selling the securities may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the securities.
The Company is required to pay certain fees and expenses incurred by the Company incident to the termsregistration of the securities. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
We agreed to keep this Private Offering, we are requiredprospectus effective until the earlier of (i) the date on which the securities may be resold by the Selling Stockholders without registration and without regard to file a registration statementany volume or manner-of-sale limitations by reason of Rule 144, without the requirement for the Company to be in compliance with the SEC that coverscurrent public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the securities have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale securities will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in the Public Offering.applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Anti-takeover EffectsUnder applicable rules and regulations under the Exchange Act, any person engaged in the distribution of Certain Provisionsthe resale securities may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of Our Certificatethe distribution. In addition, the Selling Stockholders will be subject to applicable provisions of Incorporationthe Exchange Act and Bylawsthe rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
Our certificate of incorporation contains provisions that could make it more difficultCertain legal matters with respect to acquire control of our company by means of a tender offer, open market purchases, a proxy contest or otherwise. A description of these provisions is set forth below.
Preferred Stock
We believe that the availability of the preferred stock under our certificate of incorporation provides us with flexibility in addressing corporate issues that may arise. Having these authorized shares available for issuance allows us to issue shares of preferred stock without the expense and delay of a special stockholders’ meeting. The authorized shares of preferred stock, as well as shares of common stock will be available for issuance without further action by our stockholders, unless action is required by applicable law or the rules of any stock exchange on which our securities may be listed. The Board of Directors has the power, subject to applicable law, to issue series of preferred stock that could, depending on the terms of the series, impede the completion of a merger, tender offer or other takeover attempt that some, or a majority, of the stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then prevailing market price of the stock.
Special Meetings of Stockholders
Our bylaws provide that special meetings of stockholders may be called only by the Chairman of the Board or the President.
Anti-takeover Effects of Nevada Law
Business Combinations
The “business combination” provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, or NRS, prohibit a Nevada corporation with at least 200 stockholders from engaging in various “combination” transactions with any interested stockholder: for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the transaction is approved by the board of directors prior to the date the interested stockholder obtained such status; or after the expiration of the three-year period, unless:
A “combination” is defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions, with an “interested stockholder” having: (a) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (b) an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, or (c) 10% or more of the earning power or net income of the corporation.
In general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within three years, did own) 10% or more of a corporation’s voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire our company even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.
Control Share Acquisitions
The “control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS, which apply only to Nevada corporations with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents, and which conduct business directly or indirectly in Nevada, prohibit an acquirer, under certain circumstances, from voting its shares of a target corporation’s stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation’s disinterested stockholders. The statute specifies three thresholds: one-fifth or more but less than one-third, one-third but less than a majority, and a majority or more, of the outstanding voting power. Once an acquirer crosses one of the above thresholds, those shares in an offer or acquisition and acquired within 90 days thereof become “control shares” and such control shares are deprived of the right to vote until disinterested stockholders restore the right. These provisions also provide that if control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other stockholders who do not vote in favor of authorizing voting rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters’ rights.
Transfer Agent and Registrar
Our independent stock transfer agent is Island Stock Transfer, Inc., 15500 Roosevelt Blvd., Suite 301, Clearwater, Florida 33760. Phone (727) 289-0010.
The validity of the shares of our common stock to be issued in this offeringoffered hereby will be passed upon for us by our counsel, Carmel, Milazzo & DiChiara LLP,LLP., New York, New York.
KBL,
The financial statements of Ecoark Holdings, Inc. as of March 31, 2019 have been audited by RBSM LLP, an independent registered public accounting firm, has audited Magnolia Solar’s and Ecoark’sas stated in their report appearing herein. The financial statements at Decemberof Ecoark Holdings, Inc. as of March 31, 2015 and 2014, and for each of the two years in the period ended December 31, 2015,2018 have been audited by KBL LLP, an independent registered public accounting firm, as set forthstated in their report. We have included ourreport appearing herein. Such financial statements are included in this prospectus and elsewhere in this registration statement in reliance onupon the report (which report includes an explanatory paragraph relating to our ability to continue as a going concern) of RBSM, LLP and KBL, LLP’s report, given on theirLLP, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing.
Table of ContentsWHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our common stock and warrants offered byin this prospectus. This prospectus, which constitutes a part of thatthe registration statement, does not contain all of the information set forth in the registration statement or the accompanyingand its exhibits and schedules. Some items included in the registration statement areschedules, portions of which have been omitted from this prospectus in accordance withas permitted by the rules and regulations of the SEC. For further information with respect toabout us and theour common stock, offered in this prospectus, we refer you to the registration statement and the accompanyingto its exhibits and schedules. Statements contained in this prospectus regardingabout the contents of any contract, agreement or any other document are summariesnot necessarily complete and, in each instance, we refer you to the copy of the material terms of these contracts, agreementssuch contract, agreement or other documents. With respect to each of these contracts, agreements or other documentsdocument filed as an exhibit to the registration statement, with each such statement being qualified in all respects by reference is made to such exhibit for a more complete description of the matter involved.
Adocument to which it refers. Anyone may inspect and copy of the registration statement and the accompanyingits exhibits and schedules and any other document we file may be inspected without charge and copied at the SEC’s public reference roomPublic Reference Room the SEC maintains at 100 F Street, N.E., Washington, D.C. 20549. The publicYou may obtain further information onabout the operation of the public reference roomSEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxyYou may also inspect the registration statement and information statementsits exhibits and schedules and other information regarding registrants that file electronically withwithout charge at the website maintained by the SEC. The address of the SEC’s websitethis site is http://www.sec.gov.
We are subject to the information and periodic reporting requirements of the Exchange Act, and we file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are available for inspection and copying at the public reference room and website of the SEC referred to above. Wealso maintain a website at www.ecoarkusa.com. You will be able towww.zestlabs.com, at which you may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, proxy statements and other information to be filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC filings free of charge at our website as soon as reasonably practicable after such material will bethey are electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not incorporated by reference in, and is not part of, this prospectus. You may also request a copy of these filings, at no cost, by writing us at Ecoark Holdings, Inc., 5899 Preston Road #505, Frisco, Texas, 75034.
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014; MARCH 31, 2016
Table of Contents
| Balance Sheets | |
| Statements of Operations | |
| Statement of Changes in Stockholders’ Equity (Deficit) | F-6 |
| Statements of Cash Flows | F-7 |
| Notes to Financial Statements | F-8 – F-44 |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Table of Contents
| Balance Sheets | F-45 |
| Statements of Operations | F-46 |
| Statements of Changes in Stockholders’ Equity (Deficit) | |
| Statements of Cash Flows | |
| Notes to Financial Statements |
| |
| |
Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Magnolia Solar CorporationEcoark Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Magnolia Solar CorporationEcoark Holdings, Inc. (the "Company"“Company”), as of DecemberMarch 31, 2015 and 2014,2019, and the related consolidated statements of operations, changes in stockholders' deficitstockholders’ equity and cash flows for fiscal year ended March 31, 2019 and the years then ended. related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019, and the results of its operations and its cash flows for the fiscal year ended March 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordanceare a public accounting firm registered with standards of the Public Company Accounting Oversight Board (United States). (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Wemisstatement, whether due to error or fraud. The company is not required to have, nor were notwe engaged to perform, an audit of the Company’s internal control over financial reporting. Our audits included considerationAs part of our audit, we are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An
Our audit includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. AnOur audit also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Magnolia Solar Corporation as of December 31, 2015 and 2014, and the results of its consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is in process of completing a merger with another entity while they are continuing their development of their thin film solar cell technology and has incurred substantial losses as a result of this. The lack of profitable operations raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The consolidated financial statements were restated to reflect the retroactive treatment of the Company’s common stock in accordance with SAB Topic 4:C. This restatement had no effect on the Company’s net loss or total stockholders’ deficit.
KBL, LLP
/s/ KBL, LLP
New York, NY
February 26, 2016, except for Note 12 which is dated June 15, 2016
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2015 AND 2014
| DECEMBER 31, | DECEMBER 31, | |||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 45,870 | $ | 25,127 | ||||
| Accounts receivable | 10,513 | 185,455 | ||||||
| Prepaid expense | - | 1,417 | ||||||
| Total current assets | 56,383 | 211,999 | ||||||
| Fixed assets, net | 311 | 623 | ||||||
| OTHER ASSETS | ||||||||
| License with related party, net of accumulated amortization | 83,183 | 118,833 | ||||||
| Total other assets | 83,183 | 118,833 | ||||||
| TOTAL ASSETS | $ | 139,877 | $ | 331,455 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 682,029 | $ | 578,810 | ||||
| Current portion of Original Issue Discount Senior Secured Convertible Promissory Note, net of discount | 2,400,000 | 2,400,000 | ||||||
| Total current liabilities | 3,082,029 | 2,978,810 | ||||||
| TOTAL LIABILITIES | 3,082,029 | 2,978,810 | ||||||
| STOCKHOLDERS' DEFICIT | ||||||||
| Common stock, $0.001 par value, 75,000,000 shares authorized, 189,737 and 158,909 shares issued and outstanding (Restated) | 190 | 159 | ||||||
| Additional paid-in capital (Restated) | 2,539,048 | 2,267,935 | ||||||
| Additional paid-in capital - warrants | 962,297 | 962,297 | ||||||
| Accumulated deficit | (6,443,687 | ) | (5,877,746 | ) | ||||
| Total stockholders' deficit | (2,942,152 | ) | (2,647,355 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 139,877 | $ | 331,455 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
| YEAR ENDED DECEMBER 31, 2015 | YEAR ENDED DECEMBER 31, 2014 | |||||||
| REVENUE – net | $ | 159,882 | $ | 218,270 | ||||
| COST OF REVENUES | 102,069 | 135,356 | ||||||
| GROSS PROFIT | 57,813 | 82,914 | ||||||
| OPERATING EXPENSES | ||||||||
| Indirect and administrative labor | 160,483 | 198,800 | ||||||
| Professional fees | 150,179 | 138,260 | ||||||
| Depreciation and amortization expense | 35,962 | 35,962 | ||||||
| General and administrative | 37,145 | 43,629 | ||||||
| Total operating expenses | 383,769 | 416,651 | ||||||
| OTHER (INCOME) EXPENSE | ||||||||
| Interest expense | 239,985 | 239,981 | ||||||
| Total other (income) expense | 239,985 | 239,981 | ||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (565,941 | ) | (573,718 | ) | ||||
| PROVISION FOR INCOME TAXES | - | - | ||||||
| NET LOSS | $ | (565,941 | ) | $ | (573,718 | ) | ||
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (RESTATED) | 171,932 | 149,880 | ||||||
| NET LOSS PER SHARE (RESTATED) | $ | (3.29 | ) | $ | (3.83 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
| Additional | Additional | |||||||||||||||||||||||
| Common Stock | Paid-In | Paid-In | ||||||||||||||||||||||
| (Restated) | Capital | Capital - | Accumulated | |||||||||||||||||||||
| Shares | Amount | (Restated) | Warrants | Deficits | Total | |||||||||||||||||||
| Balance - December 31, 2013 | 135,341 | $ | 135 | $ | 1,991,275 | $ | 962,297 | $ | (5,304,028 | ) | $ | (2,350,321 | ) | |||||||||||
| Common shares issued for payment of interest | 22,546 | 23 | 239,977 | - | - | 240,000 | ||||||||||||||||||
| Common shares issued for services rendered | 1,022 | 1 | 8,999 | - | - | 9,000 | ||||||||||||||||||
| Stock based compensation | - | - | 27,684 | - | - | 27,684 | ||||||||||||||||||
| Net loss for the year ended December 31, 2014 | - | - | - | - | (573,718 | ) | (573,718 | ) | ||||||||||||||||
| Balance - December 31, 2014 | 158,909 | 159 | 2,267,935 | 962,297 | (5,877,746 | ) | (2,647,355 | ) | ||||||||||||||||
| Common shares issued for payment of interest | 30,828 | 31 | 239,969 | - | - | 240,000 | ||||||||||||||||||
| Common shares issued for services rendered | - | - | - | - | - | - | ||||||||||||||||||
| Stock based compensation | - | - | 31,144 | - | - | 31,144 | ||||||||||||||||||
| Net loss for the year ended December 31, 2015 | - | - | - | - | (565,941 | ) | (565,941 | ) | ||||||||||||||||
| Balance - December 31, 2015 | 189,737 | $ | 190 | $ | 2,539,048 | $ | 962,297 | $ | (6,443,687 | ) | $ | (2,942,152 | ) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
| YEAR ENDED DECEMBER 31, 2015 | YEAR ENDED DECEMBER 31, 2014 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (565,941 | ) | $ | (573,718 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization expense | 35,962 | 35,962 | ||||||
| Stock based compensation | 31,144 | 27,684 | ||||||
| Common stock issued for services rendered | - | 9,000 | ||||||
| Common stock issued for payment of interest | 240,000 | 240,000 | ||||||
| Change in assets and liabilities: | ||||||||
| Decrease in accounts receivable | 174,942 | 41,170 | ||||||
| Decrease in prepaid expenses | 1,417 | - | ||||||
| Increase in accounts payable and accrued expenses | 103,219 | 126,857 | ||||||
| Total adjustments | 586,684 | 480,673 | ||||||
| Net cash provided by (used in) operating activities | 20,743 | (93,045 | ) | |||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 20,743 | (93,045 | ) | |||||
| CASH - BEGINNING OF YEAR | 25,127 | 118,172 | ||||||
| CASH - END OF YEAR | $ | 45,870 | $ | 25,127 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | - | $ | - | ||||
| Income taxes | $ | 912 | $ | 1,222 | ||||
| NON-CASH SUPPLEMENTAL INFORMATION: | ||||||||
| Stock issued for services rendered | $ | - | $ | 9,000 | ||||
| Stock issued for payment of interest | $ | 240,000 | $ | 240,000 | ||||
| Stock based compensation | $ | 31,144 | $ | 27,684 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 1 – Organization and Nature of Business
Magnolia Solar Corporation (the “Registrant”) through its wholly-owned subsidiary, Magnolia Solar, Inc. (“Magnolia Solar” and together with the Registrant, “we,” “our,” “us,” or the “Company”) is focused on developing and commercializing thin film solar cell technologies that employ nanostructured materials and designs.
The Company is pioneering the development of thin film, high efficiency solar cells for applications such as power generation for electrical grids as well as for local applications, including lighting, heating, traffic control, irrigation, water distillation, and other residential, agricultural and commercial uses.
The Company’s technology takes multiple approaches to bringing cell efficiencies close to those realized in silicon based solar cells while also lowering manufacturing costs. The technology uses a different composition of materials than those used by competing thin film cell manufacturers; incorporates additional layers of material to absorb a wider spectrum of light; uses inexpensive substrate materials, such as glass and polymers, lowering the cost of the completed cell compared to silicon based solar cells; and is based on non-toxic materials that do not have adverse environmental effects.
Since 2010, the Company filed a series of U.S. utility patents relating to the technologies under development.
Reverse Merger
On November 19, 2007, the Registrant, formerly known as Mobilis Relocation Services, Inc. (“Mobilis”), was organized under the laws of the State of Nevada. Mobilis formed Magnolia Solar Acquisition Corp., a wholly-owned subsidiary incorporated in the State of Delaware. Mobilis filed a Certificate of Change to its Articles of Incorporation in order to affect a forward split of the number of authorized shares of common stock which they were authorized to issue, and of the then issued and outstanding shares in a ratio of 1.3157895:1. The forward split occurred in February 2010. All share and per share amounts have been reflected herein post-split.
On December 31, 2009, Mobilis entered into an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”) with Magnolia Solar, Inc., a privately held Delaware corporation incorporated on January 8, 2008, and Magnolia Solar Acquisition Corp. (“Acquisition Sub”). Upon closing of the transaction, under the Merger Agreement, Acquisition Sub merged with and into Magnolia Solar, and Magnolia Solar, as the surviving corporation, became a wholly-owned subsidiary of Mobilis. Thereafter, Mobilis changed its name to Magnolia Solar Corporation. The transaction was accounted for as a reverse merger, and the historical financial information is that of Magnolia Solar, Inc.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 1 – Organization and Nature of Business (continued)
Going Concern
These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has been generating revenues from various development contracts with governmental agencies; however the Company has generated losses totaling $565,941 and $573,718 for the years ended December 31, 2015 and 2014, respectively. While the Company raised funds in a private placement that it consummated in 2009 (raising $990,000 in $2,660,000 of Original Issue Discount Senior Secured Convertible Promissory Notes (the “2009 Notes”)), at December 31, 2015 and December 31, 2014, it had cash of $45,870 and $25,127, respectively, and will need to raise additional funds to carry out its business plan.
The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations.
On December 29, 2011, the 2009 Notes in the aggregate principal amount of $2,660,000 were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $260,000 converted into an aggregate of 4,160 shares of common stock of the Company at an adjusted conversion price of $62.50 per share, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2011 to December 31, 2012 and 2009 Notes in the aggregate principal amount of the remaining $400,000 were amended to extend the maturity date from December 31, 2011 to December 31, 2013, (iii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to adjust the conversion price of such notes from $250.00 per share to $62.50 per share, (iv) 2009 Notes in the aggregate principal amount of $400,000 were amended to provide that such notes shall, from January 1, 2012 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, (v) an aggregate of 5,200 shares of common stock of the Company were issued to certain holders of the 2009 Notes, and (vi) the exercise price of the warrants to purchase an aggregate of 13,541 shares of common stock was adjusted from $312.50 per share to $125.00 per share.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 1 – Organization and Nature of Business (continued)
Going Concern (continued)
On December 21, 2012 and June 27, 2013 the 2009 Notes as described in the preceding paragraph were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2012 to December 31, 2013, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to provide that such notes shall, from January 1, 2013 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, and (iii) the exercise price of warrants to purchase an aggregate of 13,541 shares of common stock was adjusted from $125.00 per share to $62.50 per share.
On December 29 and 31, 2013, the 2009 Notes as described in the preceding paragraphs were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,400,000 were amended to extend the maturity dates from December 31, 2013 to December 31, 2014, and (ii) the exercise price of the warrants to purchase an aggregate of 13,541 shares of common stock was adjusted from $62.50 per share to $25.00 per share. Additionally, the Company also agreed to extend the expiration date of the warrants to purchase an aggregate of 10,640 shares of common stock from December 31, 2014 to December 31, 2016.
There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to the Company. If the Company were to default on its indebtedness, then holders of the notes may foreclose on the debt and seize the Company's assets which may force the Company to suspend or cease operations altogether. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. These factors raise substantial doubt regarding the ability of the Company to continue as a going concern.
On January 29, 2016, the Company entered into a Merger Agreement with Ecoark, Inc. ("Ecoark") providing, among other things, for the acquisition of Ecoark by the Company in a share for share exchange pursuant to which it was contemplated that at the closing Ecoark shareholders would own approximately 95% of the outstanding shares of the Company. The Company filed a preliminary 14A Proxy Statement informing its shareholders of the Company’s intent to hold a shareholder meeting in order to vote on certain proposals to amend the Articles of Incorporation to increase of the authorized shares of common stock to 100,000,000 shares, to effect the creation of 5,000,000 shares of "blank check" preferred stock, to approve a reverse stock split of the common stock 1 for 250, and to change the name of the corporation to Ecoark Holdings Inc., the approval of which were conditions to closing the merger with Ecoark. The Company’s shareholders approved the proposals, and the merger was completed in March 2016. In accordance with SEC SAB Topic 4:C, the Company has given retroactive effect to the reverse split of the common stock 1 for 250 (see Note 12).
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 1 – Organization and Nature of Business (continued)
Going Concern (continued)
The Company may need to raise additional capital to expand operations to the point at which the Company can achieve profitability. The terms of equity or debt that may be raised may not be on terms acceptable by the Company. If adequate funds cannot be raised outside of the Company, the Company may suspend or cease operations altogether.
The development of renewable energy and energy efficiency marks a new era of energy exploration in the United States. The Company continues to explore low cost alternatives for energy solutions which are in line with United States government initiatives for renewable energy sources. The Company hopes that these factors will mitigate the current unstable factors in the United States economy.
Note 2 – Summary of Significant Accounting Policies
Basis of Accounting
The financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles.
Principles of Consolidation
The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification 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—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. 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 consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.
The consolidated financial statements include all accounts of the entities at December 31, 2015 as follows:
All inter-company balances and transactions have been eliminated.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 2 - Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
For financial reporting, current earnings are charged and an allowance is credited with a provision for doubtful accounts based on experience. Accounts deemed uncollectible are charged against this allowance. Receivables are reported on the balance sheet net of such allowance. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. The Company believes no allowance for doubtful accounts is necessary at December 31, 2015 or December 31, 2014.
Property and Equipment
Property and equipment are stated at cost and are depreciated on a straight-line basis over their estimated useful lives (from three to seven years). Additions, renewals, and betterments, unless of a minor amount, are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Impairment of Long-Lived Assets
The Company reviews their recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment will be based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell. The Company’s management has determined that the fair value of long-lived assets exceeds the book value and thus no impairment charge is necessary as of December 31, 2015 or December 31, 2014.
Fair Value of Financial Instruments
In accordance with ASC 820,Fair Value Measurements and DisclosuresConsideration, the carrying amount reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company does not utilize derivative instruments.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 2 - Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes utilizing the liability method of accounting. Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.
Revenue Recognition
Revenue is recognized from private and public sector contracts that are time and material type contracts. These revenues are recognized in accordance with ASC 605,Revenue Recognition. The Company recognizes revenue when; (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable and (4) collectability is reasonably assured.
The Company assesses whether fees are fixed or determinable at the time of sale and recognizes revenue if all other revenue recognition requirements are met. The Company's standard payment terms are net 30 days. Payments that extend beyond 30 days from the contract date but that are due within twelve months are generally deemed to be fixed or determinable based on the Company's successful collection history on such arrangements, and thereby satisfy the required criteria for revenue recognition.
Revenue from inception to December 31, 2015 has been primarily from research and development grants or contracts to develop solar cells using the Company’s technology.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other short-term investments with an original maturity of three months or less, when purchased, to be cash equivalents. The Company had no cash equivalents as of December 31, 2015 or December 31, 2014.
Uncertainty in Income Taxes
The Company follows ASC 740-10,Accounting for Uncertainty in Income Taxes. This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates their tax positions on an annual basis. The Company’s policy is to recognize both interest and penalties related to unrecognized tax benefits expected to result in payment of cash within one year are classified as accrued liabilities, while those expected beyond one year are classified as other liabilities. The Company has not recorded any interest or penalties since its inception.
The Company files income tax returns in the U.S. federal tax jurisdiction and various state tax jurisdictions. The tax years for 2012 to 2014 remain open for examination by federal and/or state tax jurisdictions. The Company is currently not under examination by any other tax jurisdictions for any tax year.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 2 - Summary of Significant Accounting Policies (continued)
Loss Per Share of Common Stock
Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as 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. The following is a reconciliation of the computation for basic and diluted EPS:
| December 31, | December 31, | ||||||||
| 2015 | 2014 | ||||||||
| Net loss | $ | (565,941 | ) | $ | (573,718 | ) | |||
| Restated Weighted-average common shares outstanding (Basic) | 171,932 | 149,880 | |||||||
| Weighted-average common stock | |||||||||
| Equivalents | |||||||||
| Stock options | 9,800 | 6,921 | |||||||
| Warrants | 15,141 | 15,141 | |||||||
| Weighted-average common shares outstanding (Diluted) | 196,873 | 171,942 | |||||||
Stock based compensation
The Company applies ASC No. 718 and ASC Subtopic No. 505-50,Equity-Based Payments to Non Employees, to options and other stock based awards issued to nonemployees. In accordance with ASC No. 718 and ASC Subtopic No. 505-50, the Company uses the Black-Scholes option pricing model to measure the fair value of the options at the measurement date.
Recently Issued Accounting Standards
During August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern.” The provisions of ASU No. 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 2 - Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Standards (continued)
During May 2014, the FASB issued an Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". The objective of ASU 2014-09 is to (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a more robust framework for addressing revenue issues, (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (4) provide more useful information to users of financial statements through improved disclosure requirements, and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The effective date of this ASU was subsequently changed with the issuance of ASU 2015-14 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the effect of this standard on its financial statements.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Note 3 - Stockholders’ Deficit
The Company has 75,000,000 shares of common stock, par value of $0.001 per share authorized.
Shares
Prior to the Reverse Merger as discussed in Note 1, the Company issued 17,895 shares of common stock between January and March 2008 at prices ranging from $2.50 to $5.00 per share for a total of $53,000 cash.
In accordance with the Reverse Merger, the Company cancelled 7,895 shares of common stock and issued 85,230 shares to the former shareholders of Magnolia Solar, Inc. As a result of these transactions, as of December 31, 2009, there were 95,320 shares of common stock issued and outstanding.
The Company effectuated a 1.3157895 forward stock split in February 2010, in accordance with the Merger Agreement which resulted in 95,320 shares of common stock issued and outstanding.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 3 - Stockholders’ Deficit (continued)
Shares (continued)
In February 2014, the Company issued 4,196 shares of common stock at its fair value price ($15.00 per share) in lieu of interest payment for a value of $60,000.
In March 2014, the Company issued 379 shares of common stock for consulting services for a value of $4,500 at a fair market value price of $12.50 per share.
In April 2014, the Company issued 8,276 shares of common stock at its fair value price ($7.50 per share) in lieu of interest payment for a value of $60,000.
In April 2014, the Company issued 643 shares of common stock for consulting services for a value of $4,500 at a fair market value price of $7.50 per share.
In August 2014, the Company issued 5,275 shares of common stock at its fair value price ($12.50 per share) in lieu of interest payment for a value of $60,000.
In October 2014, the Company issued 4,800 shares of common stock at its fair value price ($12.50 per share) in lieu of interest payment for a value of $60,000.
In March 2015, the Company issued 4,781 shares of common stock at its fair value price ($12.50 per share) in lieu of interest payment for a value of $60,000.
In April 2015, the Company issued 6,138 shares of common stock at its fair value price ($10.00 per share) in lieu of interest payment for a value of $60,000.
In July 2015, the Company issued 6,575 shares of common stock at its fair value price ($10.00 per share) in lieu of interest payment for a value of $60,000.
In October 2015, the Company issued 13,333 shares of common stock at its fair value price ($5.00 per share) in lieu of interest payment for a value of $60,000.
As of December 31, 2015, the Company had 189,737 shares issued and outstanding.
Warrants
Following the closing of the Reverse Merger in December 2009, the Company issued five-year callable warrants (the “2009 Warrants”) to purchase an aggregate of 10,640 shares of common stock exercisable at $312.50 per share to investors in a private placement (the “2009 Private Placement”) and further issued seven year placement agent warrants to purchase an aggregate of 2,901 shares of common stock exercisable at $262.50 per share. On December 29, 2011, the exercise price of both the 2009 Warrants and placement agent warrants was reduced to $125.00 per share.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 3 - Stockholders’ Deficit (continued)
Warrants (continued)
On December 21, 2012, the exercise price of the 2009 Warrants and placement agent warrants were reduced to $62.50 per share. On December 23, 2013, the exercise price of the 2009 Warrants and placement agent warrants were further reduced to $25.00 per share. Additionally, the Company also agreed to extend the expiration date of the 2009 Warrants from December 31, 2014 to December 31, 2016.
On August 15, 2011, the Company issued 1,600 warrants for public relations services. The warrants vest immediately, and are for a term of 5 years with a strike price of $125.00 per share. The warrants have been valued at $59,534 and are reflected in the consolidated financial statements for the year ended December 31, 2014.
As of December 31, 2015, the following warrants are outstanding:
| Balance – December 31, 2008 | - | - | |||||||
| Issued – in the 26.6 units | 10,640 | $ | 25.00 | ||||||
| Issued – to Placement Agent | 2,901 | $ | 25.00 | ||||||
| Balance – December 31, 2009 | 13,541 | $ | 25.00 | ||||||
| Balance – December 31, 2010 | 13,541 | $ | 25.00 | ||||||
| Issued – for public relations | 1,600 | $ | 125.00 | ||||||
| Balance – December 31, 2011 | 15,541 | $ | 35.00 | ||||||
| Balance – December 31, 2012 | 15,541 | $ | 35.00 | ||||||
| Balance – December 31, 2013 | 15,541 | $ | 35.00 | ||||||
| Balance – December 31, 2014 | 15,541 | $ | 35.00 | ||||||
| Balance – December 31, 2015 | 15,541 | $ | 35.00 |
Stock Options
In May 2014, the Company granted 9,800 shares of common stock under the 2013 Incentive Stock Option Plan. Under the 2013 Plan, the Company may grant options to purchase up to 22,000 shares of common stock to be granted to Company employees, officers, directors, consultants and advisors. The vesting provisions, exercise price and expiration dates will be established by the Board of Directors (the "Board") of the Company at the date of grant, but incentive stock options may be subject to earlier termination, as provided in the 2013 Plan. As of December 31, 2015, there were 9,343 shares available for future grant.
The fair value of each option grant was estimated on the date of grant using theBlack-Scholes option-pricing model.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 3 - Stockholders’ Deficit (continued)
Stock Options (continued)
Expected volatility was calculated based upon the company’s observed median volatility. The risk-free interest rate assumption is based upon the United States Treasury Bond yield curve in effect at the time of grant for instruments with a similar expected life.
The Company recognized compensation cost related to stock-based compensation in the amount of $31,144, for the year ended December 31, 2015. The Company has not recognized any tax benefits or deductions related to the effects of employee stock-based compensation.
In addition, as of December 31, 2015, approximately $10,382 was related to non-vested options which will be recognized over a weighted-average period of approximately 3.42 years.
No options were exercised under all share-based compensation arrangements for the period ending December 31, 2015.
The following is a summary of stock option activity under the Company's stock option plan:
| Number of Options/Shares | Range of Exercise Prices | Weighted- Average Exercise Price | |||||||||||
| Outstanding as of December 31, 2014 | 9,800 | $ | 12.50 | $ | 12.50 | ||||||||
| Options granted | - | $ | 0.00 | $ | 0.00 | ||||||||
| Options exercised | - | $ | 0.00 | $ | 0.00 | ||||||||
| Options forfeited/expired/cancelled | - | $ | 0.00 | $ | 0.00 | ||||||||
| Outstanding as of December 31, 2015 | 9,800 | $ | 12.50 | $ | 12.50 | ||||||||
| Exercisable as of December 31, 2015 | 8,330 | $ | 12.50 | $ | 12.50 | ||||||||
| Exercisable as of December 31, 2014 | 3,920 | $ | 12.50 | $ | 12.50 | ||||||||
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 3 - Stockholders’ Deficit (continued)
Stock Options (continued)
Information about stock options outstanding as of December 31, 2015 is as follows:
| Exercise Price | Number of Options Outstanding | Weighted-Average Remaining Contractual Life (years) | Number of Options Exercisable | ||||||||||||
| $ | 12.50 | 9,800 | 3.42 | 8,330 | |||||||||||
| 9,800 | 3.42 | 8,330 | |||||||||||||
Note 4 - Property and Equipment
Property and equipment consisted of the following at December 31, 2015 and December 31, 2014:
| December 31, | December 31, | ||||||||
| 2015 | 2014 | ||||||||
| Office equipment and computers | $ | 6,106 | $ | 6,106 | |||||
| Furniture and fixtures | 2,182 | 2,182 | |||||||
| 8,288 | 8,288 | ||||||||
| Accumulated depreciation | (7,977 | ) | (7,665 | ) | |||||
| $ | 311 | $ | 623 | ||||||
The Company incurred $312 and $312, respectively, in depreciation expense for the periods ended December 31, 2015 and 2014.
Note 5 - License Agreement with Related Party
The Company has entered into a 10-year, renewable, exclusive license with Magnolia Optical Technologies, Inc. (“Magnolia Optical”) on April 30, 2008 for the exclusive rights of the technology related to the application of Optical’s solar cell technology. Magnolia Optical shares common ownership with the Company.
The Company is amortizing the license fee of $356,500 over the 120 month term of the Agreement. Accumulated amortization as of December 31, 2015 and December 31, 2014 was $273,317 and $237,667, respectively. Amortization expense for each of the years ended December 31, 2015 and 2014 was $35,650, respectively. The Company’s management has determined that the fair value of the license exceeds the book value and thus no further impairment or amortization is necessary as of December 31, 2015 or December 31, 2014.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 6 – Original Issue Discount Senior Secured Convertible Promissory Note
Original Notes
Following the closing of the Reverse Merger in December 2009, the Company issued 26.6 units in the 2009 Private Placement consisting of an aggregate of $2,660,000 of 2009 Notes and 2009 Warrants exercisable into an aggregate of 10,640 shares of common stock exercisable at $312.50 per share, for $50,000 per unit for aggregate proceeds to the Company of $990,000. In addition, placement agent warrants to purchase an aggregate of 2,901 shares of common stock exercisable at $262.50 per share were issued. The 2009 Notes are secured by a first-priority security interest in the assets of the Company. Holders of the 2009 Notes and warrants issued in the 2009 Private Placement also have the right to “piggyback” registration of the shares underlying the 2009 Notes and warrants.
Prior to the amendment and restatement of the 2009 Notes, the 2009 Notes were originally due December 31, 2011 and convertible at the option of the holder, into shares of the Company’s common stock at an initial conversion rate of $250.00 per share.
Amended Notes
On December 29, 2011, the Company entered into amendment agreements with holders of the 2009 Notes and 2009 Warrants. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $260,000 were converted into an aggregate of 4,160 shares of common stock of the Company at an adjusted conversion price of $62.50 per share, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2011 to December 31, 2012 and 2009 Notes in the aggregate principal amount of the remaining $400,000 were amended to extend the maturity date from December 31, 2011 to December 31, 2013, (iii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to adjust the conversion price of such notes from $250.00 per share to $62.50 per share, (iv) 2009 Notes in the aggregate principal amount of $400,000 were amended to provide that such notes shall, from January 1, 2012 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, (v) an aggregate of 5,200 shares of common stock of the Company were issued to certain holders of the 2009 Notes, and (vi) the exercise price of warrants to purchase an aggregate of 13,540 shares of common stock was adjusted from $312.50 per share to $125.00 per share.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 6 – Original Issue Discount Senior Secured Convertible Promissory Note (continued)
Amended Notes (continued)
On December 21, 2012 and on June 27, 2013 the 2009 Notes as described in the preceding paragraph were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2012 to December 31, 2013, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to provide that such notes shall, from January 1, 2013 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, and (iii) the exercise price of the warrants to purchase an aggregate of 13,541 shares of common stock was adjusted from $125.0 per share to $62.50 per share. Upon amendment of the notes, interest was calculated on the entire $2,400,000 of promissory notes at a rate of 10% per year. Interest expense was accrued in the amount of $60,000 per quarter and shares are issued in lieu of cash payments.
On December 29 and 31, 2013 the 2009 Notes as described in the preceding paragraph were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,400,000 were amended to extend the maturity dates from December 31, 2013 to December 31, 2014, (ii) the exercise price of the warrants to purchase an aggregate of 13,541 shares of common stock was adjusted from $62.50 per share to $25.00 per share. Additionally, the Company also agreed to extend the expiration date of the warrants to purchase an aggregate of 10,640 shares of common stock from December 31, 2014 to December 31, 2016.
As of December 31, 2015, the Company issued 75,180 shares of its common stock in lieu of interest payments in the aggregate of $700,000 relating to the 2009 Notes in the aggregate principal of $2,400,000.
As of December 31, 2015, the entire $2,400,000 balance of the amended 2009 Notes remains outstanding. In the transaction, the Company recognized a discount of $1,670,000 which was amortized over the original life of the 2009 Notes. The discount represented the original issue discount. In addition, the Company determined that the value of the warrants in the transaction of $412,830 as a discount to the 2009 Notes. This discount was being amortized as well over the original life of the 2009 Notes.
The 2009 Notes mature on June 30, 2016 (these notes were extended on January 29, 2016 and will convert to equity if the merger is completed - see Note 11).
As of December 31, 2015, $2,400,000 of the 2009 Notes are classified as a current liability and the amounts have not been repaid as of the issuance of these financial statements. The modifications made to the debt instruments did not constitute a material modification under ASC 470-50.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 7 – Provision for Income Taxes
Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.
As of December 31, 2015, there is no provision for income taxes, current or deferred.
| December 31, 2015 | |||||
| Net operating losses | $ | 1,371,196 | |||
| Valuation allowance | (1,371,196 | ) | |||
| $ | - |
At December 31, 2015, the Company had a net operating loss carry forward in the amount of approximately $4,000,000 available to offset future taxable income through 2035. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the years ended December 31, 2015 and 2014 is summarized below.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 8 – Commitments and Contingencies
Office Lease
The Company leases office facilities located in Woburn, MA under a lease agreement that expires December 30, 2016. The Company leased additional office facilities at a second location in Albany, NY under a lease agreement that was canceled effective October 31, 2015. Rent expense for the Company’s facilities for the years ended December 31, 2015 and December 31, 2014 totaled $15,009 and $18,143, respectively.
The future minimum lease payments due under the above mentioned non-cancelable lease agreement is as follows:
| Year ending December 31, | |||||
| 2016 | $ | 4,212 | |||
| $ | 4,212 |
Contract Related Fees
As part of the contract to develop its products, the Company has agreed to pay the contractor 1.5% of future New York state manufactured sales, and 5% of future non-New York state manufactured sales until the entire funds paid by the contractor have been repaid, or 15 years, whichever comes first. As of December 31, 2015, the Company has $1,251,885 of contract related expenses, all of which will be owed to the contractor, contingent upon the sale of the Company’s product. The Company has not accrued a liability as management has determined that it is not probable sales will occur prior to the 15 year expiration of the obligation.
Note 9 - Concentration of Credit Risk
The Company maintains its cash in one bank deposit account, which at times may exceed the federally insured limits of $250,000 that exist through December 31, 2015. At December 31, 2015, the Company did not have any uninsured deposits.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 9 - Concentration of Credit Risk (continued)
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company extends credit based on the customers’ financial conditions. The Company does not require collateral or other security to support customer receivables. Credit losses, when realized, have been within the range of management’s expectations. To further reduce credit risk associated with accounts receivable, the Company performs periodic credit evaluations of its customers.
| December 31, 2015 | December 31, 2014 | ||||||||
| Concentrations in net revenue: | |||||||||
| Customer A | 93 | % | 90 | % | |||||
* Customer did not exceed 10% for the respective year.
Note 10 - Fair Value Measurements
The Company adopted certain provisions of ASC Topic 820. ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 10 - Fair Value Measurements (continued)
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
December 31, 2015 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
| Cash | $ | 45,870 | $ | - | $ | - | $ | 45,870 | |||||||||
| Total assets | $ | 45,870 | $ | - | $ | - | $ | 45,870 | |||||||||
| Original Issue Discount Senior Secured Convertible Promissory Notes | $ | - | $ | - | $ | 2,400,000 | $ | 2,400,000 | |||||||||
| Total liabilities | $ | - | $ | - | $ | 2,400,000 | $ | 2,400,000 | |||||||||
December 31, 2014 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
| Cash | $ | 25,127 | $ | - | $ | - | $ | 25,127 | |||||||||
| Total assets | $ | 25,127 | $ | - | $ | - | $ | 25,127 | |||||||||
| Original Issue Discount Senior Secured Convertible Promissory Notes | $ | - | $ | - | $ | 2,400,000 | $ | 2,400,000 | |||||||||
| Total liabilities | $ | - | $ | - | $ | 2,400,000 | $ | 2,400,000 | |||||||||
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 10 - Fair Value Measurements (continued)
| Original Issue Discount Senior Secured Convertible Promissory Notes | |||||
| Balance, January 1, 2014 | $ | 2,400,000 | |||
| Realized gains (losses) | - | ||||
| Unrealized gains (losses) relating to instruments still held at the reporting date | - | ||||
| Purchases, sales, issuances and settlements, net | - | ||||
| Discount on notes | - | ||||
| Amortization of discount on notes | - | ||||
| Conversion of notes to common stock | - | ||||
| Balance, December 31, 2014 | $ | 2,400,000 | |||
| Realized gains (losses) | - | ||||
| Unrealized gains (losses) relating to instruments still held at the reporting date | - | ||||
| Purchases, sales, issuances and settlements, net | - | ||||
| Discount on notes | - | ||||
| Amortization of discount on notes | - | ||||
| Balance, December 31, 2015 | $ | 2,400,000 | |||
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 11 – Subsequent Events
On January 19, 2016, the Company issued 6,283 shares of common stock for payment in lieu of cash of interest equal to $60,000.
On January 29, 2016, the Company entered into a Merger Agreement with Ecoark providing, among other things, for the acquisition of Ecoark by the Company in a share for share exchange pursuant to which it is contemplated that at the closing Ecoark shareholders will own approximately 95% of the outstanding share of the Company. The Company filed a 14A and is awaiting approval from the SEC on certain proposals to amend the Articles of Incorporation to increase of the authorized shares of common stock to 100,000,000 shares, to effect the creation of 5,000,000 shares of "blank check" preferred stock, to approve a reverse stock split of the common stock 1 for 250, and to change the name of the corporation to Ecoark Holdings Inc. Upon approval by the SEC, it is anticipated that the merger will be completed in March 2016.
On January 29, 2016, the Company entered into an agreement with holders of the Notes Payable as mentioned in Note 6 to extend the term of the note to June 30, 2016. The notes will convert to equity if the merger is completed.
Management has evaluated subsequent events for the disclosure and/or recognition in the financial statements through February 26, 2016 except Note 12 which is dated June 15, 2016, the date that the financial statements were issued.
Note 12 – Restatement of Financial Statements
On March 18, 2016, the Company effected the reverse stock split of its common stock by a ratio of 1 for 250 described in Note 11. In accordance with SEC SAB Topic 4:C, the Company has given retroactive effect to the reverse split by adjusting the number of shares in the consolidated balance sheets, consolidated statements of operations, consolidated statement of changes in stockholders’ deficit and accompanying notes. The retroactive treatment changed the reported common stock and additional paid-in capital in the balance sheets, the weighted average number of shares outstanding and resulting net loss per share in the statements of operations, the number of shares and related dollar amounts in the statement of changes in stockholders’ deficit, and various disclosures regarding number of shares and related amounts in these notes to consolidated financial statements.There was no effect on the net loss or total stockholders’ deficit as a result of the restatement.
The change became effective on March 18, 2016 when the reverse split was approved.
The merger with Ecoark described in Notes 1 and 11 was completed on March 24, 2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Directors of
EcoArk, Inc. and Subsidiaries
Rogers, Arkansas
We have audited the accompanying consolidated balance sheets of EcoArk, Inc. and Subsidiaries (the “Company”) as of December 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EcoArk, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the results of its statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has sustained significant operating losses and needs to obtain additional financing to continue its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ RBSM LLP
We have served as the Company’s auditor since 2019
Larkspur, CA
August 19, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Ecoark Holdings, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Ecoark Holdings, Inc. and Subsidiaries (the “Company”) as of March 31, 2018, the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years ended March 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2018, and the results of its consolidated operations and its cash flows for the year ended March 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of March 31, 2018, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting related to the lack of segregation of duties, the lack of communication on current information for inclusion in disclosures of the quarterly and annual filings, and in the accounting for certain debt and equity transactions which have resulted in the restatement of the Company’s financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above is described in Management’s Annual Report on Internal Control over Financial Reporting. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements for the year ended March 31, 2018, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and performing procedures that respond to those risks. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Going Concern Consideration
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has sustained significant operating losses and needs to obtain additional financing to continue the development of their products.services they provide. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
TheRestatement of Financial Statements
As discussed in Note 3 to the consolidated financial statements, the Company has identified errors in the accounting for certain embedded derivative liabilities in connection with warrants issued in capital raises. As a result of these errors, the Company recognized $13,010 (in thousands) in derivative liabilities as of March 31, 2018, that were restated to reflectpreviously recorded in stockholders’ equity as additional paid in capital. In addition, the retroactive treatmentCompany recognized $9,316 (in thousands) of gains in the Company’s Class A, B, C, and D Common Sharesfair value of these derivative liabilities, resulting in accordance with Accounting Standards Codification 805-40-45. This restatement had no effect ona liability of $3,694 (in thousands) at March 31, 2018. These errors resulted in decreasing the Company’s net loss or total stockholders’ equity (deficit)for the year ended March 31, 2018 from $42,152 (in thousands) to $32,836 (in thousands) and decreasing the loss per share from ($0.93) to ($0.72).
/s/ KBL, LLP
We have served as the Company’s auditor since 2009 through 2018.
KBL, LLP
New York, NY
March 28, 2016,June 27, 2018, except for Note 153 which is dated June 15, 2016August 13, 2019
F-3
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
DECEMBERAS OF MARCH 31 2015 AND 2014
| (Dollars in thousands, except per share, data) | ||||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 1,962 | $ | 2,220 | ||||
| Accounts receivable, net of allowance | 972 | 884 | ||||||
| Inventory, net of reserves | 743 | 903 | ||||||
| Prepaid expenses | 161 | 151 | ||||||
| Related party receivable | - | 100 | ||||||
| Other current assets | 130 | 25 | ||||||
| Total current assets | 3,968 | 4,283 | ||||||
| Property and equipment, net | 363 | 462 | ||||||
| Intangible assets, net | 852 | 1,904 | ||||||
| Other assets | 25 | - | ||||||
| Total non-current assets | 1,240 | 2,366 | ||||||
| TOTAL ASSETS | $ | 5,208 | $ | 6,649 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Current portion of long-term debt | $ | 3,175 | $ | 3,027 | ||||
| Current portion of long-term debt - related parties | 1,329 | 6,176 | ||||||
| Note payable – bank | - | 250 | ||||||
| Accounts payable | 1,074 | 967 | ||||||
| Accrued expenses | 503 | 209 | ||||||
| Accrued interest | 40 | 148 | ||||||
| Deferred revenue | - | 142 | ||||||
| Total current liabilities | 6,121 | 10,919 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| Long-term debt, net of current portion | - | 171 | ||||||
| Long-term debt - related parties, net of current portion | - | 3,111 | ||||||
| Total non-current liabilities | - | 3,282 | ||||||
| COMMITMENTS AND CONTINGENCIES | - | - | ||||||
| Total liabilities | 6,121 | 14,201 | ||||||
| STOCKHOLDERS' EQUITY (DEFICIT) (Numbers of shares rounded to thousands) (Restated) | ||||||||
| Series A General Common Shares - $0.001 par value; 38,000 shares authorized and issued, 17,229 and 12,300 shares outstanding as of December 31, 2015 and 2014, respectively | 19 | 19 | ||||||
| Series B Common Shares - $0.001 par value; 10,000 shares authorized, 4,931 shares issued and outstanding as of December 31, 2015 and 2014, respectively | 5 | 5 | ||||||
| Series C Common Shares - $0.001 par value; 5,000 shares authorized, 1,738 and 1,675 shares issued and outstanding as of December 31, 2015 and 2014, respectively | 2 | 2 | ||||||
| Series D Common Shares - $0.001 par value; 8,000 shares authorized, 3,723 shares issued and outstanding as of December 31, 2015 and 2014, respectively | 4 | 4 | ||||||
| Additional paid-in-capital | 36,722 | 22,172 | ||||||
| Subscription receivable | (55 | ) | (31 | ) | ||||
| Accumulated deficit | (36,587 | ) | (26,085 | ) | ||||
| Treasury stock, at cost, 1,771 and 6,700 Series A General Common Shares as of December 31, 2015 and 2014, respectively | (928 | ) | (3,514 | ) | ||||
| Total stockholders' equity (deficit) before non-controlling interest | (818 | ) | (7,428 | ) | ||||
| Non-controlling interest | (95 | ) | (124 | ) | ||||
| Total stockholders' equity (deficit) | (913 | ) | (7,552 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 5,208 | $ | 6,649 | ||||
| (Dollars in thousands, except per share data) | ||||||||
| 2019 | 2018 | |||||||
| ASSETS | (Restated) | |||||||
| CURRENT ASSETS | ||||||||
| Cash ($35 pledged as collateral for credit) | $ | 244 | $ | 3,730 | ||||
| Accounts receivable, net of allowance of $573 and $87 as of March 31, 2019 and March 31, 2018, respectively | 520 | 2,617 | ||||||
| Prepaid expenses and other current assets | 900 | 242 | ||||||
| Current assets held for sale – (Note 2) | 23 | 645 | ||||||
| Total current assets | 1,687 | 7,234 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Property and equipment, net | 824 | 2,619 | ||||||
| Intangible assets, net | - | 1,545 | ||||||
| Non-current assets held for sale – (Note 2) | - | 1,023 | ||||||
| Other assets | 27 | 26 | ||||||
| Total non-current assets | 851 | 5,213 | ||||||
| TOTAL ASSETS | $ | 2,538 | $ | 12,447 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 1,416 | $ | 2,350 | ||||
| Accrued liabilities | 828 | 1,080 | ||||||
| Note payable | 1,350 | - | ||||||
| Derivative liabilities – (Note 3) | 3,104 | 3,694 | ||||||
| Current portion of long-term debt | - | 500 | ||||||
| Current liabilities held for sale – (Note 2) | 34 | 43 | ||||||
| Total current liabilities | 6,732 | 7,667 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Total liabilities | 6,732 | 7,667 | ||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) (Numbers of shares rounded to thousands) | ||||||||
| Preferred stock, $0.001 par value; 5,000 shares authorized; none issued | - | - | ||||||
| Common stock, $0.001 par value; 100,000 shares authorized, 52,571 shares issued and 51,986 shares outstanding as of March 31, 2019 and 49,468 shares issued and 48,923 outstanding as of March 31, 2018 | 53 | 49 | ||||||
| Additional paid-in-capital | 113,310 | 108,585 | ||||||
| Accumulated deficit | (115,886 | ) | (102,236 | ) | ||||
| Treasury stock, at cost | (1,671 | ) | (1,618 | ) | ||||
| Total stockholders’ equity (deficit) | (4,194 | ) | 4,780 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 2,538 | $ | 12,447 | ||||
The accompanying notes are an integral part of these consolidated financial statements
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THEFISCAL YEARS ENDED DECEMBERMARCH 31 2015 AND 2014
| (Dollars in thousands, except per share data) | ||||||||
| 2019 | 2018 | |||||||
| (Restated) | ||||||||
| CONTINUING OPERATIONS: | ||||||||
| REVENUES (Note 4) | $ | 1,062 | $ | 558 | ||||
| COST OF REVENUES | 699 | 243 | ||||||
| GROSS PROFIT | 363 | 315 | ||||||
| OPERATING EXPENSES: | ||||||||
| Salaries and salary related costs, including non-cash share-based compensation of $2,722 and $20,592 for 2019 and 2018, respectively (Note 13) | 4,848 | 25,962 | ||||||
| Professional fees and consulting, including non-cash share-based compensation of $405 and $2,860 for 2019 and 2018, respectively (Note 13) | 1,315 | 4,812 | ||||||
| Other selling, general and administrative | 1,671 | 1,677 | ||||||
| Depreciation, amortization, and impairment | 3,357 | 818 | ||||||
| Research and development | 3,320 | 5,576 | ||||||
| Total operating expenses | 14,511 | 38,845 | ||||||
| Loss from continuing operations before other expenses | (14,148 | ) | (38,530 | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Change in fair value of derivative liabilities | 3,160 | 9,316 | ||||||
| Interest expense, net of interest income | (417 | ) | (55 | ) | ||||
| Total other income | 2,743 | 9,261 | ||||||
| LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES | (11,405 | ) | (29,269 | ) | ||||
| DISCONTINUED OPERATIONS: | ||||||||
| Loss from discontinued operations | (2,300 | ) | (4,181 | ) | ||||
| Gain on disposal of discontinued operations | 57 | 636 | ||||||
| Total discontinued operations | (2,243 | ) | (3,545 | ) | ||||
| PROVISION FOR INCOME TAXES | (2 | ) | (22 | ) | ||||
| NET LOSS | $ | (13,650 | ) | $ | (32,836 | ) | ||
| NET LOSS PER SHARE | ||||||||
| Basic and diluted: Continuing operations | $ | (0.23 | ) | $ | (0.64 | ) | ||
| Discontinued operations | $ | (0.04 | ) | $ | (0.08 | ) | ||
| Total | $ | (0.27 | ) | $ | (0.72 | ) | ||
| SHARES USED IN CALCULATION OF NET LOSS PER SHARE | ||||||||
| Basic and diluted | 51,010 | 45,500 | ||||||
| (Dollars in thousands, except per share, data) | ||||||||
| 2015 | 2014 | |||||||
| REVENUES | ||||||||
| Revenue from product sales | $ | 5,167 | $ | 4,378 | ||||
| Revenue from services | 2,701 | 1,639 | ||||||
| 7,868 | 6,017 | |||||||
| COST OF REVENUES | ||||||||
| Cost of product sales | 4,960 | 4,298 | ||||||
| Cost of services | 1,178 | 726 | ||||||
| 6,138 | 5,024 | |||||||
| GROSS PROFIT | 1,730 | 993 | ||||||
| OPERATING EXPENSES: | ||||||||
| Salaries and salary related costs, including stock based compensation | 3,791 | 2,836 | ||||||
| Professional fees and consulting | 3,651 | 5,311 | ||||||
| General and administrative | 1,636 | 1,630 | ||||||
| Depreciation and amortization | 1,226 | 1,708 | ||||||
| Research and development | 1,114 | 1,053 | ||||||
| Total operating expenses | 11,418 | 12,538 | ||||||
| Loss from operations | (9,688 | ) | (11,545 | ) | ||||
| OTHER EXPENSE: | ||||||||
| Interest expense, net of interest income | (785 | ) | (1,270 | ) | ||||
| Loss from continuing operations before provision for income taxes | (10,473 | ) | (12,815 | ) | ||||
| PROVISION FOR INCOME TAXES | - | - | ||||||
| LOSS FROM CONTINUING OPERATIONS | (10,473 | ) | (12,815 | ) | ||||
| DISCONTINUED OPERATIONS | ||||||||
| Loss from discontinued operations | - | (1,449 | ) | |||||
| Gain (loss) on disposal of operations | - | - | ||||||
| LOSS FROM DISCONTINUED OPERATIONS | - | (1,449 | ) | |||||
| NET LOSS | (10,473 | ) | (14,264 | ) | ||||
| NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST | 29 | (129 | ) | |||||
| NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST | $ | (10,502 | ) | $ | (14,135 | ) | ||
| NET LOSS PER SHARE (RESTATED) | ||||||||
| Basic | $ | (0.36 | ) | $ | (0.51 | ) | ||
| Diluted | $ | (0.36 | ) | $ | (0.51 | ) | ||
| SHARES USED IN CALCULATION OF NET LOSS PER SHARE (RESTATED) | (Number of shares in thousands) | |||||||
| Basic | 29,344 | 27,575 | ||||||
| Diluted | 29,395 | 27,922 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
MARCH 31, 2019
(Restated)
(Dollar amounts and number of shares in thousands)
| Preferred | Common | Additional Paid-In- | Accumulated | Treasury | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | |||||||||||||||||||||||||
| Balances at April 1, 2017 (Restated) | - | $ | - | 42,330 | $ | 42 | $ | 80,845 | $ | (69,400 | ) | $ | - | $ | 11,487 | |||||||||||||||||
| Shares issued for cash in private placement, net of expenses | - | - | 5,000 | 5 | 3,029 | - | - | 3,034 | ||||||||||||||||||||||||
| Share-based compensation – stock – Board of Directors | - | - | 201 | - | 550 | - | �� | - | 550 | |||||||||||||||||||||||
| Share-based compensation – stock – services rendered | - | - | 65 | - | 596 | - | - | 596 | ||||||||||||||||||||||||
| Share-based compensation – stock – employees | - | - | 1,783 | 2 | 20,590 | - | - | 20,592 | ||||||||||||||||||||||||
| Purchase shares from employees in lieu of taxes | - | - | - | - | - | - | (1,618 | ) | (1,618 | ) | ||||||||||||||||||||||
| Stock issued to purchase 440 Labs | - | - | 300 | - | 1,500 | - | - | 1,500 | ||||||||||||||||||||||||
| Share-based compensation due to employment agreements | - | - | 300 | - | 1,500 | - | - | 1,500 | ||||||||||||||||||||||||
| Warrant conversion – cashless | - | - | 49 | - | - | - | - | - | ||||||||||||||||||||||||
| Sale of Eco3d, shares received and cancelled | - | - | (560 | ) | - | (25 | ) | - | - | (25 | ) | |||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | (32,836 | ) | - | (32,836 | ) | ||||||||||||||||||||||
| Balances at March 31, 2018 (Restated) | - | - | 49,468 | 49 | 108,585 | (102,236 | ) | (1,618 | ) | 4,780 | ||||||||||||||||||||||
| Shares issued for cash in private placement, net of expenses | - | - | 2,969 | 3 | 1,648 | - | - | 1,651 | ||||||||||||||||||||||||
| Share-based compensation – options – Board of Directors | - | - | - | - | 400 | - | - | 400 | ||||||||||||||||||||||||
| Share-based compensation – stock – services rendered | - | - | - | - | (14 | ) | - | - | (14 | ) | ||||||||||||||||||||||
| Share-based compensation – stock, options – employees | - | - | 134 | 1 | 2,691 | - | - | 2,692 | ||||||||||||||||||||||||
| Purchase shares from employees in lieu of taxes | - | - | - | - | - | - | (53 | ) | (53 | ) | ||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | (13,650 | ) | - | (13,650 | ) | ||||||||||||||||||||||
| Balances at March 31, 2019 | - | $ | - | 52,571 | $ | 53 | $ | 113,310 | $ | (115,886 | ) | $ | (1,671 | ) | $ | (4,194 | ) | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MARCH 31
| (Dollars in thousands) | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | (Restated) | |||||||
| Net loss | $ | (13,650 | ) | $ | (32,836 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation, amortization and impairment | 3,357 | 3,041 | ||||||
| Bad debt expense | 486 | - | ||||||
| Share-based compensation - services rendered | 400 | 2,860 | ||||||
| Share-based compensation - employees | 2,673 | 20,592 | ||||||
| Share-based compensation due to employment agreements | - | 1,500 | ||||||
| Change in fair value of derivative liabilities | (3,160 | ) | (9,316 | ) | ||||
| Adjusted loss from discontinued operations | 1,848 | 4,181 | ||||||
| Gain on sale of discontinued operations | (57 | ) | (636 | ) | ||||
| Loss on retirement of assets | 5 | 61 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 1,611 | (1,060 | ) | |||||
| Inventory | - | (983 | ) | |||||
| Prepaid expenses and other current assets | (36 | ) | 34 | |||||
| Other assets | (26 | ) | 6 | |||||
| Accounts payable | (934 | ) | 634 | |||||
| Accrued liabilities | 291 | (1,691 | ) | |||||
| Net cash used in operating activities of continuing operations | (7,192 | ) | (13,613 | ) | ||||
| Net cash used in discontinued operations | (1,848 | ) | (4,030 | ) | ||||
| Net cash used in operating activities | (9,040 | ) | (17,643 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of discontinued operations | 825 | 2,029 | ||||||
| Purchases of short-term investments | - | (1,001 | ) | |||||
| Redemption of short-term investments | - | 1,001 | ||||||
| Purchases of property and equipment | (289 | ) | (277 | ) | ||||
| Net cash provided by investing activities | 536 | 1,752 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock and warrants, net of fees | 4,221 | 12,693 | ||||||
| Proceeds from credit facility | 1,350 | - | ||||||
| Purchase of treasury shares from employees | (53 | ) | (1,618 | ) | ||||
| Repayments of debt - related parties | - | (100 | ) | |||||
| Repayments of debt | (500 | ) | - | |||||
| Net cash provided by financing activities | 5,018 | 10,975 | ||||||
| NET DECREASE IN CASH | (3,486 | ) | (4,916 | ) | ||||
| Cash - beginning of period | 3,730 | 8,646 | ||||||
| Cash - end of period | $ | 244 | $ | 3,730 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | 382 | $ | 60 | ||||
| Cash paid for income taxes | $ | 2 | $ | - | ||||
| SUMMARY OF NONCASH ACTIVITIES: | ||||||||
| Inventory reclassified to property and equipment | $ | - | $ | 2,477 | ||||
| Assets and liabilities acquired via acquisition of companies: | ||||||||
| Identifiable intangible assets | $ | - | $ | 1,435 | ||||
| Goodwill | $ | - | $ | 65 | ||||
| Other assets | $ | - | $ | 28 | ||||
The accompanying notes are an integral part of these consolidated financial statements
ECOARK HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 (RESTATED)
| (Dollar amounts and number of shares in thousand) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A General Common | Series B Common | Series C Common | Series D Common | Additional Paid-In- | Subscription | Accumulated | Treasury | Non-controlling | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Stock | Interest | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2014 | 19,000 | $ | 19 | 4,931 | $ | 5 | 1,000 | $ | 1 | 890 | $ | 1 | $ | 13,872 | - | $ | (11,950 | ) | $ | (994 | ) | $ | 5 | $ | 959 | |||||||||||||||||||||||||||||||
| Shares issued for cash, net of expenses | - | - | - | - | - | - | 2,333 | 2 | 5,172 | $ | (31 | ) | - | - | - | 5,143 | ||||||||||||||||||||||||||||||||||||||||
| Shares issued for services rendered | - | - | - | - | 675 | 1 | 500 | 1 | 2,936 | - | - | - | - | 2,938 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchase of treasury shares | - | - | - | - | - | - | - | - | - | - | - | (3,116 | ) | - | (3,116 | ) | ||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury shares for company formation | - | - | - | - | - | - | - | - | - | - | - | 28 | - | 28 | ||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury shares for services rendered | - | - | - | - | - | - | - | - | - | - | - | 568 | - | 568 | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation - options | - | - | - | - | - | - | - | - | 192 | - | - | - | - | 192 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss for the year | - | - | - | - | - | - | - | - | - | - | (14,135 | ) | - | (129 | ) | (14,264 | ) | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2014 | 19,000 | 19 | 4,931 | 5 | 1,675 | 2 | 3,723 | 4 | 22,172 | (31 | ) | (26,085 | ) | (3,514 | ) | (124 | ) | (7,552 | ) | |||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury shares for cash, net of expenses | - | - | - | - | - | - | - | - | 7,301 | (55 | ) | - | 1,184 | - | 8,430 | |||||||||||||||||||||||||||||||||||||||||
| Shares issued for services rendered | - | - | - | - | 63 | - | - | - | 175 | - | - | - | 175 | |||||||||||||||||||||||||||||||||||||||||||
| Repurchase of treasury shares for release of guarantee | - | - | - | - | - | - | - | - | 393 | - | - | (393 | ) | - | - | |||||||||||||||||||||||||||||||||||||||||
| Collection of subscription receivable | - | - | - | - | - | - | - | - | - | 31 | - | - | 31 | |||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury shares for services rendered | - | - | - | - | - | - | - | - | - | - | - | 719 | - | 719 | ||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury shares for debt conversion | - | - | - | - | - | - | - | - | 6,315 | - | - | 1,076 | - | 7,391 | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation - options | - | - | - | - | - | - | - | - | 366 | - | - | - | - | 366 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss for the year | - | - | - | - | - | - | - | - | - | - | (10,502 | ) | - | 29 | (10,473 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2015 | 19,000 | $ | 19 | 4,931 | $ | 5 | 1,738 | $ | 2 | 3,723 | $ | 4 | $ | 36,722 | $ | (55 | ) | $ | (36,587 | ) | $ | (928 | ) | $ | (95 | ) | $ | (913 | ) | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
ECOARK INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
| (Dollars in thousands) | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss attributable to controlling interest | $ | (10,502 | ) | $ | (14,135 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,226 | 1,708 | ||||||
| Stock-based compensation - options | 366 | 192 | ||||||
| Shares of common stock issued for services rendered | 175 | 2,938 | ||||||
| Shares of treasury stock re-issued for services rendered, company formation | 719 | 596 | ||||||
| Change in non-controlling interest on cash | 29 | (129 | ) | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (88 | ) | (671 | ) | ||||
| Inventory | 160 | 93 | ||||||
| Prepaid expenses | (10 | ) | 13 | |||||
| Other assets | (130 | ) | 38 | |||||
| Accounts payable | 107 | 123 | ||||||
| Accrued expenses | 294 | 103 | ||||||
| Accrued interest | 125 | 977 | ||||||
| Deferred revenue | (142 | ) | 142 | |||||
| Net cash used in operating activities | (7,671 | ) | (8,012 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (60 | ) | (197 | ) | ||||
| Collections (advances) on notes receivable - related party | 100 | (100 | ) | |||||
| Acquisition of intangible assets | (15 | ) | - | |||||
| Net cash provided by (used in) investing activities | 25 | (297 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the issuance of common stock, net of fees | 31 | 5,143 | ||||||
| Re-issuance of treasury shares for cash, net of expenses | 8,430 | - | ||||||
| Proceeds from the issuances of long-term debt | - | 3,000 | ||||||
| Repayments of debt | (273 | ) | (26 | ) | ||||
| Proceeds from the issuances of long-term debt - related parties | 1,875 | 5,259 | ||||||
| Repayments of long-term debt - related parties | (2,675 | ) | (3,199 | ) | ||||
| Net cash provided by financing activities | 7,388 | 10,177 | ||||||
| NET INCREASE (DECREASE) IN CASH | (258 | ) | 1,868 | |||||
| Cash - beginning of the year | 2,220 | 352 | ||||||
| Cash - end of the year | $ | 1,962 | $ | 2,220 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | 551 | $ | 23 | ||||
| Cash paid for income taxes | $ | - | $ | 1 | ||||
| SUMMARY OF NONCASH ACTIVITIES: | ||||||||
| Treasury stock re-purchased for long-term debt related parties | $ | - | $ | 2,500 | ||||
| Treasury stock re-purchased for release of guarantee | $ | 393 | $ | - | ||||
| Treasury stock re-purchased for sale of net assets - SA Concepts | $ | - | $ | 616 | ||||
| Treasury stock re-issued for debt conversion - related parties | $ | 7,391 | $ | - | ||||
| Accrued interest converted into debt - related parties | $ | 235 | $ | 1,400 | ||||
The accompanying notes are an integral part of these consolidated financial statements
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and sharesAND SHARES IN THOUSANDS, EXCEPT PER SHARE data)DATA)
YEARS ENDED DECEMBERMARCH 31, 2015 AND 20142019
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Organization
EcoArkEcoark Holdings, Inc. and Subsidiaries(“Ecoark Holdings”) is an innovative and growth-oriented company founded in 2011 that develops and deploys intelligent technologies and products in order to meet the demand for sustainable, integrated solutions to contemporary business needs. EcoArk Inc. is a holdingAgTech company that integratesis focused on modernizing the businesspost-harvest fresh food supply chain for a wide range of its subsidiaries (see detail below).organizations including growers, processors, distributors and retailers. Ecoark Holdings is the parent company of Ecoark, Inc. and Magnolia Solar Inc. On June 6, 2019, the Company announced that it had entered into a definitive agreement to acquire Trend Discovery Holdings, Inc. (“Trend Discovery”), a fund management company.
Eco3D,Ecoark, Inc. (“Ecoark”) was founded in 2011. Ecoark merged into a wholly-owned subsidiary of Magnolia Solar Corporation (“MSC”) on March 24, 2016, with Ecoark as the surviving entity. At the merger, MSC changed its name to Ecoark Holdings, Inc. Ecoark is the parent company of Eco360, Pioneer Products and Zest Labs (formerly known as Intelleflex Corporation). Ecoark was also the parent company of Eco3d until it was sold in April 2017, as discussed below.
Eco3d, LLC (“Eco3D”Eco3d”) iswas located in Phoenix, Arizona and provides customers with the latest 3D3d technologies. Eco3DEco3d was formed by Ecoark in November 2013 and Ecoark ownsowned 65% of the LLC. The remaining 35% iswas reflected as non-controlling interests. Eco3Dinterest until September 2016 when Ecoark Holdings issued shares of stock in exchange for the 35% non-controlling interest. Eco3d provides 3D3d mapping, modeling, and consulting services for clients in retail, construction, healthcare, and multiple other industries throughout the United StatesStates. As described further in Note 2, in March 2017 the Ecoark Holdings Board of Directors (“Ecoark Holdings Board”) approved a plan to sell Eco3d, and overseas. Eco3D is transitioning businesses from 2D technology that has existed for hundreds of years, to a world of digital 3D. Eco3D incorporates a variety of 3D technologies to achieve customer goals and objectives. Utilizing several techniques, Eco3D can capture existing conditions – topography, buildings, exterior/interior spaces, etc. –the sale was completed in highly accurate detail that allows for 2D and 3D measurement. These measurements form the basis for analysis, design, documentation, and quality control.April 2017.
Eco360, LLC (“Eco360”) is located in Bentonville, Arkansas and iswas engaged in research and development activities. Eco360 was formed in November 2014 by Ecoark. Eco360 does not currently have any active operations.
Pioneer Products, LLC (“Pioneer Products”) is located in Bentonville, Arkansas and iswas involved in the selling of recycled plastic products and other products. In additionIt sold to a strong and successful relationship with the world’s largest retailer, Pioneer Products also has vendor relationships with other key retailers. As such, Pioneer strategically leverages its role as a trusted supplier to these retailers with existing and new products. This subsidiary also recovers plastic waste from retail supply chains and creates new consumer products with the reclaimed materials.retailer. Pioneer Products was purchased by Ecoark in 2012. Pioneer Products acquired Sable Polymer Solutions, LLC in a stock transaction on May 3, 2016, so its results were included with Pioneer’s since May 2016. As described in Note 2, in May 2018 the Ecoark Holdings Board approved a plan to sell Pioneer, and it ceased operations in February 2019.
Intelleflex CorporationSable Polymer Solutions, LLC (“Intelleflex”Sable”) was located in Flowery Branch, Georgia and specialized in the sale, purchase and processing of post-consumer and post-industrial plastic materials. It provided products to a variety of suppliers and customers throughout the plastics processing industry, from small extruders, molders and scrap collectors to large corporations. As described in Note 2, in May 2018 the Ecoark Holdings Board approved a plan to sell Sable, and its key assets were sold in March 2019.
Zest Labs, Inc. (“Zest Labs”) is located in San Jose, California and provides food retailers and suppliers intelligent, on-demandoffers freshness management solutions for retailersgrocers, restaurants, growers, manufacturers and companies that ship and store products for perishable food quality management. Intelleflex's ZEST Data Servicessuppliers. Its Zest Fresh solution is a secure, multi-tenant cloud-based data collection platform for aggregating and real-time permission-based sharing and analysis of information. ZEST Fresh, a fresh foodpost-harvest freshness management solution that utilizes the ZEST Data Service platform,improves delivered quality and reduces losses due to temperature handling and processing by intelligently matching customer freshness requirements with actual product freshness. It focuses on threefour primary value propositions – operational efficiency, consistent food quality,freshness, reduced waste, and improved food safety. ZESTZest Fresh empowers workers with real-time analytic tools and alerts that improve efficiency while driving quality consistency through best practice adherence on every pallet. ZESTat a pallet level. The Zest Delivery provides real-timesolution offers dynamic monitoring and control for prepared food delivery containers, helping delivery and dispatch personnel ensure the quality and safety of delivered food. Zest Labs (then known as Intelleflex Corporation) was purchased by Ecoark in September 2013. Effective October 28, 2016, Intelleflex Corporation changed its name to Zest Labs, Inc. to align its corporate name with its mission and the brand name of its products and services. Zest Labs acquired 440labs, Inc. in a stock transaction on May 23, 2017.
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MARCH 31, 2019
440labs, Inc. (“440labs”) is located near Boston, Massachusetts and is a software development and information solutions provider for cloud, mobile, and IoT (Internet of Things) applications. 440labs had been a key development partner with Zest Labs for more than four years prior to the May 2017 acquisition, contributing its expertise in scalable enterprise cloud solutions and mobile applications.
Magnolia Solar Inc. (“Magnolia Solar”) is located in Albany, New York and is principally engaged in the development and commercialization of nanotechnology-based, high-efficiency, thin-film technology that can be deposited on a variety of substrates, including glass and flexible structures. Magnolia Solar was a subsidiary of MSC that merged with Ecoark on March 24, 2016 to create Ecoark Holdings and continued operations as a subsidiary of Ecoark Holdings. As described in Note 2, in May 2018 the Ecoark Holdings Board approved a plan to sell Magnolia Solar, and the sale was completed in May 2019.
Principles of Consolidation
The consolidated financial statements include the accounts of EcoArk, Inc.Ecoark Holdings and its direct and indirect subsidiaries, collectively referred to as “the Company”. All significant intercompany accounts and transactions have been eliminated in consolidation. The CompanyEcoark Holdings is a holding company that holds 100% of Ecoark and Magnolia Solar. Ecoark holds one hundred percent100% of Eco360, Pioneer Products (which owns 100% of Sable), Zest Labs and, Intelleflex. EcoArk ownsuntil April 2017, Eco3d. As described further in Note 2, in March 2017 the Ecoark Holdings Board approved a plan to sell Eco3d, and the sale was completed in April 2017. Ecoark previously owned 65% of Eco3DEco3d and the remaining 35% interest iswas owned by executives of Eco3D.Eco3d until September 2016 when the executives’ 35% interest was acquired in exchange for 525 shares of Ecoark Holdings stock. In conjunction with the sale of Eco3d in April 2017, the 525 shares were reacquired by the Company and canceled.
In May 2018 the Ecoark Holdings Board approved a plan to sell key assets of Pioneer (including the assets of Sable) and Magnolia Solar. Relevant assets and liabilities are classified as held for sale and operations as discontinued in the consolidated financial statements. See Note 2.
The Company applies the guidance of Topic 810 “Consolidation”Consolidation of the Financial Accounting Standards Board (FASB)(“FASB”) Accounting Standards Codification (ASC)(“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—shall beare 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.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
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MARCH 31, 2019
Noncontrolling Interests
In accordance with ASC 810-10-45Noncontrolling Interests in Consolidated Financial Statements,the Company classifies noncontrolling interests as a component of equity within the consolidated balance sheets. Forsheet. In September 2016, the years ended December 31, 201535% noncontrolling interest of Eco3d was acquired in exchange for 525 shares of Ecoark Holdings stock which eliminated the noncontrolling interest. On April 14, 2017, the Company sold the assets, liabilities and 2014, net income or (loss) attributable to noncontrollingmembership interests in Eco3d, and the 525 shares of $29Ecoark Holdings were returned as part of the sales proceeds and ($129), respectively, is included in the Company’s net loss.were subsequently canceled.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with U.SU.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “Commission” or the “SEC”). It is Management'smanagement’s opinion that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.As a result of the merger transaction described in Note 14 and in accordance with ASC 805-40-45, the Company has given retroactive effect to certain share calculations by restating amounts (see Note 15).
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Reclassification
The Company has reclassified certain amounts in the 2014fiscal 2018 consolidated financial statements to comply with the 20152019 presentation. These changes principally consistrelate to classification of stating $1,053 of research and development costs as a component of operating expenses rather than as acertain revenues, cost of revenues and related segment data, as well as certain research and development expenses. Reclassifications relating to the discontinued operations of Eco3d, Pioneer, Sable and Magnolia are described further in Note 2. The Company reclassified certain items in inventory of Zest Labs to property and equipment to reflect the transition to the Software as a Service (“SaaS”) model. The reclassifications had no effectimpact on thetotal net loss or net cash flows for 2014.the years ended March 31, 2019 and 2018. However, restatements described further in Note 3 did impact fiscal 2018 reported amounts.
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 non-collectibleuncollectible accounts receivable, obsolete or slow-moving inventory,fair value of assets held for sale and assets and liabilities acquired, impaired value of equipment and intangible assets, 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 issued.awards. Actual results could differ from those estimates.
Cash
Cash consists of cash, demand deposits and money market funds with an original maturity of three months or less. The Company holds no cash equivalents as of March 31, 2019 and 2018, respectively. The Company maintains cash balances in excess of the FDIC insured limit. The Company does not consider this risk to be material.
Inventory
Inventory iswas stated at the lower of cost or market. Inventory cost iswas determined by specific identification on a firstaverage cost and at standard cost, which approximates average costs in first out basis, and provisions are madeaccordance with ASC 330-10-30-12. Provisions weremade to reduce slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values. The Company established reserves for this purpose. As of March 31, 2018, the inventory of Sable wasincluded in assets held for sale as more fully described on Note 2. Effective April 1, 2017, the Company changed its inventory costing method at Sable from first-in first-out (“FIFO”) to average cost. FIFO costs approximated average cost. The change was made in conjunction with a system conversion that enabled the Company to move from a periodic to a perpetual inventory system. In accordance with ASC 250-10-45-11 through 45-13, management determined that the change was preferable because it provides better operational control and visibility into inventory levels and costs, and it facilitates cost analysis at a batch level that was not available previously. The effect of the change was not material to the Company’s consolidated financial statements for the period ended March 31, 2018. As of March 31, 2018, the inventory of Zest Labs consisting of tags, readers, antenna, etc. was reclassified to property and equipment to reflect the use of the assets in the SaaS revenue model.
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MARCH 31, 2019
Property and Equipment and Long-Lived Assets
Property and equipment is stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from threetwo to ten years for all classes of property and equipment, except leasehold improvements which are depreciated over the shorter of 10 years or the term of the lease.lease, which is shorter than the estimated useful life of the improvements.
FASB Codification TopicASC 360 “Property, Plant and Equipment” (ASC 360), requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The applicationCompany has early adopted Accounting Standard Update (“ASU”) 2017-04 Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment effective April 1, 2017. The adoption of ASC 360 hasthis ASU did not materially affectedhave a material impact on our consolidated financial statements.
The Company reviews recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s reported earnings, financial conditionability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets.
ASC 360-10 addresses criteria to be considered for long-lived assets expected to be disposed of by sale. Six criteria are listed in ASC 360-10-45-9 that must be met in order for assets to be classified as held for sale. Once the criteria are met, long-lived assets classified as held for sale are to be measured at the lower of carrying amount or cash flows.fair value less costs to sell. The Company did consider it necessary to record impairment charges for equipment acquired as part of the Sable acquisition. As of March 31, 2019 and 2018, the property and equipment of Sable and Magnolia Solar have been reclassified as assets held for sale as more fully described in Note 2.
Intangible assets with definite useful lives are stated at cost less accumulated amortization.amortization and impairment. Intangible assets capitalized as of DecemberMarch 31, 20152019 and 20142018 represent the valuation of the Company-owned patents, outsourced vendor relationships and customer lists.non-compete agreements. These intangible assets arewere being amortized on a straight-line basis over their estimated average useful lives of thirteen and a half years for the patents, and three years for the customer lists.outsourced vendor relationships and two years for non-compete agreements. Expenditures on intangible assets through the Company’s filing of patent and trademark protection for Company-owned inventions are expensed as incurred.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
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MARCH 31, 2019
The Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers to be important which could trigger an impairment review include the following:
1. Significant underperformance relative to expected historical or projected future operating results;
2. Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and
3. Significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows. The Company tested the carrying value of its intangiblelong-lived assets for recoverability. The projected undiscounted cash flows exceeded the carrying value of these assets by a significant amount. The Company did not consider it necessary to record any impairment chargesrecoverability during the yearsyear ended DecemberMarch 31, 20152019, and 2014.impairments were recorded during this period.
Advertising Expense
The Company expenses advertising costs, as incurred. Advertising expenses for the years ended DecemberMarch 31, 20152019 and 20142018, which were nominal, are included in other general and administrative costs.
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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YEARS ENDED DECEMBER 31, 2015 AND 2014Software Costs
Software Costs
The Company accounts for software development costs in accordance with ASC 985.730,985-730 Software Research and Development, and ASC 985-20, Costs of Software to be Sold, Leased or Marketed. ASC 985-20 requires that costs related to the development of the Company’s products be capitalized as an asset when incurred subsequent to the point at which technological feasibility of the enhancement is established.established and prior to when a product is available for general release to customers. ASC 985-20 specifies that “technological feasibility”technological feasibility can only be established by the completion of a “detailed program design” or if no such design is prepared, upon the completion of a “working model” of the software. The Company’s development process does not include a detailed program design. Management believes that suchCosts incurred prior to achieving technological feasibility are expensed. The Company does utilize detailed program designs; however, the Company’s products are released soon after technological feasibility has been established and as a design could be produced in the early stages of development but would entail significant wasted expense and delay. Consequently, ASC 985-20 requires thatresult software development costs be recordedhave been expensed as an expense until the completion of a “working model”. In the Company’s case, the completion of a working model does not occur until shortly before the time when the software is ready for sale.incurred.
Research and Development Costs
Research and development costs are expensed as incurred. These costs include internal salaries and related costs and professional fees for activities related to development. These costs relate to the Zest Data Services platform, Zest Fresh and Zest Delivery.
Subsequent Events
Subsequent events have beenwere evaluated up through March 28, 2016 except for Note 15 which is dated June 15, 2016, the date the consolidated financial statements were issued in accordance with ASC 855-10-50-1.filed.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
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(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
Shipping and Handling Costs
The Company reports shipping and handling revenues and their associated costs in revenue and cost of revenue, respectively. Shipping revenues and costs for the years ended DecemberMarch 31, 20152019 and 20142018, were nominal and included in cost of product sales.
Revenue Recognition
In regards to product revenue, product revenue primarily consists of the sale of electronic hardware, recycled plastics products, and recycled furniture. These subsidiaries recognize revenue when the following criteria have been met:
Evidence of an arrangement exists.The Company considersaccounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company early adopted effective April 1, 2017. No cumulative adjustment to accumulated deficit was required as a customer purchase order, service agreement, contract, or equivalent document to be evidenceresult of an arrangement.
Delivery has occurred. The Company’s standard transfer terms are freethis adoption, and the early adoption did not have a material impact on board (FOB) shipping point. Thus, delivery is considered to have occurred when title and risk of loss have passedour consolidated financial statements as no material arrangements prior to the customer at the time of shipment.
The fee is fixed or determinable.The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard, which is generally 30-60 days.
Collection is deemed reasonably assured. Collection is deemed reasonably assured if it is expected that the customer will be able to pay amountsadoption were impacted under the arrangement as payments become due. If it is determined that collection is not reasonably assured, then revenue is deferred and recognized upon cash collection.new pronouncement.
The Company accounts for its software revenue will recognize revenues in accordance with ASC 985-605, Softwarea 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 Recognition.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 at a point in time depending on the evaluation of when persuasive evidence of an agreement exists, deliverythe customer obtains control of the software has occurred, the fee is fixedpromised goods or determinable, and collectability is probable. In software arrangements that include more than one element, the Company allocates the total arrangement fee among the elements based on the relative fair value of each of the elements.
License revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements is recognized as the services are performed. If evidence of fair value does not exist for all elements of a license agreement and post customer support (PCS) is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement as license revenue. If evidence of fair value of all undelivered PCS elements exists but evidence does not exist for one or more delivered elements, thenagreement. For agreements where the software requires continuous updates to provide the intended functionality, revenue is recognized over the term of the agreement. For software as a service (“SaaS”) contracts that include multiple performance obligations, including hardware, perpetual software licenses, subscriptions, term licenses, maintenance 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 residual method. Underadjusted market assessment approach, the expected cost plus a margin approach or the residual method,approach as appropriate under the fair value ofcircumstances. Contracts are typically on thirty-day payment terms from when the undelivered elements is deferred andCompany satisfies the remaining portion ofperformance obligation in the arrangement fee is recognized as revenue.contract. In fiscal 2019, the Company did not have significant revenue from software license agreements.
TableThe Company accounts for contract costs in accordance with ASC Topic 340-40, Contracts with Customers. The Company recognizes the cost of Contentssales 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 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 incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained.
Revenue Recognition – Discontinued Operations
Product revenue for discontinued operations which is netted in loss from discontinued operations consists primarily of the sale of recycled plastics products by Pioneer and Sable. Contracts for products are for products held in inventory and typically are on thirty-day payment terms. Management’s evaluation of credit risk involves judgement and may include securing insurance coverage on the recoverability of the receivables. Revenues are recognized when obligations under the terms of a contract with the customer are satisfied and when control of the promised goods are transferred to the customer, typically when products are shipped to the customer. Expected costs of standard warranties and claims are recognized as expense.
For discontinued operations of Magnolia Solar, services contracts include research contracts for the government. The contracts define delivery dates for which the performance obligation will be satisfied over time. Revenue is recognized over time based on the output method to measure the Company’s progress toward complete satisfaction of a performance obligation.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and sharesAND SHARES IN THOUSANDS, EXCEPT PER SHARE data)DATA)
YEARS ENDED DECEMBERMARCH 31, 2015 AND 20142019
Cost of license revenue primarily includes product, delivery, and royalty costs. Cost of maintenance and service revenue consists primarily of labor costs for engineers performing implementation services, technical support, and training personnel as well as facilities and equipment costs.
The Company enters into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. The Company uses a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence, and (iii) best estimate of selling price (“ESP”). For software elements, the Company follows the industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace.
ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. The process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
When the arrangement with a customer includes significant production, modification, or customization of the software, we recognize the related revenue using the percentage-of-completion method in accordance with the accounting guidance and certain production-type contracts contained in ASC 605-35, Construction-Type and Production-Type Contracts. We use the percentage of completion method provided all of the following conditions exist:
We measure completion based on achieving milestones detailed in the agreements with the customers. Costs of providing services, including services accounted for in accordance with ASC 605-35, are expensed as incurred.
Accounts Receivable and Concentration of Credit Risk
The Company considers accounts receivable, net of allowance for returns and 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.uncollateralized, however credit insurance is obtained for some customers. Past-due status is based on contractual terms. Management has determined that the allowance for doubtful accounts at December 31, 2015 and 2014 was $2 and $0, respectively.
Uncertain Tax Positions
The Company follows ASC 740-10 “AccountingAccounting for Uncertainty in Income Taxes”Taxes. This requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates their tax positions on an annual basis.
The Company files income tax returns in the U.S. federal tax jurisdiction and various state tax jurisdictions. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed.
Stock-BasedVacation and Paid-Time-Off Compensation
The Company follows ASC 718-10710-10 “Share Based Payments”Compensation – General. The Company records liabilities and expense when obligations are attributable to services already rendered, will be paid even if an employee is terminated, payment is probable, and the amount can be estimated.
Share-Based Compensation
The Company follows ASC 718 Compensation – Stock Compensation and has early adopted ASU 2017-09 Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting as of July 1, 2017. The Company calculates compensation expense for all awards granted, but not yet vested, based on the grant-date fair values. Stock-basedShare-based compensation expense for all awards granted is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate. The Company facilitates payment of the employee tax withholdings resulting from the issuances of these awards by remitting the employee taxes and recovering the resulting amounts due from the employee either via payments from employees or from the sale of shares issued sufficient to cover the amounts due the Company.
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
The Company measures compensation expense for its non-employee stock-basedshare-based compensation under ASC 505-50 “Accounting for Equity Instruments that are IssuedEquity-Based Payments to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or ServicesNon-Employees”. The fair value of the optionoptions and shares issued is used to measure the transaction,transactions, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to expense, or to a prepaid expense if shares of common stock are issued in advance of services being rendered, and additional paid-in capital.
The Company adopted ASU 2016-09 Improvements to Employee Share-Based Payment Accounting effective April 1, 2017. Cash paid when shares were directly withheld for tax withholding purposes is classified as a financing activity in the statement of cash flows. There were no other impacts from this adoption.
Fair Value of Financial Instruments
ASC 825 "Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company'sCompany’s financial instruments: The carrying amount of cash, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses,liabilities, and accountsamounts payable to related parties, approximate fair value because of the short-term maturity of those instruments. The Company does not utilize derivative instruments. The carrying amount of the Company’s debt instruments also approximates fair value.
Recoverability of Long-Lived Assets
The Company reviews recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell.
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 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.
Fair Value Measurements
ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, 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.
Segment Information
The Company follows the provisions of ASC 280-10,“Disclosures about Segments of an Enterprise and Related Information”.This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. For 2015 and 2014 the Company and its Chief Operating Decision Makers determined that the Company’s operations were divided into two segments: Products and Services. See Note 13 for segment information disclosures.
Related Party Transactions
Parties are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal stockholders of the Company, its management, members of the immediate families of principal stockholders of the Company and its management and other parties with which the Company may deal where one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as compensation or distribution to related parties depending on the transaction.
A related party receivable of $100 outstanding at December 31, 2014 was collected in August 2015.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Recently Issued Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842)”.ASU 2016-02 changes the accounting for leased assets, principally by requiring balance sheet recognition of assets under lease arrangements. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of the adoption of ASU 2015-02 on its consolidated financial statements.
In November 2014, the FASB issued ASU No. 2014-17, “Business Combinations – Pushdown Accounting.” The provisions of ASU 2014-17 require management to determining whether and at what threshold an acquiree (acquired entity) can reflect the acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. Since neither unit of this business combination is in the development stage, nor had recognizable revenues during this period the application of push down accounting would not be of significant value to the readers of these consolidated financial statements. The Company has not elected to apply pushdown accounting in its separate financial statements upon occurrence of this event.
During August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern.” The provisions of ASU 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in ASU 2014-09 will be applied using one of two retrospective methods. The effective date will be the first quarter of the fiscal year ending December 31, 2018. The Company has not determined the potential effects on its financial statements.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Going Concern
The Company commenced operations in 2011, and has experienced typical start-up costs and losses from operations resulting in an accumulated deficit of $36,587 since inception. The accumulated deficit as well as recurring losses of $10,502 and $14,135 for the years ended December 31, 2015 and 2014, and the working capital deficit of $2,153 as of December 31, 2015, have resulted in the uncertainty of the Company to continue as a going concern.
These consolidated financial statements of the Company have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable period of time.
The Company plans to raise additional capital to carry out its business plan and following a reverse merger transaction in March 2016, the Company received $6,725 (see Note 14). The Company’s ability to raise additional capital through future equity and debt securities issuances is unknown. Obtaining additional financing, the successful development of the Company’s contemplated plan of operations, ultimately, to profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the uncertainties.
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 2:INVENTORY
Inventory, net of reserves, consisted of the following as of December 31, 2015 and 2014:
| 2015 | 2014 | |||||||
| Inventory | $ | 1,363 | $ | 1,495 | ||||
| Inventory Reserves | (620 | ) | (592 | ) | ||||
| Total | $ | 743 | $ | 903 | ||||
NOTE 3:PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2015 and 2014:
| 2015 | 2014 | |||||||
| Furniture and fixtures | $ | 110 | $ | 110 | ||||
| Computers and software costs | 382 | 359 | ||||||
| Machinery and equipment | 476 | 443 | ||||||
| Leasehold improvements | 4 | 5 | ||||||
| Total property and equipment | 972 | 917 | ||||||
| Accumulated depreciation | (609 | ) | (455 | ) | ||||
| Property and equipment, net | $ | 363 | $ | 462 | ||||
Depreciation expense for the years ended December 31, 2015 and 2014 was $159 and $312, respectively. There was no impairment on these assets for this two-year period. The Company retired approximately $5 of fully depreciated property and equipment in 2015.
NOTE 4: INTANGIBLE ASSETS
The following is a summary of intangible assets as of December 31, 2015 and 2014:
| 2015 | 2014 | |||||||
| Customer lists | $ | 3,980 | $ | 3,965 | ||||
| Patents | 1,013 | 1,013 | ||||||
| Total intangible assets | 4,993 | 4,978 | ||||||
| Accumulated amortization | (4,141 | ) | (3,074 | ) | ||||
| Intangible assets, net | $ | 852 | $ | 1,904 | ||||
Amortization expense for the years ended December 31, 2015 and 2014 was $1,067 and $1,396, respectively. There was no impairment on these assets for this two-year period. Amortization amounts for the next five years are: $116, $116, $81, $75 and $75.
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 5: LONG-TERM DEBT – RELATED PARTIES
The following is a summary of long-term debt – related parties as of December 31, 2015 and 2014:
| 2015 | 2014 | |||||||||
| Promissory notes – shareholders | (a) | $ | - | $ | - | |||||
| Promissory note – related party | (b) | 50 | 412 | |||||||
| Promissory note #1 – CEO | (c) | 62 | 227 | |||||||
| Promissory note #2 – CEO | (d) | - | 2,500 | |||||||
| Promissory note #3 – CEO | (e) | 1,217 | - | |||||||
| Note payable – various | (f) | - | 800 | |||||||
| Note payable –SA Concepts | (g) | - | 74 | |||||||
| Note payable – Goldenhawk | (h) | - | 3,674 | |||||||
| Note payable - other | (i) | - | 1,600 | |||||||
| Total | 1,329 | 9,287 | ||||||||
| Less: current portion | (1,329 | ) | (6,176 | ) | ||||||
| Long-term debt – related parties | $ | - | $ | 3,111 | ||||||
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Interest expense on the long-term debt – related parties for the years ended December 31, 2015 and 2014 was $466 and $1,236, respectively.
NOTE 6: NOTE PAYABLE - BANK
The Company’s former subsidiary, SA Concepts, had a note payable with a bank that was due November 2014 at 5.5% interest per annum. The note was transferred to the Company upon the sale of SA Concepts. The note was secured by the property of the Company. This note was extended to February 2016 and was paid off in October 2015. The balance of this note at December 31, 2014 was $250.
NOTE 7: LONG-TERM DEBT
The following is a summary of long-term debt as of December 31, 2015 and 2014:
| 2015 | 2014 | |||||||||
| Note payable – Celtic Bank | (a) | $ | 175 | $ | 198 | |||||
| Note payable – B&B Merritt | (b) | 3,000 | 3,000 | |||||||
| Total | 3,175 | 3,198 | ||||||||
| Less: current portion | (3,175 | ) | (3,027 | ) | ||||||
| Long-term debt | $ | - | $ | 171 | ||||||
Interest expense on the long-term debt for the years ended December 31, 2015 and 2014 were $310 and $11, respectively.
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 8: STOCKHOLDERS’ EQUITY (DEFICIT)
On November 28, 2011, the Company was formed with three series’ of common stock authorizing a total of 50,000 shares as follows:
Series A General Common Shares – 38,000 authorized shares
Series B Common Shares – 10,000 authorized shares
Series C Common Shares – 2, 000 authorized shares
On April 29, 2013, the Certificate of Incorporation was amended to increase the authorized shares to 58,000 shares, designating a Series D Common Shares with an authorized limit of 8,000 shares.
On November 1, 2014, the Certificate of Incorporation was amended a second time to increase the authorized shares to 61,000 shares, increasing the Series C Common Shares authorized from 2,000 shares to 5,000 shares.
As a result of the merger transaction described in Note 14 and in accordance with ASC 805-40-45, the Company has given retroactive effect to certain share numbers and calculations by restating amounts (see Note 15).
Series A General Common Shares (“Series A Stock”) and Treasury Stock
The Series A Stock was incorporated with 38,000 shares authorized with a par value of $0.01.
Each share of Series A Stock represents the right to one (1) vote on all issues presented to shareholders for a vote. Series A shareholders will not have any cumulative voting rights.
Holders of Series A Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Company legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Company, after the payment in full of its debts and other liabilities, the remaining Company assets are to be distributed pro rata among the holders of the common stock.
All 38,000 shares of authorized Series A Stock were issued to the founders of the Company at par ($380) for services rendered to the Company in the start-up phase. As of December 31, 2015 and 2014, the 38,000 shares are issued, and there were 17,229 and 12,300 shares outstanding at December 31, 2015 and 2014, respectively.
The 1,771 and 6,700 share difference between issued shares and outstanding shares represent treasury stock. At various times in 2013 through 2014, the Company repurchased shares in various transactions, and re-issued some of these shares in other acquisitions of companies as well as for services rendered. The treasury stock is calculated at cost, and the value of the treasury stock at December 31, 2015 and 2014 are $928 and $3,514, respectively.
Series B Common Shares (“Series B Stock”)
The Series B Stock was incorporated with 10,000 shares authorized with a par value of $0.01.
Every fifty (50) shares of Series B Stock represent the right to one (1) vote on all issues presented to shareholders for a vote. Series B shareholders will not have any cumulative voting rights.
Holders of Series B Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Company legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Company, after the payment in full of its debts and other liabilities, the remaining Company assets are to be distributed pro rata among the holders of the common stock.
The Company issued 4,431 shares of Series B Stock in 2012 for $8,342. Of this amount the Company had a subscription receivable in the amount of $885 that was received in 2013. Additionally, in 2013, the Company issued 500 shares of Series B Stock for services valued at $800.
As of December 31, 2015 and 2014, the Company has 4,931 shares issued and outstanding.
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Series C Common Shares (“Series C Stock”)
The Series C Stock was incorporated with 2,000 shares authorized with a par value of $0.01. On November 1, 2014, the Certificate of Incorporation was amended a second time to increase the authorized shares of the Series C Stock from 2,000 shares to 5,000 shares.
The Series C stockholders will have no voting rights.
Holders of Series C Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Company legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Company, after the payment in full of its debts and other liabilities, the remaining Company assets are to be distributed pro rata among the holders of the common stock.
In 2013, the Company issued 1,000 shares of Series C Stock for services rendered valued at $2,500; in 2014, the Company issued 675 shares of Series C Stock for services rendered valued at $1,688; and in 2015, the Company issued 63 shares of Series C Stock for services rendered valued at $175.
As of December 31, 2015 and 2014, the Company has 1,738 and 1,675 shares issued and outstanding.
Series D Common Shares (“Series D Stock”)
On April 29, 2013, the Certificate of Incorporation was amended to designate a new class of shares, Series D Stock with authorized shares of 8,000 shares.
The Series D Stock has a par value of $0.01.
Every fifty (50) shares of Series D Stock represent the right to one (1) vote on all issues presented to shareholders for a vote. Series B shareholders will not have any cumulative voting rights.
Holders of Series D Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Company legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Company, after the payment in full of its debts and other liabilities, the remaining Company assets are to be distributed pro rata among the holders of the common stock.
The Company issued 890 shares of Series D Stock in 2013 for $1,876. Additionally, in 2014, the Company issued 2,334 shares for $5,373 of which $31 is reflected was a subscription receivable and was collected in February 2015, and an additional 500 shares of Series D Stock for services valued at $1,250. No Series D Stock was issued in 2015.
As of December 31, 2015 and 2014, the Company has 3,723 shares issued and outstanding.
Series C Stock Options (“Series C Stock Options”)
On February 16, 2013, the Board of Directors approved the EcoArk Inc. 2013 Stock Option Plan (the “Plan”).The purposes of the Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants, and to promote the success of the Company’s business. The Plan is expected to contribute to the attainment of these objectives by offering employees, directors and consultants the opportunity to acquire stock ownership interests in the Company, and other rights with respect to stock of the Company, and to thereby provide them with incentives to put forth maximum efforts for the success of the Company.
Awards under the Plan may only be granted in the form of nonstatutory stock options (“Options”) to purchase the Company's Series C Stock. The Company does not plan to register the Series C Stock under applicable securities laws and certificates evidencing shares of Series C Stock issued upon exercise may contain a legend restricting transfer thereof.
The maximum number of shares to be issued under the Plan is 5,000.
In May 2014, the Company granted 347 thousand Series C Stock Options to various employees and consultants of the Company. The Series C Stock Options have a term of 10 years, and the Series C Stock Options vest over a three-year period as follows: 25% immediately; 25% on the first anniversary date; 25% on the second anniversary date; and 25% on the third anniversary date. During 2015 the Company issued 313 thousand additional Series C Stock Options.
Management valued the Series C Stock Options utilizing the Black-Scholes Method, with the following criteria: stock price - $1.25; exercise price - $1.25; expected term – 10 years; discount rate – 0.25%; and volatility – 100%.
The Company records stock based compensation in accordance with ASC 718, and has recorded stock based compensation of $366 and $192 for the years ended December 31, 2015 and 2014, respectively.
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 9: ACQUISITIONS
SA Concepts
On June 11, 2013, the Company, entered into a Stock Purchase Agreement (the “SPA”) with Sustainable Aerodynamic (“SA”) Concepts pursuant to which the Company issued from its shares held in Class A Stock 750 shares to three individuals valued at $426 to acquire 100% of SA Concepts. The Company sold this entity in November 2014. The acquisition was accounted for as a purchase of a business under ASC 805.
Intelleflex Corporation
On September 19, 2013, the Company acquired Intelleflex Corporation. The acquisition was accounted for as a purchase of a business under ASC 805.
The allocation of the purchase price was as follows
| Cash | $ | 782 | ||
| Inventory | 988 | |||
| Prepaid expenses and other assets | 210 | |||
| Fixed assets | 510 | |||
| Intangible assets | 1,013 | |||
| Accounts payable and other liabilities | (1,010 | ) | ||
| Total | $ | 2,492 | ||
| Cash | $ | 1,300 | ||
| Retirement of debt | 1,192 | |||
| Total consideration | $ | 2,492 |
The intangible assets represent acquired patents that were independently valued. The remaining useful life of these patents was 13.5 years as of the date purchased.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases many of its operating and office facilities for various terms under long-term, non-cancelable operating lease agreements. These leases expire at various dates through 2018. Rent expense was approximately $412 and $415 for the years ended December 31, 2015 and 2014. Future minimum lease payments required under the operating leases are as follows: 2016 - $284, 2017 - $96, and 2018 - $68. In March 2016 the Company agreed to lease additional space adjoining its office in Phoenix, Arizona. This will increase the future minimum payments and extend them through 2019.
Settlement
In March 2016 the Company agreed to settle a dispute regarding a contract. The agreement requires the Company to pay $100 to certain parties within 30 days of the agreement. The amount was recorded as an operating expense and included in accrued expenses as of December 31, 2015.
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 11: DISCONTINUED OPERATIONS
SA Concepts
In November 2014, the Company sold its subsidiary, SA Concepts. In the sale, the Company sold the net assets back to an original shareholder of SA Concepts for his return of 1,000 Class A shares of stock. The value of the treasury stock in this transaction of $616 was equal to the value of the net assets of SA Concepts sold. Therefore, there was no gain or loss attributable to the disposal of this subsidiary. The operations of SA Concepts for the year ended December 31, 2014 are reflected as loss from discontinued operations in the consolidated statements of operations in accordance with ASC 205-50.
The following table sets forth for the year ended December 31, 2014 selected financial data of the Company’s discontinued operations of its SA Concepts subsidiary.
| Revenues | $ | 379 | ||
| Cost of sales | 818 | |||
| Gross (loss) | (439 | ) | ||
| Operating and other non-operating expenses | 1,010 | |||
| Loss from discontinued operations | (1,449 | ) | ||
| Gain from sale of SA Concepts | - | |||
| Loss from discontinued operations | $ | (1,449 | ) |
NOTE 12: PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 2015 and 2014 differs from the amount which would be expected as a result of applying the statutory tax rates to the losses before income taxes due primarily to the valuation allowance to fully reserve net deferred tax assets.
Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income. As the achievement of required future taxable income is uncertain, the Company recorded a valuation allowance.
| As of December 31, 2015 | As of December 31, 2014 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss before non-deductible items | $ | (36,028 | ) | $ | (25,892 | ) | ||
| Tax rate | 34 | % | 34 | % | ||||
| Total deferred tax assets | 12,250 | 8,803 | ||||||
| Less: Valuation allowance | (12,250 | ) | (8,803 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
As of December 31, 2015, the Company has a net operating loss carry forward of $36,028 expiring through 2035. The Company has provided a valuation allowance against the full amount of the deferred tax asset due to management’s uncertainty about its realization. Furthermore, the net operating loss carry forward may be subject to further limitation pursuant to Section 382 of the Internal Revenue Code. The valuation allowance was increased by $3,447 in 2015.
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 13: SEGMENT INFORMATION AND CONCENTRATIONS
The Company follows the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”. This standard requires that companies disclose operating segments based on the manner in which Management disaggregates the Company in making operating decisions. As of December 31, 2015 and for the years ended December 31, 2015 and 2014, the Company operates in two segments. The segments are Products (principally consisting of Pioneer Products’ operations consisting of sales of recycled plastic products) and Services (principally consisting of Eco3D’s mapping, modeling and consulting services business plus costs associated with developing Intelleflex and Eco360 solutions). Home office costs are allocated to the two segments based on the relative support provided to those segments.
| December 31, 2015 | Products | Services | Total | |||||||||
| Segmented operating revenues | $ | 5,167 | $ | 2,701 | $ | 7,868 | ||||||
| Cost of revenues | 4,960 | 1,178 | 6,138 | |||||||||
| Gross profit | 207 | 1,523 | 1,730 | |||||||||
| Total operating expenses net of depreciation and amortization, and interest expense, net | 178 | 10,014 | 10,192 | |||||||||
| Depreciation and amortization | 992 | 234 | 1,226 | |||||||||
| Interest expense, net | 10 | 775 | 785 | |||||||||
| Net (loss) applicable to common shares | (973 | ) | (9,500 | ) | (10,473 | ) | ||||||
| Non-controlling interest income | - | 29 | 29 | |||||||||
| Net (loss) – controlling interest | $ | (973 | ) | $ | (9,529 | ) | $ | (10,502 | ) | |||
| Segmented assets | ||||||||||||
| Property and equipment, net | $ | - | $ | 363 | $ | 363 | ||||||
| Intangible assets, net | $ | 15 | $ | 837 | $ | 852 | ||||||
| Capital expenditures | $ | - | $ | 60 | $ | 60 | ||||||
| December 31, 2014 | Products | Services | Total | |||||||||
| Segmented operating revenues | $ | 4,378 | $ | 1,639 | $ | 6,017 | ||||||
| Cost of revenues | 4,298 | 726 | 5,024 | |||||||||
| Gross profit | 80 | 913 | 993 | |||||||||
| Total operating expenses net of depreciation and amortization, interest expense, net and loss from discontinued operations | 200 | 10,630 | 10,830 | |||||||||
| Depreciation and amortization | 1,322 | 386 | 1,708 | |||||||||
| Interest expense, net | 11 | 1,259 | 1,270 | |||||||||
| Loss from discontinued operations | 1,449 | - | 1,449 | |||||||||
| Net (loss) applicable to common shares | (2,902 | ) | (11,362 | ) | (14,264 | ) | ||||||
| Non-controlling interest loss | - | (129 | ) | (129 | ) | |||||||
| Net (loss) – controlling interest | $ | (2,902 | ) | $ | (11,233 | ) | $ | (14,135 | ) | |||
| Segmented assets | ||||||||||||
| Property and equipment, net | $ | - | $ | 462 | $ | 462 | ||||||
| Intangible assets, net | $ | 991 | $ | 913 | $ | 1,904 | ||||||
| Capital expenditures | $ | - | $ | 197 | $ | 197 | ||||||
During the years ended December 31, 2015 and 2014, the Company had one major customer comprising 63% and 72% of sales. A major customer is defined as a customer that represents 10% or greater of total sales. Additionally, the Company had two customers as of December 31, 2015 and 2014 with accounts receivable balances of 32% and 54% of the total accounts receivable. The Company does not believe that the risk associated with these customers will have an adverse effect on the business.
The Company maintained cash balances in excess of the FDIC insured limit in both years. The Company does not consider this risk to be material.
ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 14: SUBSEQUENT EVENTS
During January 2016 the Company re-issued 50 Class A Treasury Shares. The Company re-issued those shares as it raised an additional $200.
On January 29, 2016, the Company entered into a Merger Agreement with Magnolia Solar Corporation (“MSC”) providing, among other things, for the acquisition of the Company by MSC in a share for share exchange pursuant to which it was contemplated that at the closing the Company shareholders would own approximately 95% of the outstanding shares of MSC. On March 18, 2016, in a special meeting called by MSC, the shareholders of MSC approved proposals necessary to complete the merger. Following the shareholder meeting, the name of MSC was changed to Ecoark Holdings, Inc. (EHI). Further, the Articles of Incorporation were amended to increase the authorized shares of common stock to 100,000 shares, to effect the creation of 5,000 shares of "blank check" preferred stock, and to approve a reverse stock split of the MSC common stock of 1 for 250.
On March 24, 2016, FINRA corporate action announced the reverse split and the name change which became effective in the market on March 28, 2016. Following that, EHI stock will trade under the symbol “EARK.” All actions to close the merger were completed in March 2016.
In conjunction with the merger, MSC offered up to 5,000 thousand units at a price of $4.00 per unit or a maximum of $20,000 in a private placement offering. Each unit consists of one share of MSC (now EHI) common stock (par value $0.001 per share) and a warrant to purchase one share of MSC (now EHI) common stock exercisable on or before December 31, 2018 at a price of $5.00 per share. The units are being offered to an unlimited number of Accredited Investors until the earlier of the date upon which subscriptions for the maximum offering have been received and accepted; March 31, 2016, subject to a 60-day extension at the option of EHI; or the date upon which the offering is terminated by EHI. On March 24, 2016 the Company received proceeds of $6,725 from EHI as a result of subscriptions to the offering.
NOTE 15: RESTATEMENT OF FINANCIAL STATEMENTS
As a result of the merger transaction described in Note 14 and in accordance with ASC 805-40-45, the Company has given retroactive effect to the transaction by adjusting the number of shares in the consolidated balance sheets, consolidated statements of operations, consolidated statement of changes in stockholders’ deficit and accompanying notes. The retroactive treatment changed the reported common shares and additional paid-in capital in the balance sheets, the shares used in the calculation of net loss per share and resulting net loss per share in the statements of operations, the number of shares and related dollar amounts in the statement of changes in stockholders’ equity (deficit), and various disclosures regarding number of shares and related amounts in these notes to consolidated financial statements. There was no effect on the net loss or total stockholders’ deficit as a result of the restatement.
The change became effective on March 24, 2016 when the merger closed.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
| (Dollars in thousands, except per share data) | ||||||||
| March 31, 2016 | December 31, 2015 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 8,848 | $ | 1,962 | ||||
| Accounts receivable, net of allowance | 1,421 | 972 | ||||||
| Inventory, net of reserves | 809 | 743 | ||||||
| Prepaid expenses | 156 | 161 | ||||||
| Other current assets | - | 130 | ||||||
| Total current assets | 11,234 | 3,968 | ||||||
| Property and equipment, net | 360 | 363 | ||||||
| Intangible assets, net | 907 | 852 | ||||||
| Other assets | 26 | 25 | ||||||
| Total non-current assets | 1,293 | 1,240 | ||||||
| TOTAL ASSETS | $ | 12,527 | $ | 5,208 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Current portion of long-term debt | $ | 3,000 | $ | 3,175 | ||||
| Debt - related parties | 742 | 1,329 | ||||||
| Accounts payable | 1,244 | 1,074 | ||||||
| Accrued expenses | 687 | 503 | ||||||
| Accrued interest | 58 | 40 | ||||||
| Deferred revenue | 61 | - | ||||||
| Total current liabilities | 5,792 | 6,121 | ||||||
| COMMITMENTS AND CONTINGENCIES | - | - | ||||||
| Total liabilities | 5,792 | 6,121 | ||||||
| STOCKHOLDERS' EQUITY (DEFICIT) (Numbers of shares rounded to thousands) | ||||||||
| Ecoark, Inc. Series A, B, C, D Common Shares – exchanged for Ecoark Holdings shares in connection with March 24, 2016 merger (Restated) | - | 30 | ||||||
| Ecoark Holdings, Inc. Common Stock, $0.001 par value; 100,000 shares authorized, 31,436 shares issued and outstanding as of March 31,2016 | 31 | - | ||||||
| Additional paid-in-capital (Restated) | 49,897 | 36,722 | ||||||
| Subscription receivable | (4,290 | ) | (55 | ) | ||||
| Accumulated deficit | (38,810 | ) | (36,587 | ) | ||||
| Treasury stock, at cost, 3,542 Ecoark Inc. Series A General Common Shares as of December 31, 2015 – canceled in connection with March 24, 2016 merger | - | (928 | ) | |||||
| Total stockholders' equity (deficit) before non-controlling interest | 6,828 | (818 | ) | |||||
| Non-controlling interest | (93 | ) | (95 | ) | ||||
| Total stockholders' equity (deficit) | 6,735 | (913 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 12,527 | $ | 5,208 | ||||
See accompanying notes to the unaudited consolidated financial statements.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
| (Dollars in thousands, except per share, data) | ||||||||
| 2016 | 2015 | |||||||
| REVENUES | ||||||||
| Revenue from product sales | $ | 1,207 | $ | 1,483 | ||||
| Revenue from services | 757 | 742 | ||||||
| 1,964 | 2,225 | |||||||
| COST OF REVENUES | ||||||||
| Cost of product sales | 1,182 | 1,417 | ||||||
| Cost of services | 277 | 224 | ||||||
| 1,459 | 1,641 | |||||||
| GROSS PROFIT | 505 | 584 | ||||||
| OPERATING EXPENSES: | ||||||||
| Salaries and salary related costs, including stock based compensation | 1,020 | 812 | ||||||
| Professional fees and consulting | 267 | 750 | ||||||
| General and administrative | 517 | 590 | ||||||
| Depreciation and amortization | 75 | 416 | ||||||
| Research and development | 752 | 777 | ||||||
| Total operating expenses | 2,631 | 3,345 | ||||||
| Loss from operations | (2,126 | ) | (2,761 | ) | ||||
| OTHER EXPENSE: | ||||||||
| Interest expense, net of interest income | (95 | ) | (206 | ) | ||||
| Loss before provision for income taxes | (2,221 | ) | (2,967 | ) | ||||
| PROVISION FOR INCOME TAXES | - | - | ||||||
| NET LOSS | (2,221 | ) | (2,967 | ) | ||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | 2 | 51 | ||||||
| NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST | $ | (2,223 | ) | $ | (3,018 | ) | ||
| NET LOSS PER SHARE | ||||||||
| Basic | $ | (0.08 | ) | $ | (0.13 | ) | ||
| Diluted | $ | (0.08 | ) | $ | (0.13 | ) | ||
| SHARES USED IN CALCULATION OF NET LOSS PER SHARE | (Number of shares in thousands) | |||||||
| Basic | 27,847 | 22,513 | ||||||
| Diluted | 27,847 | 22,513 | ||||||
See accompanying notes to the unaudited consolidated financial statements.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE PERIOD ENDED MARCH 31, 2016
(Dollar amounts and number of shares in thousands)
| Additional | Non- | |||||||||||||||||||||||||||||||
| Common | Paid-In- | Subscription | Accumulated | Treasury | controlling | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Deficit | Stock | Interest | Total | |||||||||||||||||||||||||
| Balance at December 31, 2015 (Restated) | 29,392 | $ | 30 | $ | 36,722 | (55 | ) | $ | (36,587 | ) | $ | (928 | ) | $ | (95 | ) | $ | (913 | ) | |||||||||||||
| Re-issuance of treasury shares for cash, net of expenses | - | - | 148 | 52 | 200 | |||||||||||||||||||||||||||
| Shares issued for cash in private placement, net of expenses | 2,389 | 2 | 13,843 | (4,290 | ) | 9,555 | ||||||||||||||||||||||||||
| Merger adjustments | (345 | ) | (1 | ) | (816 | ) | 876 | 59 | ||||||||||||||||||||||||
| Collection of subscription receivable | 55 | 55 | ||||||||||||||||||||||||||||||
| Net loss for the period | (2,223 | ) | 2 | $ | (2,221 | ) | ||||||||||||||||||||||||||
| Balance at March 31, 2016 | 31,436 | $ | 31 | $ | 49,897 | $ | (4,290 | ) | $ | (38,810 | ) | $ | - | $ | (93 | ) | $ | 6,735 | ||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTs OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss attributable to controlling interest | $ | (2,223 | ) | $ | (3,018 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 75 | 416 | ||||||
| Stock-based compensation - options | 28 | - | ||||||
| Shares of common stock issued for services rendered | - | 231 | ||||||
| Shares of treasury stock re-issued for services rendered | - | 498 | ||||||
| Cash acquired in merger transaction | 14 | - | ||||||
| Change in non-controlling interest on cash | 2 | 51 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (449 | ) | (174 | ) | ||||
| Inventory | (66 | ) | 14 | |||||
| Prepaid expenses | 5 | 18 | ||||||
| Other assets | 130 | (20 | ) | |||||
| Accounts payable | 152 | 283 | ||||||
| Accrued expenses | 140 | 284 | ||||||
| Accrued interest | 18 | 118 | ||||||
| Deferred revenue | 61 | (142 | ) | |||||
| Net cash used in operating activities | (2,113 | ) | (1,441 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (49 | ) | (8 | ) | ||||
| Net cash used in investing activities | (49 | ) | (8 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the issuance of common stock, net of fees | 9,555 | - | ||||||
| Collection of subscription receivable | 55 | 31 | ||||||
| Re-issuance of treasury shares for cash, net of expenses | 200 | 149 | ||||||
| Proceeds from the issuances of debt | 185 | - | ||||||
| Repayments of debt | (360 | ) | (176 | ) | ||||
| Proceeds from the issuances of debt - related parties | 250 | |||||||
| Repayments of debt - related parties | (587 | ) | (104 | ) | ||||
| Net cash provided by financing activities | 9,048 | 150 | ||||||
| NET INCREASE (DECREASE) IN CASH | 6,886 | (1,299 | ) | |||||
| Cash - beginning of the period | 1,962 | 2,220 | ||||||
| Cash - end of the period | $ | 8,848 | $ | 921 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | 77 | $ | 90 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| SUMMARY OF NONCASH ACTIVITIES: | ||||||||
| Intangibles acquired in merger | $ | 77 | $ | - | ||||
| Payables assumed in merger | $ | 59 | $ | - | ||||
| Treasury stock re-purchased for release of guarantee | $ | - | $ | 393 | ||||
See accompanying notes to the unaudited consolidated financial statements.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 20162019
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Leases
Nature of Business and Organization
Ecoark Holdings, Inc. (“Ecoark Holdings”) is an innovative and growth-oriented company founded in 2007 that develops and deploys intelligent technologies and products in order to meet the demand for sustainable, integrated solutions to contemporary business needs. Ecoark Holdings is a holding company that integrates the businesses of its subsidiaries to provide technological solutions in several industries that support ecological conservation through improvements in efficiency or reduction of waste.
Ecoark, Inc.(“Ecoark”) was founded in 2011 and is located in Rogers, Arkansas, the home office for Ecoark and Ecoark Holdings. Home office staff members are employees of Ecoark, which merged with Magnolia Solar on March 24, 2016 to create Ecoark Holdings as described further in Note 2 below. Ecoark is the parent company for Eco3D, Eco360, Pioneer Products and Intelleflex.
Eco3D, LLC (“Eco3D”) is located in Phoenix, Arizona and provides customers with the latest 3D technologies. Eco3D was formed by Ecoark in November 2013 and Ecoark owns 65% of the LLC. The remaining 35% is reflected as non-controlling interests. Eco3D provides 3D mapping, modeling, and consulting services for clients in retail, construction, healthcare, and multiple other industries throughout the United States and overseas. Eco3D is transitioning businesses from 2D technology that has existed for hundreds of years, to a world of digital 3D. Eco3D incorporates a variety of 3D technologies to achieve customer goals and objectives. Utilizing several techniques, Eco3D can capture existing conditions – topography, buildings, exterior/interior spaces, etc. – in highly accurate detail that allows for 2D and 3D measurement. These measurements form the basis for analysis, design, documentation, and quality control.
Eco360, LLC (“Eco360”) is located in Bentonville, Arkansas and is engaged in research and development activities. Eco360 was formed in November 2014 by Ecoark.
Pioneer Products, LLC (“Pioneer Products”) is located in Bentonville, Arkansas and is involved in the selling of recycled plastic products and other products. In addition to a strong and successful relationship with the world’s largest retailer, Pioneer Products also has vendor relationships with other key retailers. As such, Pioneer strategically leverages its role as a trusted supplier to these retailers with existing and new products. This subsidiary also recovers plastic waste from retail supply chains and creates new consumer products with the reclaimed materials. Pioneer Products was purchased by Ecoark in 2012.
Intelleflex Corporation (“Intelleflex”) is located in San Jose, California and provides food retailers and suppliers intelligent, on-demand solutions for retailers and companies that ship and store products for perishable food quality management. Intelleflex's ZEST Data Services is a secure, multi-tenant cloud-based data collection platform for aggregating and real-time permission-based sharing and analysis of information. ZEST Fresh, a fresh food management solution that utilizes the ZEST Data Service platform, focuses on three primary value propositions – consistent food quality, reduced waste, and improved food safety. ZEST Fresh empowers workers with real-time analytic tools and alerts that improve efficiency while driving quality consistency through best practice adherence on every pallet. ZEST Delivery provides real-time monitoring and control for prepared food delivery containers, helping delivery and dispatch personnel ensure the quality and safety of delivered food. Intelleflex was purchased by Ecoark in September 2013.
Magnolia Solar Inc.(“Magnolia Solar”) is located in Woburn, Massachusetts and is principally engaged in the development and commercialization of its nanotechnology-based, high-efficiency, thin-film technology that can be deposited on a variety of substrates, including glass and flexible structures. Magnolia merged with Ecoark on March 24, 2016 to create Ecoark Holdings as described further in Note 2 below.
Principles of Consolidation
The consolidated financial statements include the accounts of Ecoark Holdings and its direct and indirect subsidiaries, collectively referred to as “the Company”. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is a holding company and holds one hundred percent of Eco360, Pioneer Products, Intelleflex and Magnolia Solar. Ecoark owns 65% of Eco3D and the remaining 35% interest is owned by executives of Eco3D.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2016
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 tofollows ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities840 Leases in which a parent has a controlling financial interest—shall be consolidated except when control does not rest with the parent. Pursuant to ASC Paragraph 810-10-15-8, the usual conditionaccounting 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.
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 sheets. For the three months ended March 31, 2016 and 2015, net income attributable to noncontrolling interests of $2 and $51, respectively, is included in the Company’s net loss.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with U.S generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”). It is Management's opinion, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year. The accounting policies and procedures employed in the preparation of these consolidated financial statements have been derived from the audited financial statements of the Company for the fiscal year ended December 31, 2015, which are contained in the Company’s Form 8-K/A as filed with the SEC on May 10, 2016. The consolidated balance sheet as of December 31, 2015, contained herein, was derived from those consolidated financial statements. As a result of the merger transaction described in Note 2 and in accordance with ASC 805-40-45, the Company has given retroactive effect to certain share calculations by restating amounts for common shares and additional paid-in capital in the December 31, 2015 balance sheet.
Reclassification
leased properties. The Company has reclassified certain amounts in the 2015 consolidated financial statements to comply with the 2016 presentation. These changes had no effect on the net lossleases office and production facilities for 2015.
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 non-collectible accounts receivable, obsolete or slow-moving inventory, and determination of the fair value of stock awards issued. Actual results could differ from those estimates.
Cash
Cash consists of cash, demand deposits and money market funds with an original maturity of three months or less.
Inventory
Inventory is stated at the lower of cost or market. Inventory cost is determined by specific identification on a first in first out basis, and provisions are made to reduce slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values. The Company establishes reserves for this purpose.
Property and Equipment and Long-Lived Assets
Property and equipment is stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which rangeterms typically ranging from three to ten years for all classes of property and equipment, except leasehold improvements which are depreciated over the shorter of 10 years or the term of the lease.
FASB Codification Topic 360 “Property, Plant and Equipment” (“ASC 360”), requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The application of ASC 360 has not materially affected the Company’s reported earnings, financial condition or cash flows.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2016
Intangible assets with definite useful lives are stated at cost less accumulated amortization. Intangible assets capitalized as of March 31, 2016 and December 31, 2015 represent the valuation of the Company-owned patents and customer lists. These intangible assets are being amortized on a straight-line basis over their estimated average useful lives of thirteen and a half years for the patents and three years for the customer lists. Expenditures on intangible assets through the Company’s filing of patent and trademark protection for Company-owned inventions are expensed as incurred.
The Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers to be important which could trigger an impairment review include the following:
1. Significant underperformance relative to expected historical or projected future operating results;
2. Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and
3. Significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows. The Company tested the carrying value of its intangible assets for recoverability. The projected undiscounted cash flows exceeded the carrying value of these assets by a significant amount. The Company did not consider it necessary to record any impairment charges during the three months ended March 31, 2016 and 2015.
Advertising Expense
The Company expenses advertising costs, as incurred. Advertising expenses for the three months ended March 31, 2016 and 2015 are included in general and administrative costs.
Software Costs
The Company accounts for software development costs in accordance with ASC 985-730,Software Research and Development, and ASC 985-20, Costs of Software to be Sold, Leased or Marketed. ASC 985-20 requires that costs related to the development of the Company’s productsbe capitalized as an asset when incurred subsequent to the point at which technological feasibility of the enhancement is established. ASC 985-20 specifies that “technological feasibility” can only be established by the completion of a “detailed program design” or if no such design is prepared, upon the completion of a “working model” of the software. The Company’s development process does not include a detailed program design. Management believes that such a design could be produced in the early stages of development but would entail significant wasted expense and delay. Consequently, ASC 985-20 requires that development costs be recorded as an expense until the completion of a “working model”. In the Company’s case, the completion of a working model does not occur until shortly before the time when the software is ready for sale.
Research and Development Costs
Research and development costs are expensed as incurred. These costs include internal salaries and related costs and professional fees for activities related to development.
Subsequent Events
Subsequent events were evaluated through the date the consolidated financial statements were filed.
Shipping and Handling Costs
The Company reports shipping and handling revenues and their associated costs in revenue and cost of revenue, respectively. Shipping revenues and costs for the three months ended March 31, 2016 and 2015 were nominal and are included in cost of product sales.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2016
Revenue Recognition
In regards to product revenue, product revenue primarily consists of the sale of electronic hardware, recycled plastics products, and recycled furniture. These subsidiaries recognize revenue when the following criteria have been met:
Evidence of an arrangement exists. The Company considers a customer purchase order, service agreement, contract, or equivalent document to be evidence of an arrangement.
Delivery has occurred. The Company’s standard transfer terms are free on board (“FOB”) shipping point. Thus, delivery is considered to have occurred when title and risk of loss have passed to the customer at the time of shipment.
The fee is fixed or determinable.The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard, which is generally 30-60 days.
Collection is deemed reasonably assured. Collection is deemed reasonably assured if it is expected that the customer will be able to pay amounts under the arrangement as payments become due. If it is determined that collection is not reasonably assured, then revenue is deferred and recognized upon cash collection.
The Company for its software revenue will recognize revenues in accordance with ASC 985-605, Software Revenue Recognition.
Revenue from software license agreements is recognized when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. In software arrangements that include more than one element, the Company allocates the total arrangement fee among the elements based on the relative fair value of each of the elements.
License revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements is recognized as the services are performed. If evidence of fair value does not exist for all elements of a license agreement and post customer support (“PCS”) is the only undelivered element, then all revenue for the license arrangement is recognized ratablyfive years. Rent escalations over the term of the agreement as license revenue. If evidence of fair value of all undelivered PCS elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.
Cost of license revenue primarily includes product, delivery, and royalty costs. Cost of maintenance and service revenue consists primarily of labor costs for engineers performing implementation services, technical support, and training personnel as well as facilities and equipment costs.
The Company enters into arrangements that can include various combinations of software, services, and hardware. Where elementsa lease are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling pricesconsidered at the inception of the arrangement, and revenuelease such that the monthly average for all payments is recognizedrecorded as each element is delivered. The Company uses a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence, and (iii) best estimate of selling price (“ESP”). For software elements,straight-line rent expense with any differences recorded in accrued liabilities. As subsequently described, the Company follows the industry specific software guidance which only allowsis adopting ASC 842 Leases for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace.fiscal year beginning April 1, 2019.
ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. The process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2016
When the arrangement with a customer includes significant production, modification, or customization of the software, we recognize the related revenue using the percentage-of-completion method in accordance with the accounting guidance and certain production-type contracts contained in ASC 605-35, Construction-Type and Production-Type Contracts. We use the percentage of completion method provided all of the following conditions exist:
We measure completion based on achieving milestones detailed in the agreements with the customers. Costs of providing services, including services accounted for in accordance with ASC 605-35, are expensed as incurred.
Accounts Receivable and Concentration of Credit Risk
The Company considers accounts receivable, net of allowance for returns and doubtful accounts, to be fully collectible. The allowance is based on Management’s estimate of the overall collectability of accounts receivable, considering historical losses 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. Past-due status is based on contractual terms. Management has determined that the allowance for doubtful accounts at March 31, 2016 and December 31, 2015 was $0 and $2, respectively.
Uncertain Tax Positions
The Company follows ASC 740-10, “Accounting for Uncertainty in Income Taxes”. This requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates their tax positions on an annual basis.
The Company files income tax returns in the U.S. federal tax jurisdiction and various state tax jurisdictions. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed.
Stock-Based Compensation
The Company follows ASC 718-10“Share Based Payments”. The Company calculates compensation expense for all awards granted, but not yet vested, based on the grant-date fair values. Stock-based compensation expense for all awards granted is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.
The Company measures compensation expense for its non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to expense and additional paid-in capital.
Fair Value of Financial Instruments
ASC 825, "Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments: The carrying amount of cash, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses, and accounts payable to related parties, approximate fair value because of the short-term maturity of those instruments. The Company does not utilize derivative instruments.
Recoverability of Long-Lived Assets
The Company reviews recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2016
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 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.presented, so only basic weighted average number of common shares are used in the computations.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Management evaluates all of the Company’s financial instruments, including warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company generally uses a Black-Scholes model, as applicable, to value the derivative instruments at inception and subsequent valuation dates when needed. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is remeasured at the end of each reporting period. The Black-Scholes model is used to estimate the fair value of the derivative liabilities. Applying this accounting policy resulted in restatements of prior periods as more fully described in Note 3.
Fair Value Measurements
ASC 820 “Fair Value Measurements”Measurements defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles,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.
Segment Information
The Company follows the provisions of ASC 280-10“Disclosures about Segments of an Enterprise and Related Information”.Segment Reporting. This standard requires that companies disclose operating segments based on the manner in which Managementmanagement disaggregates the Company in making internal operating decisions. In 2016As a result of Sable, Pioneer and 2015Magnolia Solar being classified as discontinued operations, the Company and its Chief Operating Decision Makers determined that the Company’s operations were divided into two segments: Products and Services. See Note 11 fornow consist of only one segment, information disclosures.Zest Labs.
Related PartyRelated-Party Transactions
Parties are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal stockholders of the Company, its management, members of the immediate families of principal stockholders of the Company and its management and other parties with which the Company may deal where one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions.material related-party transactions (see Note 12). All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as compensation or distribution to related parties depending on the transaction.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
Recently Adopted Accounting Pronouncements
In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09 Revenue from Contracts with Customers, ASU 2015-14 Revenue from Contracts with Customers, Deferral of the Effective Date, and ASU 2016-12 Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, respectively, which implement ASC Topic 606. ASU 2017-13 issued in September 2017 clarifies SEC Staff guidance on the transition to ASC 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under U.S. GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company entered intoadopted the above ASUs (ASC Topic 606) effective April 1, 2017. The adoption of these ASUs did not have a 10-year, renewable, exclusive license with Magnolia Optical Technologies, Inc. (“Magnolia Optical”)material impact on April 30, 2008our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09 Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting. The FASB issued this update to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. The amendments in this update are required for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 and early adoption is permitted. The Company adopted ASU 2017-09 as of July 1, 2017. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The amendments in this update are required for public business entities that have goodwill reported in their financial statements and have not elected the private company alternative for the exclusive rightssubsequent measurement of goodwill. The update is intended to simplify the annual or interim goodwill impairment test. A public business entity that is a U.S. SEC filer must adopt the amendments in this update for its annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted ASU 2017-04 effective April 1, 2017. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805), Clarifying the Definition of a Business. The amendments in this update are required for public business entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The update is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. Public business entities must apply the amendments in this update to annual periods beginning after December 15, 2017. Early application is permitted under certain conditions. The Company adopted ASU 2017-01 effective April 1, 2017. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The amendments in this update provided guidance on eight specific cash flow issues. This update provided specific guidance on each of the technology related toeight issues, thereby reducing the applicationdiversity in practice in how certain transactions are classified in the statement of Magnolia Optical’s solar cell technology. Magnolia Optical shares common Directors with the Company.cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 31, 2017. Early adoption is permitted. The Company adopted ASU 2016-15 effective April 1, 2017. The adoption of this ASU did not have a material impact on our consolidated financial statements.
The Company recordedadopted ASU 2016-09 Improvements to Employee Share-Based Payment Accounting effective April 1, 2017. Cash paid when shares were directly withheld for tax withholding purposes is classified as a financing activity in the net license feestatement of $77 in conjunctioncash flows. There were no other impacts from this adoption.
F-16
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with the merger described in Note 2 below. Amortization will continue over the remaining 23 monthsDown Rounds and II. Replacement of the term.Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This ASU changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The Company’s management has determined thatamendments also clarify existing disclosure requirements for equity-classified instruments. The amendments also require entities to recognize the fair valueeffect of the license approximates the book value and thus no impairmentdown round feature on earnings per share when it is necessarytriggered. ASU 2017-11 should be adopted retrospectively or as a cumulative-effect adjustment as of March 31, 2016.the date of adoption, only to financial instruments outstanding as of the initial application date. ASU 2017-11 will be effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018, which will be the Company’s fiscal year 2020 (beginning April 1, 2019). Early adoption is permitted, including adoption in an interim period. Prior to the adoption of this guidance the issuance of equity instruments with a down round feature would have had an impact on the Company’s consolidated financial statements and related disclosures.
Recently Issued Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No.ASU 2016-02 “and later updated with ASU 2019-01 in March 2019 Leases (Topic 842)”.ASU 2016-02 changesThe ASU’s change the accounting for leased assets, principally by requiring balance sheet recognition of assets under lease arrangements. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. TheOn adoption, the Company is currently inexpects to recognize additional operating liabilities of approximately $121, with corresponding right of use assets of $112 based on the process of evaluating the impactpresent value of the adoption of ASU 2016-02 on its consolidated financial statements.remaining minimum rental payments under leasing standards for existing operating leases.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2016
During August 2014,In June 2018, the FASB issued ASU No. 2014-15, “2018-07 PresentationCompensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of Financial Statements—Going Concern.” The provisions of ASU 2014-15 require managementshare-based compensation issued to assess an entity’s ability to continue as a going concernnon-employees by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically,making the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principlesguidance consistent accounting for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubtemployee share-based compensation. It is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annualreporting periods, and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange forwithin those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in ASU 2014-09 will be applied using one of two retrospective methods. The effective date will be the first quarter of the fiscal year endingyears, beginning after December 31,15, 2018. The Company hasdoes not determinedexpect the potential effects on its consolidated financial statements.impact to be material given the current nonemployee share-based grants outstanding.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Going Concern
The Company commenced operations in 2007, and has experienced typical start-up costs and losses from operations resulting in an accumulated deficit of $38,810$115,886 since inception. The accumulated deficit as well as recurring losses of $2,223 for the three months ended March 31, 2016,$13,650 and $10,502 and $14,135$32,836 for the years ended DecemberMarch 31, 20152019 and 2014,2018, respectively, cash used in operating activities in fiscal 2019 and 2018 were $9,040 and $17,643, respectively, and thenegative working capital deficit of $2,153$5,045 as of DecemberMarch 31, 2015,2019, have resulted in the uncertainty of the CompanyCompany’s ability to continue as a going concern even though working capital increased to a surplus of $5,442 at March 31, 2016.concern.
These consolidated financial statements of the Company have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable period of time.
The Company plans to raiseraised additional capital to carry out its business planthrough the issuance of common stock (net of fees), in private placements, issuances under equity purchase agreements and following a reverse merger transaction onsales of convertible notes of $4,221 and $12,693 in the year ended March 24, 2016,31, 2019 and 2018, respectively (see Note 13). In addition, the Company received $9,555(seehas secured a $10,000 credit facility (see Note 2)10), and it has effected a merger with Trend Discovery Holdings, Inc. on May 31, 2019 (see Note 19). The Company’s ability to raise additional capital through future equity and debt securities issuances and funding from the credit facility and Trend Discovery is unknown.not assured. Obtaining additional financing and the successful development of the Company’s contemplatedstrategic plan of operations, ultimately, to profitable operationsachieve profitability are necessary for the Company to continue operations. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the uncertainties.
As more fully described in Note 3, in connection with the preparation of the Company’s consolidated financial statements as of and for the fiscal ended March 31, 2019, the Company identified inadvertent errors in the accounting for certain embedded derivative liabilities associated with warrants issued as a part of capital raises in 2017 and 2018. In connection with those capital raises, proceeds (net of fees) were accounted for as equity. Upon further evaluation, the Company determined that a portion of the capital raised should have been accounted for as liabilities with fair value changes recorded in the Company’s consolidated statements of operations.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 20162019
NOTE 2: DISCONTINUED OPERATIONS
On April 14, 2017, the Company sold the assets, liabilities and membership interests in Eco3d to a group led by executives of Eco3d after the Company’s Board concluded that Eco3d did not fit the future strategic direction of the Company. The Company received $2,029 in cash and 560 shares of the Company’s common stock (including 525 shares that had been exchanged for the noncontrolling interest in September 2016) that was held by executives of Eco3d, which were canceled upon receipt. There will be no significant continuing involvement with Eco3d.
On March 12, 2019, the Company sold the inventory and property and equipment of Sable to a buyer for cash and a short-term receivable. There will be no significant continuing involvement with Sable.
In addition, as a result of receiving letters of intent for the sale of key assets of Pioneer and Magnolia Solar, and the approval by the Company’s Board to sell the assets, those assets are included in assets held for sale and their operations included in discontinued operations.
Carrying amounts of major classes of assets and liabilities classified as held for sale and included as part of discontinued operations in the consolidated balance sheets consisted of the following as of March 31:
| 2019 | 2018 | |||||||
| Inventory | $ | - | $ | 611 | ||||
| Other current assets | 23 | 34 | ||||||
| Current assets – held for sale | $ | 23 | $ | 645 | ||||
| Property and equipment, net | $ | - | $ | 995 | ||||
| Other assets | - | 28 | ||||||
| Non-current assets – held for sale | $ | - | $ | 1,023 | ||||
| Accounts payable | $ | 23 | $ | 30 | ||||
| Accrued liabilities | 11 | 13 | ||||||
| Current liabilities – held for sale | $ | 34 | $ | 43 | ||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
Major line items constituting income (loss) from discontinued operations in the consolidated statements of operations for the years ended March 31 consisted of the following:
| 2019 | 2018 | |||||||
| Revenue | $ | 9,883 | $ | 9,541 | ||||
| Cost of revenue | 10,515 | 10,567 | ||||||
| Gross (loss) | (632 | ) | (1,026 | ) | ||||
| Operating expenses | 1,668 | 3,155 | ||||||
| Loss from discontinued operations | $ | (2,300 | ) | $ | (4,181 | ) | ||
| Non-cash expenses | $ | 452 | $ | 2,223 | ||||
After consideration of all the evidence, both positive and negative, management has recorded a full valuation allowance due to the uncertainty of realizing income tax benefit for all periods presented, and the income tax provision for all periods presented was considered immaterial. Thus, no separate tax provision or benefit relating to discontinued operations is included here or on the face of the consolidated statements of operations.
Non-cash expenses above consist principally of depreciation, amortization and impairment costs. Capital expenditures of discontinued operations were principally at Sable and amounted to $268 and $253 for fiscal 2019 and 2018, respectively.
Gain on the sale of Sable assets of $57 in March 2019 and on the sale of Eco3d of $636 in May 2017 was recognized in discontinued operations.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
NOTE 3: RESTATEMENTS
In connection with the preparation of the Company’s consolidated financial statements as of and for the fiscal year ended March 31, 2019, the Company identified inadvertent errors in the accounting for certain embedded derivative liabilities associated with warrants issued as a part of capital raises in 2017 and 2018. In connection with those capital raises, proceeds (net of fees) were accounted for as equity. Upon further evaluation, the Company determined that a portion of the capital raised should have been accounted for as liabilities with fair value changes recorded in the Company’s consolidated statements of operations. Accordingly, the Company is restating herein its previously issued consolidated financial statements and the related disclosures for the fiscal year ended March 31, 2018 and interim periods in fiscal years 2018 and 2019 as well as an adjustment to the opening balance sheet for the first interim period of fiscal 2018 (the “Restated Periods”). The adjustment to the opening balance sheet as of April 1, 2017 consisted of establishing a current derivatives liability of $3,351, offset by a reduction in additional paid-in-capital of $4,180 and a reduction of accumulated deficit of $829.
The categories of misstatements and their impact on previously reported consolidated financial statements for the 2018 and 2017 annual periods are described below:
Derivative Liability: The recognition, measurement and presentation and disclosure related to the warrants issued in conjunction with reserved private placements of the Company’s common stock.
Stockholders’ Deficit: The measurement and presentation and disclosure related to the derivative liability associated with the warrants issued in conjunction with the reserved private placements originally classified as additional paid in capital.
Change in Fair Value of Derivative Liabilities: The recognition, measurement and presentation and disclosure related to changes in the fair value of the derivative liability
In addition to the restatement of the financial statements, certain information within the following notes to the financial statements have been restated to reflect the corrections of misstatements discussed above as well as to add disclosure language as appropriate:
Note 1: Organization and Summary of Significant Accounting Policies
Note 9: Warrant Derivative Liabilities
Note 13: Stockholders’ Equity (Deficit)
Note 18: Fair Value Measurements
The financial statement misstatements reflected in previously issued consolidated financial statements did not impact cash flows from operations, investing, or financing activities in the Company’s consolidated statements of cash flows for any period previously presented, however they did impact individual line items.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
Comparison of restated financial statements to financial statements as previously reported
The following tables compare the Company’s previously issued Consolidated Balance Sheet, Consolidated Statements of Operations, Consolidated Statement of Cashflows, and Consolidated Statement of Changes in Stockholders’ Equity as of and for the year ended March 31, 2018 to the corresponding restated consolidated financial statements for that year.
| (Dollars in thousands, | ||||||||||||
| except per share data) | ||||||||||||
| March 31, | Restatement | March 31, | ||||||||||
| 2018 | Adjustment | 2018 | ||||||||||
| As Reported | As Restated | |||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash ($265 pledged as collateral for credit) | $ | 3,730 | $ | - | $ | 3,730 | ||||||
| Accounts receivable, net of allowance of $87 | 2,617 | - | 2,617 | |||||||||
| Prepaid expenses and other current assets | 242 | - | 242 | |||||||||
| Current assets held for sale | 645 | - | 645 | |||||||||
| Total current assets | 7,234 | - | 7,234 | |||||||||
| NON-CURRENT ASSETS | ||||||||||||
| Property and equipment, net | 2,619 | - | 2,619 | |||||||||
| Intangible assets, net | 1,545 | - | 1,545 | |||||||||
| Non-current assets held for sale | 1,023 | - | 1,023 | |||||||||
| Other assets | 26 | - | 26 | |||||||||
| Total non-current assets | 5,213 | - | 5,213 | |||||||||
| TOTAL ASSETS | $ | 12,447 | - | $ | 12,447 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Accounts payable | $ | 2,350 | $ | - | $ | 2,350 | ||||||
| Accrued liabilities | 1,080 | - | 1,080 | |||||||||
| Derivative liabilities | - | 3,694 | 3,694 | |||||||||
| Current portion of long-term debt | 500 | - | 500 | |||||||||
| Current liabilities held for sale | 43 | - | 43 | |||||||||
| Total current liabilities | 3,973 | 3,694 | 7,667 | |||||||||
| NON-CURRENT LIABILITIES | ||||||||||||
| Long-term debt, net of current portion | - | - | - | |||||||||
| Long-term debt, net of current portion - related party | - | - | ||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||
| Total liabilities | 3,973 | 3,694 | 7,667 | |||||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) (Numbers of shares rounded to thousands) | ||||||||||||
| Preferred stock, $0.001 par value; 5,000 shares authorized; none issued | - | - | - | |||||||||
| Common stock, $0.001 par value; 100,000 shares authorized, 49,468 shares issued and 48,923 shares outstanding as of March 31, 2018 | 49 | - | 49 | |||||||||
| Additional paid-in-capital | 122,424 | (13,839 | ) | 108,585 | ||||||||
| Accumulated deficit | (112,381 | ) | 10,145 | (102,236 | ) | |||||||
| Treasury stock, at cost | (1,618 | ) | - | (1,618 | ) | |||||||
| Total stockholders’ equity (deficit) | 8,474 | (3,694 | ) | 4,780 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 12,447 | - | $ | 12,447 | |||||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
| Year Ended | Year Ended | |||||||||||
| March 31, | Restatement | March 31, | ||||||||||
| 2018 | Adjustment | 2018 | ||||||||||
| As Reported | As Restated | |||||||||||
| CONTINUING OPERATIONS: | ||||||||||||
| REVENUES | $ | 558 | $ | - | $ | 558 | ||||||
| COST OF REVENUES | 243 | - | 243 | |||||||||
| GROSS PROFIT (LOSS) | 315 | - | 315 | |||||||||
| OPERATING EXPENSES: | ||||||||||||
| Salaries and salary related costs, including share-based compensation | 25,962 | - | 25,962 | |||||||||
| Professional fees and consulting, including share-based compensation | 4,812 | 4,812 | ||||||||||
| Selling, general and administrative | 1,677 | - | 1,677 | |||||||||
| Depreciation, amortization, and impairment | 818 | - | 818 | |||||||||
| Research and development | 5,576 | - | 5,576 | |||||||||
| Total operating expenses | 38,845 | - | 38,845 | |||||||||
| Loss from continuing operations before other expenses | (38,530 | ) | - | (38,530 | ) | |||||||
| OTHER EXPENSE: | ||||||||||||
| Change in fair value of derivative liabilities | - | 9,316 | 9,316 | |||||||||
| Interest expense, net of interest income | (55 | ) | - | (55 | ) | |||||||
| Total other expenses | (55 | ) | 9,316 | 9,261 | ||||||||
| LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES | (38,585 | ) | 9,316 | (29,269 | ) | |||||||
| DISCONTINUED OPERATIONS: | ||||||||||||
| Income (loss) from discontinued operations | (4,181 | ) | - | (4,181 | ) | |||||||
| Gain on disposal of discontinued operations | 636 | - | 636 | |||||||||
| Total discontinued operations | (3,545 | ) | - | (3,545 | ) | |||||||
| PROVISION FOR INCOME TAXES | 22 | - | 22 | |||||||||
| NET LOSS | (42,152 | ) | 9,316 | (32,836 | ) | |||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | - | - | ||||||||||
| NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST | $ | (42,152 | ) | $ | 9,316 | $ | (32,836 | ) | ||||
| NET LOSS PER SHARE | ||||||||||||
| Basic and diluted: Continuing operations | $ | (0.85 | ) | $ | (0.21 | ) | $ | (0.64 | ) | |||
| Discontinued operations | $ | (0.08 | ) | - | $ | (0.08 | ) | |||||
| Total | $ | (0.93 | ) | $ | 0.21 | $ | (0.72 | ) | ||||
| SHARES USED IN CALCULATION OF NET LOSS PER SHARE | ||||||||||||
| Basic and diluted | 45,500 | 45,500 | ||||||||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
| Year Ended March 31, | Restatement | Year Ended March 31, | ||||||||||
| 2018 | Adjustment | 2018 | ||||||||||
| As Reported | As Restated | |||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss attributable to controlling interest | $ | (42,152 | ) | $ | 9,316 | $ | (32,836 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation, amortization and impairment | 3,041 | - | 3,041 | |||||||||
| Shares of common stock issued for services rendered | 2,860 | - | 2,860 | |||||||||
| Share-based compensation – stock - employees | 20,592 | - | 20,592 | |||||||||
| Share-based compensation due to employment agreements | 1,500 | - | 1,500 | |||||||||
| Change in value of derivative liabilities | (9,316 | ) | (9,316 | ) | ||||||||
| (Income) loss from discontinued operations | 4,181 | 4,181 | ||||||||||
| Gain on sale of discontinued operations | (636 | ) | - | (636 | ) | |||||||
| Loss on retirement of assets | 61 | - | 61 | |||||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts receivable | (1,060 | ) | - | (1,060 | ) | |||||||
| Inventory | (983 | ) | - | (983 | ) | |||||||
| Prepaid expenses | 90 | - | 90 | |||||||||
| Other current assets | (56 | ) | - | (56 | ) | |||||||
| Other assets | 6 | - | 6 | |||||||||
| Accounts payable | 634 | - | 634 | |||||||||
| Accrued liabilities | (1,691 | ) | - | (1,691 | ) | |||||||
| Net cash used in operating activities of continuing operations | (13,613 | ) | - | 13,613 | ) | |||||||
| Net cash used in discontinued operations | (4,030 | ) | - | (4,030 | ) | |||||||
| Net cash used in operating activities | (17,643 | ) | - | (17,643 | ) | |||||||
| Cash flows from investing activities: | ||||||||||||
| Proceeds from sale of Eco3d | 2,029 | - | 2,029 | |||||||||
| Purchases of short-term investments | (1,001 | ) | - | (1,001 | ) | |||||||
| Redemption of short-term investments | 1,001 | - | 1,001 | |||||||||
| Purchases of property and equipment | (277 | ) | - | (277 | ) | |||||||
| Net cash provided by (used in) investing activities | 1,752 | - | 1,752 | |||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of common stock, net of fees | 12,693 | - | 12,693 | |||||||||
| Purchase of treasury shares from employees | (1,618 | ) | - | (1,618 | ) | |||||||
| Repayments of debt - related parties | (100 | ) | - | (100 | ) | |||||||
| Net cash provided by financing activities | 10,975 | - | 10,975 | |||||||||
| NET INCREASE (DECREASE) IN CASH | (4,916 | ) | - | (4,916 | ) | |||||||
| Cash - beginning of period | 8,646 | - | 8,646 | |||||||||
| Cash - end of period | $ | 3,730 | $ | - | $ | 3,730 | ||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||||||
| Cash paid for interest | $ | 60 | $ | - | $ | 60 | ||||||
| Cash paid for income taxes | $ | - | $ | - | $ | - | ||||||
| SUMMARY OF NONCASH ACTIVITIES: | ||||||||||||
| Inventory reclassified to property and equipment | $ | 2,477 | $ | - | $ | 2,477 | ||||||
| Assets and liabilities acquired via acquisition of companies: | ||||||||||||
| Identifiable intangible assets | $ | 1,435 | $ | - | $ | 1,435 | ||||||
| Goodwill | $ | 65 | $ | - | $ | 65 | ||||||
| Other assets | $ | 28 | $ | - | $ | 28 | ||||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
The Company’s financial statements as of March 31, 2017, contained the following adjustments: (1) overstatement of additional-paid-in-capital by $4,180, (2) understatement of warrant liability by $3,351, and (3) overstatement of net loss due to change in fair value of warrant liability by $829. Accumulated deficit as of April 1, 2017, has been reduced by $4,180 to correct the aggregate effect of the adjustments, net of their related income tax effect of $0. Had the errors not been made, net loss for fiscal 2017 would have been decreased by $829, net of income tax of $0 due to the Company having a full valuation allowance for its net deferred tax assets. These adjustments were made to correct an error made in fiscal year 2017 of classifying certain warrants issued in May 2017 as a component of equity rather than as a liability at inception and changes in the fair value of the warrant liability not being recognized in the statement of operations.
| Preferred | Common | Additional Paid-In- | Accumulated | Treasury | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | |||||||||||||||||||||||||
| Balances at April 1, 2017 (Restated) | - | $ | - | 42,330 | $ | 42 | $ | 80,845 | $ | (69,400 | ) | $ | - | $ | 11,487 | |||||||||||||||||
| Shares issued for cash in private placement, net of expenses (Restated) | - | - | 5,000 | 5 | 3,029 | - | - | 3,034 | ||||||||||||||||||||||||
| Share-based compensation – stock – Board of Directors | - | - | 201 | - | 550 | - | - | 550 | ||||||||||||||||||||||||
| Share-based compensation – stock – services rendered | - | - | 65 | - | 596 | - | - | 596 | ||||||||||||||||||||||||
| Share-based compensation – stock – employees | - | - | 1,783 | 2 | 20,590 | - | - | 20,592 | ||||||||||||||||||||||||
| Purchase shares from employees in lieu of taxes | - | - | - | - | - | - | (1,618 | ) | (1,618 | ) | ||||||||||||||||||||||
| Stock issued to purchase 440 Labs | - | - | 300 | - | 1,500 | - | - | 1,500 | ||||||||||||||||||||||||
| Share-based compensation due to employment agreements | - | - | 300 | - | 1,500 | - | - | 1,500 | ||||||||||||||||||||||||
| Warrant conversion – cashless | - | - | 49 | - | - | - | - | - | ||||||||||||||||||||||||
| Sale of Eco3d, shares received and cancelled | - | - | (560 | ) | - | (25 | ) | - | - | (25 | ) | |||||||||||||||||||||
| Net loss for the period (Restated) | - | - | - | - | - | (32,836 | ) | - | (32,836 | ) | ||||||||||||||||||||||
| Balances at March 31, 2018 (Restated) | - | - | 49,468 | 49 | 108,585 | (102,236 | ) | (1,618 | ) | 4,780 | ||||||||||||||||||||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
NOTE 4: REVENUE
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company early adopted effective April 1, 2017. No cumulative adjustment to accumulated deficit was required, and the early adoption did not have a material impact on our consolidated financial statements, as no material arrangements prior to the adoption were impacted by the new pronouncement.
The following table disaggregates the Company’s revenue by major source for the years ended March 31:
| 2019 | 2018 | |||||||
| Revenue: | ||||||||
| Walmart | $ | 1,000 | $ | 500 | ||||
| Software as a Service (“SaaS”) | 62 | 57 | ||||||
| Hardware Sales | - | 1 | ||||||
| $ | 1,062 | $ | 558 | |||||
Revenues in the year ended March 31, 2019 were principally from a project with Walmart. After paying invoices for $1,000 through June, Walmart has not paid the final $500. As a result, the Company has established an allowance for doubtful accounts of $500 until the matter is resolved. Zest SaaS revenues in the years ended March 31, 2019 and 2018 were from retailers and produce growers. There were no significant contract asset or contract liability balances for all periods presented. The Company does not disclose the value of unsatisfied 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.
NOTE 5: MERGER
On January 29, 2016, Ecoark entered into a Merger Agreement (“Merger Agreement”) with Magnolia Solar Corporation (“MSC”)MSC providing, among other things, for the acquisition of the CompanyEcoark by MSC in a share for share exchange pursuant to which it was contemplated that at the closing Ecoark shareholders would own approximately 95% of the outstanding shares of MSC. On March 18, 2016, in a special meeting called by MSC, the shareholders of MSC approved proposals necessary to complete the Merger (“Merger”).
On March 24, 2016, the Merger was closed. Upon the closing of the transaction, under the Merger Agreement, Magnolia Solar Acquisition Corporation merged with and into Ecoark with Ecoark as the surviving corporation, which became a wholly-owned subsidiary of MSC. Thereafter, MSC changed its name to Ecoark Holdings, Inc. The transaction was accounted for as a reverse merger;acquisition; for accounting purposes Ecoark acquired the assets and liabilities of Magnolia Solar effective March 24, 2016. The historical financial information presented prior to March 24, 2016 is that of Ecoark.
Further, the Articles of Incorporation were amended to increase the authorized shares of common stock to 100,000 shares, to effect the creation of 5,000 shares of "blank check"“blank check” preferred stock, and to approve a reverse stock split of the MSC common stock of 1 for 250.
After the Merger, the Company had 29,04929,057 shares of common stock issued and outstanding. The MSC’s shareholders and holders of debt, notes, warrants and options received an aggregate of 1,3531,351 shares of the Company’s common stock and Ecoark’s shareholders received an aggregate of 27,69627,706 shares of the Company’s common stock.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
On March 24, 2016, FINRA corporate action announced the reverse split and the name change which became effective in the market on March 28, 2016. Following that, the Company stock trades under the symbol “EARK.” All actions to close the Merger were completed in March 2016.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
In conjunction withAs a result of the Merger MSC offered units consistingand in accordance with SAB Topic 14C and ASC 805-40-45, the Company has given retroactive effect to the transaction by adjusting the number of ashares in the consolidated balance sheets, consolidated statements of operations, consolidated statement of changes in stockholders’ equity (deficit) and accompanying notes. The retroactive treatment changed the reported common shares and additional paid-in capital in the balance sheets, the shares used in the calculation of net loss per share and a warrant at a priceresulting net loss per share in the statements of $4.00 per unit for a maximum of $20,000 in a private placement offering. Each unit consists of one share of MSC (now Ecoark Holdings) common stock (par value $0.001 per share) and a warrant to purchase one share of MSC (now Ecoark Holdings) common stock exercisable on or before December 31, 2018 at a price of $5.00 per share. The units were offered to an unlimitedoperations, the number of Accredited Investors untilshares and related dollar amounts in the earlierstatement of changes in stockholders’ equity (deficit), and various disclosures regarding number of shares and related amounts in these notes to consolidated financial statements. There was no effect on the date upon which subscriptions for the maximum offering had been received and accepted; March 31, 2016, subject to a 60-day extension at the option of Ecoark Holdings;net loss or the date upon which the offering was terminated by the Company. Through March 31, 2016 the Company received proceeds of $9,555total stockholders’ equity (deficit) as a result of subscriptions to the offering. The offering was terminated on April 28, 2016.restatement.
NOTE 3:INVENTORYThe change became effective on March 24, 2016 when the Merger closed.
Inventory, netThe financial statements presented herein for the period through March 24, 2016 represent the historical financial information of reserves, consisted ofEcoark, Inc., except for the followingcapital structure as of March 31, 2016 (unaudited) and December 31, 2015:2015 which represents the historical amounts of MSC, retroactively adjusted to reflect the legal capital structure of MSC.
| March 31, 2016 | December 31, 2015 | |||||||
| Inventory | $ | 1,429 | $ | 1,363 | ||||
| Inventory Reserves | (620 | ) | (620 | ) | ||||
| Total | $ | 809 | $ | 743 | ||||
NOTE 4:6: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of March 31, 2016 (unaudited) and December 31, 2015:31:
| March 31, 2016 | December 31, 2015 | |||||||
| Furniture and fixtures | $ | 114 | $ | 110 | ||||
| Computers and software costs | 425 | 382 | ||||||
| Machinery and equipment | 478 | 476 | ||||||
| Leasehold improvements | 4 | 4 | ||||||
| Total property and equipment | 1,021 | 972 | ||||||
| Accumulated depreciation | (661 | ) | (609 | ) | ||||
| Property and equipment, net | $ | 360 | $ | 363 | ||||
Depreciation expense for the three months ended March 31, 2016 and 2015 was $52 and $67, respectively. There was no impairment on these assets in 2016 or 2015.
| 2019 | 2018 | |||||||
| Zest Labs freshness hardware | $ | 2,493 | $ | 2,477 | ||||
| Computers and software costs | 222 | 400 | ||||||
| Machinery and equipment | 200 | 211 | ||||||
| Furniture and fixtures | - | 89 | ||||||
| Leasehold improvements | - | 4 | ||||||
| Total property and equipment | 2,915 | 3,181 | ||||||
| Accumulated depreciation and impairment | (2,091 | ) | (562 | ) | ||||
| Property and equipment, net | $ | 824 | $ | 2,619 | ||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 20162019
NOTE 5: INTANGIBLE ASSETS
As previously described, during the year ended March 31, 2018 Zest Labs entered into SaaS contracts with customers and $2,477 of assets previously classified as inventory have been reclassified to property and equipment. These assets will be used in the satisfaction of performance obligations to customers and depreciated over estimated useful lives of three to seven years. As of March 31, 2019, the Company performed an evaluation of the recoverability of these long-lived assets. The following isanalysis was performed based on assumptions for both held for use and held for sale, and as a summaryresult an impairment of intangible assets$1,139 was recorded as of March 31, 2016 (unaudited) and December 31, 2015:2019 related to these assets.
| March 31, 2016 | December 31, 2015 | |||||||
| Customer lists | $ | 3,980 | $ | 3,980 | ||||
| Patents and licenses | 1,090 | 1,013 | ||||||
| Total intangible assets | 5,070 | 4,993 | ||||||
| Accumulated amortization | (4,163 | ) | (4,141 | ) | ||||
| Intangible assets, net | $ | 907 | $ | 852 | ||||
Depreciation expense for the years ended March 31, 2019 and 2018 was $672 and $119, respectively.
NOTE 7: INTANGIBLE ASSETS
Intangible assets consisted of the following as of March 31:
| 2019 | 2018 | |||||||
| Patents | $ | 1,013 | $ | 1,013 | ||||
| Customer lists | - | - | ||||||
| Outsourced vendor relationships | 340 | 340 | ||||||
| Non-compete agreements | 1,017 | 1,017 | ||||||
| Goodwill | - | - | ||||||
| Total intangible assets | 2,370 | 2370 | ||||||
| Accumulated amortization and impairment | (2,370 | ) | (825 | ) | ||||
| Intangible assets, net | $ | - | $ | 1,545 | ||||
The outsourced vendor relationships and non-compete agreements were recorded as part of the acquisition of 440labs described in Note 17 below.
Amortization expense for the years ended March 31, 2019 and 2018 was $553 and $555, respectively.
The Company performed a review of its customers and business results at Sable in 2017 to assess the recoverability of the carrying value of intangibles. As a result, impairment charges of $1,042 against the customer lists and a related write-down of goodwill of $582 from the initially recorded amount of $1,264 were recorded in the year ended March 31, 2018. In addition, $78 of the 440labs non-compete agreements were impaired due to the separation of one of the key employees and the remaining goodwill of $65 related to the 440labs acquisition was impaired in the three months ended March 31, 2016 and 2015 was $22 and $349, respectively. There was no impairment on these assets in 2016 or 2015.2018.
NOTE 6: CURRENT PORTION OF LONG-TERM DEBT
The following is a summaryAs of long-term debtMarch 31, 2019, the Company evaluated the recoverability of the remaining intangible assets of Zest Labs and made the decision to fully impair the remaining net book value of $992 as of March 31, 2016 (unaudited) and December 31, 2015:2019.
| March 31, 2016 | December 31, 2015 | |||||||||
| Note payable – Celtic Bank | (a) | $ | - | $ | 175 | |||||
| Note payable – B&B Merritt | (b) | 3,000 | 3,000 | |||||||
| Total | $ | 3,000 | $ | 3,175 | ||||||
Intangible assets consisting of customer lists and patents for Pioneer, including those held by Ecoark, and Magnolia have been reclassified for all years presented as assets held for sale as more fully described in Note 2 and accordingly amortization and impairment expense has been included in the loss from discontinued operations.
NOTE 8: ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of March 31:
| 2019 | 2018 | |||||||
| Professional fees and consulting costs | $ | 150 | $ | 325 | ||||
| Vacation and paid time off | 345 | 278 | ||||||
| Legal fees | 108 | 100 | ||||||
| Payroll and employee expenses | 50 | 75 | ||||||
| Hardware in transit | - | 26 | ||||||
| Other | 175 | 276 | ||||||
| Total | $ | 828 | $ | 1,080 | ||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
NOTE 9: WARRANT DERIVATIVE LIABILITIES
As described in Note 3 and Note 13, the Company issued common stock and warrants in several private placements in March 2017, May 2017, March 2018 and August 2018. The March and May 2017 and March and August 2018 warrants (collectively the “Derivative Warrant Instruments”) are 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 the March and May 2017 warrants which caused the warrants to be classified as a liability. These embedded features included 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. 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.
The Company identified embedded features in the March and August 2018 warrants which caused the warrants to be classified as a liability. These embedded features 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. 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 the date of inception, the fair value of the March 2017 warrants of $4,609 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.13% an expected term of 5.0 years, an expected volatility of 107% and a 0% dividend yield. At March 31, 2017, the fair value of the March 2017 warrants of $3,351 was determined using the Black-Scholes Model based on a risk-free interest rate of 1.93% an expected term of 4.9 years, an expected volatility of 105% and a 0% dividend yield. At March 31, 2018, the fair value of the March 2017 warrants of $537 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.56% an expected term of 4.0 years, an expected volatility of 91% and a 0% dividend yield. At March 31, 2019, the fair value of the March 2017 warrants $256 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.23% an expected term of 3.0 years, an expected volatility of 96% and a 0% dividend yield.
On the date of inception, the fair value of the May 2017 warrants of $7,772 was determined using the Black-Scholes Model based on a risk-free interest rate of 1.80% an expected term of 5.0 years, an expected volatility of 101% and a 0% dividend yield. At March 31, 2018, the fair value of the May 2017 warrants of $1,001 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.56% an expected term of 4.17 years, an expected volatility of 91% and a 0% dividend yield. At March 31, 2019, the fair value of the May 2017 warrants of $505 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.23% an expected term of 3.17 years, an expected volatility of 96% and a 0% dividend yield.
On the date of inception, the fair value of the March 2018 warrants of $3,023 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.65% an expected term of 5.0 years, an expected volatility of 91% and a 0% dividend yield. At March 31, 2018, the fair value of the March 2018 warrants of $2,156 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.56% an expected term of 5.0 years, an expected volatility of 91% and a 0% dividend yield. At March 31, 2019, the fair value of the March 2018 warrants of $1,040 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.23% an expected term of 4.00 years, an expected volatility of 96% and a 0% dividend yield.
On the date of inception, the fair value of the August 2018 warrants of $2,892 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.77% an expected term of 5.00 years, an expected volatility of 97% and a 0% dividend yield. At March 31, 2019, the fair value of the August 2018 warrants of $1,303 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.23% an expected term of 4.42 years, an expected volatility of 96% and a 0% dividend yield.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
The Company’s derivative liabilities associated with the warrants are as follows:
| March 31, 2019 | March 31, 2018 | Inception | ||||||||||
| Fair value of 1,000 March 17, 2017 warrants | $ | 256 | $ | 537 | $ | 4,609 | ||||||
| Fair value of 1,850 May 22, 2017 warrants | 505 | 1,001 | 7,772 | |||||||||
| Fair value of 2,565 March 16, 2018 warrants | 1,040 | 2,156 | 3,023 | |||||||||
| Fair value of 2,969 August 14, 2018 warrants | 1,303 | - | 2,892 | |||||||||
| $ | 3,104 | $ | 3,694 | $ | 18,296 | |||||||
During the years ended March 31, 2019 and 2018 the Company recognized changes in the fair value of the derivative liabilities of $3,160 and $9,316, respectively.
NOTE 10: NOTE PAYABLE
On December 28, 2018, the Company entered into a $10,000 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 a demand note executed by the Company. The Company is able to request draws from the lender up to $1,000 with a cap of $10,000, including the $1,000 advanced on December 28, 2018 and an additional $350 advanced through March 31, 2019. If principal is prepaid, the loans may not be re-borrowed and the cap of $10,000 shall be reduced. The Company may make a request for a loan or loans from the lender, at any one time and from time to time, from the date of the Agreement until the earlier of (i) demand by the lender or (ii) December 27, 2020 or the earlier termination of the Agreement pursuant to the terms thereof. Loans made pursuant to the Agreement are secured by a security interest in the Company’s collateral held with the lender and guaranteed by the Company’s subsidiary, Zest Labs.
The Company is to pay to the lender a commitment fee on the principal amount of each loan requested thereunder in the amount of 3.5% of the amount thereof. The Company also paid an arrangement fee of $300 to the lender which was paid upon execution of the Agreement. The aforementioned fees were netted from proceeds from the $1,000 initial advance on December 28, 2018. Zest Labs is a plaintiff in a litigation styled as Zest Labs, Inc. vs WalMart, Inc., Case Number 4:18-cv-00500 filed in the United States District Court for the Eastern District of Arkansas (the “Zest Litigation”). The Company agrees that within five days of receipt by Zest Labs or the Company of any settlement proceeds from the Zest Litigation, the Company will pay or cause to be paid over to lender an additional fee in an amount equal to (i) 0.50 multiplied by (ii) the highest aggregate principal balance of the loans over the life of the loans through the date of the payment from settlement proceeds; provided, however, that such additional fee shall not exceed the amount of the settlement proceeds.
Subject to customary carve-outs, the Agreement contains customary negative covenants and restrictions for agreements of this type on actions by the Company including, without limitation, restrictions on indebtedness, liens, investments, loans, consolidation, mergers, dissolution, asset dispositions outside the ordinary course of business, change in business and restriction on use of proceeds. In addition, the Agreement requires compliance by the Company of covenants including, but not limited to, furnishing the lender with certain financial reports and protecting and maintaining its intellectual property rights. The Agreement contains customary events of default, including, without limitation, non-payment of principal or interest, violation of covenants, inaccuracy of representations in any material respect and cross defaults with certain other indebtedness and agreements.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
NOTE 11: LONG-TERM DEBT
Long-term debt consisted of the following as of March 31:
| 2019 | 2018 | |||||||
| Secured convertible promissory note | $ | - | $ | 500 | ||||
| Less: current portion | - | (500 | ) | |||||
| Long-term debt, net of current portion | $ | - | $ | - | ||||
The Company had a secured convertible promissory note (“convertible note”) bearing interest at 10% per annum, entered on January 10, 2017 for $500 with the principal due in one lump sum payment on or before July 10, 2018. The convertible note was part of the financing the Company entered into in the three months ended March 31, 2017, that raised $4,300 (of a maximum of $5,000) in convertible notes ($700 of which were from related parties, see Note 10) bearing interest at 10% per annum. On March 30, 2017, $3,700 of these notes were converted (including $600 of the $700 in connection with the related parties) into shares of common stock, along with the related accrued interest on those notes.
The Company granted note holders a security interest for the holder’s ratable share of the series notes in the Company’s ownership interest in Sable as collateral. The note holders had the right at the holders’ option to convert all or any portion of the principal amount at a conversion rate per share which ranges from $4.15 to $7.10 per share (the only non-related party note still outstanding has a conversion price of $4.50). In February 2017, the Company amended the convertible note whereby certain holders (not including related parties) received a warrant to purchase 10 shares of common stock for every $100 principal amount if the holder converted the note on or before March 31, 2017. The principal along with accrued interest of $11 was paid on July 2, 2018.
Interest expense on the long-term debt for the three monthsyears ended March 31, 20162019 and 2015 were $752018 was $12 and $77,$50, respectively.
NOTE 12: RELATED-PARTY TRANSACTIONS
On February 28, 2017, the Company entered into a Securities Purchase Agreement related to the issuance and sale of up to 1,100 shares of common stock held by Randy May, Chairman of the Board and former CEO, and Gary Metzger, an independent director on the Company’s Board and a significant shareholder. The purchase agreement is pursuant to the Company’s Form S-3 registration statement filed on August 17, 2016. The selling securityholders may sell or distribute the securities included in the prospectus supplement through underwriters, through agents, to dealers, in private transactions, at market prices prevailing at the time of sale, at prices related to the prevailing market prices, or at negotiated prices. The Company will not receive any of the proceeds from sales of the common stock made by the selling securityholders.
Subsequent to March 31, 2019, Gary Metzger has advanced to the Company $328 under a note that bears 10% simple interest per annum and is payable July 30, 2020.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 20162019
NOTE 7: DEBT – RELATED PARTIES13: STOCKHOLDERS’ EQUITY (DEFICIT)
The following is a summary of debt – related parties as of March 31, 2016 (unaudited) and December 31, 2015:
| March 31, 2016 | December 31, 2015 | |||||||||||
| Promissory note – related party | (a) | - | $ | 50 | ||||||||
| Promissory note #1 – CEO | (b) | $ | 25 | 62 | ||||||||
| Promissory note #2 – CEO | (c) | 717 | 1,217 | |||||||||
| Total | $ | 742 | $ | 1,329 | ||||||||
Interest expense on the debt – related parties for the three months ended March 31, 2016 and 2015 was $20 and $44, respectively.
NOTE 8: STOCKHOLDERS’ EQUITY (DEFICIT)
On March 24, 2016, Ecoark Series A, B, C, and D Common Shares were exchanged for Ecoark Holdings Common Shares as more fully described in Note 2 above. The Ecoark Common Shares, including Treasury Shares were canceled after the exchange.
As a result of the merger transaction and in accordance with ASC 805-40-45, the Company has given retroactive effect to certain share calculations by restating amounts for common shares and additional paid-in capital in the December 31, 2015 balance sheet.
Ecoark Holdings Preferred Stock
On March 18, 2016, theThe Company createdhas 5,000 shares of “blank check” preferred stock.stock, par value $0.001 authorized. No preferred shares have been issued.
Ecoark Holdings Common Stock
As described in Note 2 above,The Company has 100,000 shares of common stock, par value $0.001 were authorized on March 18, 2016. At the merger,authorized.
In May 2017, the Company had 29,049 shares of common stock issued and outstanding. The MSC’s shareholders and holders of debt, notes, warrants and options received an aggregate of 1,353 shares of the Company’s common stock and Ecoark’s shareholders received an aggregate of 27,696 shares of the Company’s common stock.The Company also issued 2,3872,500 shares of the Company’s common stock pursuant to a private placement offering for $9,106, net of expenses, with $2,029 recorded as equity and the remainder to derivative liabilities (see Securities Purchase Agreement – Institutional Funds below).
In March 2018, the Company issued 2,500 shares of the Company’s common stock pursuant to a private placement offering for $3,587, net of expenses, with $1,005 recorded as equity and the remainder to derivative liabilities (see Securities Purchase Agreement – Institutional Funds below).
The Company issued 201 shares for board compensation valued at $550 for the year ended March 31, 2018.
During the year ended March 31, 2018, the Company issued 65 shares to consultants under the 2013 Incentive Stock Plan.
During the year ended March 31, 2018 the Company issued 1,544 shares to employees in stock grants vested under the 2013 Incentive Stock Plan and 239 shares to employees in service-based Restricted Stock Units (“RSUs”) vested under the 2017 Ecoark Holdings Omnibus Incentive Plan (“2017 Omnibus Incentive Plan”).
The total share-based compensation expense for the year ended March 31, 2018 was $24,952. The Company acquired 545 shares of common stock from employees in lieu of amounts required to satisfy minimum tax withholding requirements of $1,618 resulting from vesting of the employees’ stock.
The Company issued 300 shares in May 2017 for the acquisition of 440labs valued at $1,500.
The Company issued 300 shares in May 2017 upon the execution of employment agreements with employees of 440labs valued at $1,500 recorded as share-based compensation.
In May 2017, the Company issued 49 shares for the cashless exercise of 100 warrants to a consultant. The remaining 51 shares were forfeited.
On April 14, 2017, the Company sold the assets, liabilities and membership interests in Eco3d to a group led by executives of Eco3d after the Company’s Board concluded that Eco3d did not fit the future strategic direction of the Company. The Company received $2,029 in cash and 560 shares of the Company’s common stock that was held by executives of Eco3d, which shares were canceled.
F-31
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
Securities Purchase Agreements – Institutional Funds
On March 14, 2017, the Company completed a reserved private placement agreement entered into on March 13, 2017 related to the issuance and sale of 2,000 shares of common stock for $8,000 ($7,255 net of expenses) to institutional purchasers at $4.00 per share. The purchase agreement is pursuant to the Company’s Form S-3 registration statement filed on August 17, 2016. The purchasers also received warrants to purchase 1,000 shares of common stock equal to 50% of the purchaser’s shares for $5.00 for up to 5 years from the date the transaction completed. The investment bankers for the transaction received warrants to purchase 140 shares of common stock for $5.00 for up to 5 years, the same terms as the investors. Of the total net proceeds of $7,255, $4,609 were determined to be warrant liabilities, and $429 of the fees that were considered related to liabilities were charged to other expense.
On May 22, 2017, the Company completed a reserved private placement agreement related to the issuance and sale of 2,500 shares of common stock for $10,000 ($9,106 net of expenses) to institutional purchasers at $4.00 per share. The purchase agreement is pursuant to the Company’s Form S-3 registration statement filed on August 17, 2016. The purchasers also received warrants to purchase 1,875 shares of common stock equal to 50% of the purchaser’s shares for $5.50 for up to 5 years from the date the transaction completed. The investment bankers for the transaction received warrants to purchase 175 shares of common stock for $5.50 for up to 5 years, the same terms as the investors. Of the total net proceeds of $9,106, $7,772 were determined to be warrant liabilities, and $695 of the fees that were considered related to liabilities were charged to other expense.
On March 16, 2018, the Company completed a reserved private placement agreement related to the issuance and sale of 2,500 shares of common stock for $4,200 ($3,587 net of expenses) to institutional purchasers at $1.68 per share. The purchase agreement is pursuant to the Company’s Form S-3 registration statement filed on August 17, 2016. The purchasers also received warrants to purchase 2,500 shares of common stock for $2.00 for up to 5 years from the date the transaction completed. The investment bankers for the transaction received warrants to purchase 88 shares of common stock for $2.02 for up to 5 years, the same terms as the investors. In addition, investment bankers from the May 22, 2017 reserved private placement received warrants to purchase 175 shares of common stock for $2.10 for up to 5 years pursuant to an exclusivity clause. Of the total net proceeds of $3,587, $3,023 were determined to be warrant liabilities, and $441 of the fees that were considered related to liabilities were charged to other expense.
As described in Note 2. See Note 12 below3, the March 14, 2017, May 22, 2017 and March 16, 2018 warrants due to certain embedded features that preclude equity treatment are accounted for issuancesunder liability accounting and are fair valued at each reporting period. The consolidated financial statements have been restated to reflect adjustments consisting of establishing derivative liabilities of $3,351, offset by a corresponding reduction of stockholders’ equity (deficit) that includes reductions of $829 in April. Total shares issuedaccumulated deficit and outstanding$4,180 in additional paid-in-capital as of March 31, 20162017. The Company uses the Black Scholes option pricing model for determining fair value of the warrants at the end of each period. As of March 31, 2018, the fair value of the derivative liabilities was 31,436.$3,694.
On August 9, 2018, the Company entered into an Amendment to Common Stock Warrant with the institutional purchasers in the March 17, 2017 and May 22, 2017 that modified the purchase price of the March 17, 2017 warrants from $5.00 per share to $2.50 per share and modified the purchase price of the May 22, 2017 warrants from $5.50 per share to $2.50 per share. The reductions in the exercise prices resulted in charges resulting from the changes in fair value of the derivative liabilities of $845 and $1,635 for the March 17 and May 22 warrants, respectively.
On August 14, 2018, the Company completed a reserved private placement agreement related to the issuance and sale of 2,969 shares of common stock that raised $4,221 (net of fees) to institutional investors. The investors also received 2,969 warrants exercisable into common stock at an exercise price of $2.09. The Company also provided 208 warrants at an exercise price of $1.92 to the investment banker in the transaction. The warrants due to certain embedded features that preclude equity treatment are accounted for under liability accounting and are fair valued at each reporting period. The Company uses the Black Scholes option pricing model for determining fair value of the warrants at the end of each period. Of the total net proceeds of $4,221, $2,892 were determined to be warrant liabilities, and $322 of the fees that were considered related to liabilities were charged to other expense. A reduction in the exercise price to $1.34 for the March 16, 2018 and August 14, 2018 warrants resulted in a charge due to the change in fair value of the derivative liabilities of $260.
In the nine months ended December 31, 2018, the Company issued 94 shares of common stock pursuant to stock awards granted from the 2013 Ecoark Holdings Incentive Stock Plan (“2013 Incentive Stock Plan”), net of 41 shares of common stock acquired from employees in lieu of amounts required to satisfy minimum withholding requirements upon vesting of the employees’ stock. The Company also issued 25 shares to an advisor to the Company pursuant to a stock award granted from the 2017 Ecoark Holdings Omnibus Incentive Plan (“2017 Omnibus Incentive Plan”).
As of March 31, 2019, 52,571 total shares were issued and 51,986 shares were outstanding, net of 585 treasury shares.
F-32
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
Additional Warrants
As discussed in Note 11, the Company issued warrants to convertible note holders that converted their notes into shares of common stock in accordance with the amended secured convertible promissory note. The warrants were exercisable into 310 shares of common stock with a strike price of $7.50 per share and expired on December 31, 2018. The warrants were valued using the Black-Scholes model, which incorporated a volatility of 82% and a discount yield of 1.27%.
On October 26, 2017, the Company entered into a consulting agreement for $8 per month unless otherwise terminated and agreed to issue warrants for 75 shares of common stock at $2.10 per share, vesting immediately with a term of five years.
Changes in the warrants are described in the table below for the years ended March 31:
| 2019 | 2018 | |||||||||||||||
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||
| Beginning balance | 10,577 | $ | 4.37 | 5,789 | $ | 5.09 | ||||||||||
| Granted | 3,177 | $ | 2.00 | 4,888 | $ | 3.47 | ||||||||||
| Exercised Cashless | - | (49 | ) | |||||||||||||
| Forfeited | - | (51 | ) | |||||||||||||
| Expired | (4,547 | ) | $ | 5.17 | - | |||||||||||
| Ending balance | 9,206 | $ | 2.12 | 10,577 | $ | 4.37 | ||||||||||
| Intrinsic value of warrants | $ | - | ||||||||||||||
| Weighted Average Remaining Contractual Life (Years) | 3.0 | 2.5 | ||||||||||||||
F-33
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
Share-based Compensation Expense
Share-based compensation for employees is included in salaries and salary related costs and directors and services are included in professional fees and consulting in the consolidated statement of operations as follows for the years ended March 31:
| 2013 Incentive Stock Plan | 2017 Omnibus Incentive Plan | Non-Qualified Stock Options | Common Stock | Warrants | Total | |||||||||||||||||||
| 2019 | ||||||||||||||||||||||||
| Directors | $ | - | $ | 400 | $ | - | $ | - | $ | - | $ | 400 | ||||||||||||
| Employees | 270 | 356 | 2,066 | - | - | 2,692 | ||||||||||||||||||
| Services | - | (14 | ) | - | - | - | (14 | ) | ||||||||||||||||
| $ | 270 | $ | 742 | $ | 2,066 | $ | - | $ | - | $ | 3,078 | |||||||||||||
| 2018 | ||||||||||||||||||||||||
| Directors | $ | - | $ | 550 | $ | - | $ | - | $ | - | $ | 550 | ||||||||||||
| Employees | 16,701 | 2,707 | 1,184 | 1,500 | - | 22,092 | ||||||||||||||||||
| Services | 181 | 307 | - | - | 108 | 596 | ||||||||||||||||||
| Services prepaid expense | 1,714 | - | - | - | - | 1,714 | ||||||||||||||||||
| $ | 18,596 | $ | 3,564 | 1,184 | $ | 1,500 | $ | 108 | $ | 24,952 | ||||||||||||||
F-34
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
Modification of Awards
During the three months ended December 31, 2017, the Compensation Committee of the Board of Directors of the Company issued option awards to individuals in replacement of existing restricted stock and restricted stock unit awards previously granted. In addition, the Committee approved 2,909 new option awards that vest over a four-year period to induce certain employees to accept the replacement options, to compensate them for diminution in value of their existing awards and in consideration of a number of other factors, including each individual’s role and responsibility with the Company, their years of service to the Company, and market precedents and standards for modification of equity awards. With respect to the replacement options, grantees agreed to exchange the existing awards covering 2,718 shares of the Company’s common stock and were granted replacement options to purchase 2,926 shares of the Company’s common stock at an exercise price set at 100% of the fair market value of the Company’s stock price on the effective date of the grants. In consideration of the agreements, the majority of replacement options vested immediately upon grant. The new option awards vest in 12 equal installments, with the first installment vesting on January 15, 2018, and additional installments vesting on the last day of each of the eleven successive three-month periods, subject to continued employment by the Company. The replacement options were issued under the 2017 Omnibus Incentive Plan or 2013 Incentive Stock Plan to correspond with the plan under which the existing awards were issued. The new options were not granted under any of the Company’s existing equity compensation plans.
In accordance with ASU 2017-09 Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting, the Company recognized the total compensation cost measured at the date of a modification which is the sum of the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at that date and the incremental cost resulting from the modification. The replacement and new options had a fair value of $10,290, of which $4,507 (including $3,286 of fair value adjustments to the new instruments) was recognized as share-based compensation in the three months ended December 31, 2017 and the remaining $5,783 will be recognized in periods through December 2021.
During the three months ended March 31, 2018, the Compensation Committee of the Board of Directors of the Company issued option awards to individuals in replacement of existing restricted stock and restricted stock unit awards previously granted. With respect to the replacement options, grantees agreed to exchange the existing awards covering 300 shares of the Company’s common stock and were granted replacement options to purchase 300 shares of the Company’s common stock at an exercise price set at 100% of the fair market value of the Company’s stock price on the effective date of the grants. The replacement options vest according to the original vesting schedule of the awards exchanged. The replacement options were issued under the 2013 Incentive Stock Plan to correspond with the plan under which the existing awards were issued.
In accordance with ASU 2017-09 Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting, the Company recognized the total compensation cost measured at the date of a modification which is the sum of the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at that date and the incremental cost resulting from the modification. The replacement options had a fair value of $467, which was less than the fair value of the existing awards exchanged and therefore an incremental share-based compensation cost was not recognized and the $467 will be recognized in periods through December 2018.
Non-Qualified Stock Options
As previously described, new option awards were granted to induce individuals in replacement of existing restricted stock and restricted stock unit awards previously granted. The individuals were granted options to purchase 2,909 shares of Company common stock that vest at a rate of 25% per year from 2018 to 2021, subject to continued employment by the Company. As with the replacement options, the new options have an exercise price set at 100% of the fair market value of the Company’s stock price on the effective date of the grant. Share-based compensation costs of $1,684 for grants not yet recognized will be recognized as expense through 2021, subject to any change for actual versus estimated forfeitures. The new options were not granted under any of the Company’s existing equity compensation plans, however they have terms consistent with terms of the plans.
The Company records share-based compensation in accordance with ASC 718 for employees and ASC 505 for non-employees. Management valued the options utilizing the Black-Scholes model with the following criteria: stock price - $2.60; exercise price - $2.60; expected term – 4 years; discount rate – 2.03%; and volatility – 97%.
As described further in Note 14, the Company entered into a settlement agreement with a former consultant which provided for the issuance of options for 7 shares of common stock in addition to other terms. The options entitle the holders to purchase shares of common stock for $0.98 per share through November 2023. Management valued the options utilizing the Black-Scholes model with the following criteria: stock price - $0.98; exercise price - $0.98; expected term – 4 years; discount rate – 2.51%; and volatility – 148%.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
Changes in the non-qualified stock options are described in the table below for the years ended March 31:
| 2019 | 2018 | |||||||||||||||
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||
| Beginning balance | 2,909 | $ | 2.60 | - | ||||||||||||
| Granted | 7 | $ | 0.98 | 2,909 | $ | 2.60 | ||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Forfeited | - | - | ||||||||||||||
| Ending balance | 2,916 | $ | 2.60 | 2,909 | $ | 2.60 | ||||||||||
| Intrinsic value of options | $ | - | ||||||||||||||
| Weighted Average Remaining Contractual Life (Years) | 8.5 | 9.5 | ||||||||||||||
2013 Option Plan
On February 16, 2013, the Board of Directors of Ecoarkthe Company approved the EcoArkEcoark Inc. 2013 Stock Option Plan (the “Plan”“2013 Option Plan”).The. The purposes of the 2013 Option Plan arewere to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants, and to promote the success of the Company’s business. The 2013 Option Plan iswas expected to contribute to the attainment of these objectives by offering employees, directors and consultants the opportunity to acquire stock ownership interests in the Company, and other rights with respect to stock of the Company,Ecoark, and to thereby provide them with incentives to put forth maximum efforts for the success of the Company.Ecoark.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2016
Awards under thisthe 2013 Option Plan were only granted in the form of nonstatutorynon-statutory stock options (“Options”) to purchase the Company'sEcoark’s Series C Stock prior to the mergerMerger with MSC. UponUnder the consummation of the merger, all outstanding stock options previously granted by Ecoark, were canceled and new stock options in Ecoark Holdings were issued as replacements, with the same terms of the originally issued Series C Stock Options granted by Ecoark under the 2013 Incentive Stock Option Plan (the “2013 Plan”). Underand the 2013 Plan,Merger, the Company may grant optionsOptions converted into the right to purchase up to 5,500 shares of common stock to be granted to Company employees, officers, directors, consultants and advisors. The vesting provisions, exercise price and expiration dates will be established by the Board of Directors (the "Board") of the Company at the date of grant, but incentive stock options may be subject to earlier termination, as provided in the 2013 Plan.Company.
In May 2014, Ecoark had granted Stock Options to purchase 693 shares to various employees and consultants of Ecoark. The Stock Options had an exercise price of $1.25 per share and have a term of 10 years. The Stock Options were to vest over a three-year period as follows: 25% immediately; 25% on the first anniversary date; 25% on the second anniversary date; and 25% on the third anniversary date. During 2015 Ecoark issued additional Stock Options on 625 shares of common stock. Therefore, atAt the end of 2015, Stock Options under the 2013 Option Plan were outstanding to purchase 1,318 shares of common stock. The total original number of Options on 1,318 Ecoark Stock Options have beenshares was divided by two in conjunction with changesthe exchange ratio required by the Merger Agreement and converted to Stock Options to purchase 659 shares of the Company (Holdings) with an adjusted exercise price of $2.50. In September 2016, the remaining vesting was accelerated to have those Options 100% vested. In 2016, the Company issued options to purchase 125 shares of stock at a strike price of $2.50 per share to a consultant. These options vested immediately and expired on March 31, 2018. In the Company’s fourth quarter of 2016, an option holder forfeited 125 options and thus, at present optionsDecember 31, 2016, Options on 659 shares of the Company arewere outstanding with an adjusted exercise price of $2.50. The Board of Directors adjusted the expiration date of these options to March 28, 2018. All unexercised options expired as of March 31, 2018.
Management valued the Stock Options utilizing the Black-Scholes Method, with the following criteria: stock price - $2.50; exercise price - $2.50; expected term – 10 years; discount rate – 0.25%; and volatility – 55%.
F-36
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
Changes in the Options under the 2013 Option Plan are described in the table below for the years ended March 31:
| 2019 | 2018 | |||||||||||||||
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||
| Beginning balance | - | 884 | $ | 2.50 | ||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | (884 | ) | $ | 2.50 | |||||||||||
| Forfeited | - | - | ||||||||||||||
| Ending balance | - | $ | - | - | $ | - | ||||||||||
| Intrinsic value of Options | $ | - | ||||||||||||||
| Weighted Average Remaining Contractual Life (Years) | - | - | ||||||||||||||
2013 Incentive Stock Plan
The 2013 Incentive Stock Plan was registered on February 7, 2013. Under the 2013 Incentive Stock Plan, the Company may grant incentive stock in the form of stock options, stock awards and stock purchase offers of up to 5,500 shares of common stock to Company employees, officers, directors, consultants and advisors. The type of grant, vesting provisions, exercise price and expiration dates are to be established by the Board at the date of grant. At the time of the Merger, 5,497 shares were available to issue under the 2013 Incentive Stock Plan.
As previously described, during the three months ended March 31, 2018, new option awards were granted to individuals in replacement of existing restricted stock and restricted stock unit awards previously granted. With respect to the replacement options, grantees agreed to exchange the existing awards covering 300 shares of the Company’s common stock and were granted 300 replacement options to purchase shares of Company common stock at an exercise price set at 100%. of the fair market value of the Company’s stock price on the effective date of the grants. The replacement options vest according to the original vesting schedule of the awards exchanged through December 2018. The replacement options were issued under the 2013 Incentive Stock Plan to correspond with the plan under which the existing awards were issued.
Share-based compensation costs have been fully recognized as expense through December 31, 2018.
F-37
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
The Company records stock basedshare-based compensation in accordance with ASC 718 for employees and has recordedASC 505 for non-employees. Management valued the options utilizing the Black-Scholes model with the following criteria ranges: stock based compensation of $28price - $2.10 to $2.60 exercise price - $2.10 to $2.60; expected term – 4.0 to 5.2 years; discount rate – 2.22% to 2.7%; and $91volatility – 95 to 105%. Changes in the options under the 2013 Incentive Stock Plan are described in the table below for the three monthsyears ended March 31:
| 2019 | 2018 | |||||||||||||||
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||
| Beginning balance | 2,563 | $ | 2.52 | - | ||||||||||||
| Granted | - | - | ||||||||||||||
| Options granted in exchange for shares | - | 2,563 | $ | 2.52 | ||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Forfeited | (210 | ) | - | |||||||||||||
| Ending balance | 2,353 | $ | 2.52 | 2,563 | $ | 2.52 | ||||||||||
| Intrinsic value of options | $ | - | ||||||||||||||
| Weighted Average Remaining Contractual Life (Years) | 8.6 | 9.6 | ||||||||||||||
A summary of the activity for service-based grants as of March 31, 20162019 and 2015, respectively.2018 is presented below for the years ended March 31:
| 2019 | 2018 | |||||||||||||||
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||
| Beginning balance | 105 | $ | 4.90 | 1,983 | $ | 4.90 | ||||||||||
| Granted | - | |||||||||||||||
| Issued | (96 | ) | (1,585 | ) | ||||||||||||
| Expired | - | - | ||||||||||||||
| Forfeited | (9 | ) | (293 | ) | ||||||||||||
| Options granted in exchange for shares | - | |||||||||||||||
| Ending balance | - | $ | - | 105 | $ | 4.90 | ||||||||||
| Weighted Average Remaining Contractual Life (Years) | - | 0.8 | ||||||||||||||
A reconciliation of the shares available and issued under the 2013 Incentive Stock Plan is presented in the table below for the years ended March 31:
| 2019 | 2018 | |||||||
| Beginning available | 235 | 11 | ||||||
| Shares modified to options | - | 2,493 | ||||||
| Options in exchange for shares | - | (2,563 | ) | |||||
| Shares forfeited | 219 | 294 | ||||||
| Ending available | 454 | 235 | ||||||
| Vested stock awards | 2,353 | 4,799 | ||||||
| Beginning number of shares issued | 2,585 | 1,000 | ||||||
| Issued | 96 | 1,585 | ||||||
| Cancelled | - | - | ||||||
| Ending number of shares issued | 2,681 | 2,585 | ||||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
2017 Omnibus Incentive Plan
The 2,450 Stock Options2017 Omnibus Incentive Plan was registered on June 14, 2017. Under the 2017 Omnibus Incentive Plan, the Company may grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other awards. Awards of MSC were converted intoup to 4,000 shares of common stock to Company employees, officers, directors, consultants and advisors are available under the 2017 Omnibus Incentive Plan. The type of grant, vesting provisions, exercise price and expiration dates are to be established by the Board at the date of grant.
As previously described, new option awards were granted to individuals in replacement of existing restricted stock and restricted stock unit awards previously granted. With respect to the replacement options, grantees agreed to exchange the existing awards covering 525 shares of the Company’s common stock and were granted 663 replacement options to purchase shares of Company common stock at an exercise price set at 100% of the fair market value of the Company’s stock price on the effective date of the grants. In consideration of the agreements, the majority of the replacement options vested immediately upon grant. The remaining replacement options will vest in equal installments through July 2020, subject to continued employment by the Company.
Share-based compensation costs of approximately $629 for grants not yet recognized will be recognized as expense through October 2023 subject to any changes for actual versus estimated forfeitures.
The Company records share-based compensation in accordance with ASC 718 for employees and ASC 505 for non-employees. Management valued the Merger Agreementoptions utilizing the Black-Scholes model with Ecoark.the following criteria ranges: stock price - $1.61 to $3.76 exercise price - $1.61 to $3.76; expected term – ten years in the first two quarters and four years in the last two quarters; discount rate – 1.99% to 2.65%; and volatility – 89 to 103%. Changes in the options under the 2017 Omnibus Incentive Plan are described in the table below for the years ended March 31:
Warrants
MSC had issued warrants for 3,785 shares that were converted into shares of common stock in accordance with the Merger Agreement with Ecoark.
| 2019 | 2018 | |||||||||||||||
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||
| Beginning balance | 1,374 | $ | 2.76 | - | ||||||||||||
| Granted | 1,034 | $ | 0.93 | 911 | $ | 2.44 | ||||||||||
| Shares modified to options | - | - | 663 | $ | 3.00 | |||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | (8 | ) | |||||||||||||
| Forfeited | (538 | ) | (192 | ) | ||||||||||||
| Ending balance | 1,870 | $ | 1.54 | 1,374 | $ | 2.76 | ||||||||||
| Intrinsic value of options | $ | - | ||||||||||||||
| Weighted Average Remaining Contractual Life (Years) | 9.2 | 9.5 | ||||||||||||||
In March 2016,A summary of the Company issued warrantsactivity for 2,389 shares in accordance with the private placement. As indicated in the subsequent events, the private placement was completed on April 28, 2016, and additional warrants were issued at the closing. These warrants have a strike price of $5.00 per share and expire on December 31, 2018. Asperformance-based RSUs as of March 31, 2016, they2019 and since inception in June 2017 is presented below for the years ended March 31:
| 2019 | 2018 | |||||||||||||||
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||
| Beginning balance | - | - | ||||||||||||||
| Granted | - | 135 | $ | 3.36 | ||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Forfeited | - | (135 | ) | $ | 3.36 | |||||||||||
| Ending balance | - | $ | - | - | $ | - | ||||||||||
| Weighted Average Remaining Contractual Life (Years) | - | - | ||||||||||||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
A summary of the activity for service-based RSUs as of March 31, 2019 and since inception in June 2017 is presented below for the years ended March 31:
| 2019 | 2018 | |||||||||||||||
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||
| Beginning balance | 50 | $ | 2.60 | - | ||||||||||||
| Granted | - | 1,381 | $ | 3.30 | ||||||||||||
| Issued | (25 | ) | (465 | ) | ||||||||||||
| Expired | - | - | ||||||||||||||
| Forfeited | (25 | ) | (341 | ) | ||||||||||||
| Options granted in exchange | - | (525 | ) | |||||||||||||
| Ending balance | - | $ | - | 50 | $ | 2.60 | ||||||||||
| Weighted Average Remaining Contractual Life (Years) | - | 9.3 | ||||||||||||||
Additional information regarding the RSUs is presented in the table below as of and for the years ended March 31:
| 2019 | 2018 | |||||||
| Total market value of shares/units vested | $ | - | $ | - | ||||
| Share-based compensation expense for RSUs | $ | (254 | ) | $ | 609 | |||
| Total tax benefit related to RSU share-based compensation expense | $ | - | $ | - | ||||
| Cash tax benefits realized for tax deductions for RSUs | $ | - | $ | - | ||||
At March 31, 2019, there was no unrecognized compensation cost related to non-vested RSUs with a weighted average vesting period of 0 years. At March 31, 2018, there was $314 of unrecognized compensation cost related to non-vested RSUs with a weighted average vesting period of 0.2 years.
A reconciliation of the total shares available and issued under the 2017 Omnibus Incentive Plan is presented in the table below for the years ended March 31:
| 2019 | 2018 | |||||||
| Beginning available | 2,111 | 4,000 | ||||||
| Shares granted | (1,034 | ) | (2,427 | ) | ||||
| Shares modified to options | - | 525 | ||||||
| Options in exchange for shares | (- | ) | (663 | ) | ||||
| Shares expired | - | 8 | ||||||
| Shares forfeited | 538 | 668 | ||||||
| Ending available | 1,615 | 2,111 | ||||||
| Vested stock awards | 905 | 1,066 | ||||||
| Beginning number of shares issued | 465 | - | ||||||
| Issued | 25 | 465 | ||||||
| Cancelled | - | - | ||||||
| Ending number of shares issued | 490 | 465 | ||||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
NOTE 14: COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On August 1, 2018, Ecoark Holdings, Inc. and Zest Labs, Inc. filed a complaint against Walmart Inc. in the United States District Court for the Eastern District of Arkansas, Western Division. The complaint includes claims for violation of the Arkansas Trade Secrets Act, violation of the federal Defend Trade Secrets Act, breach of contract, unfair competition, unjust enrichment, breach of the covenant of good faith and fair dealing, conversion and fraud. Ecoark Holdings and Zest Labs are seeking monetary damages and other related relief to the only warrantsextent it is deemed proper by the court. The Company does not believe that expenses incurred in pursuing the complaint will have a material effect on the Company’s net income or financial condition for the fiscal year ended March 31, 2019 or any individual fiscal quarter. On October 22, 2018, the Court issued an order setting a trial date of June 1, 2020. The order also established deadlines for the completion of fact discovery by October 15, 2019, opening expert reports on October 24, 2019, and dispositive motions, on January 22, 2020. The case is presently in the fact discovery phase.
On December 12, 2018, a complaint was filed against the Company has outstanding.in the Twelfth Judicial Circuit in Sarasota County, Florida by certain investors who invested in the Company before it was public. The complaint alleges that the investment advisors who solicited the investors to invest into the Company made omissions and misrepresentations concerning the Company and the shares. The Company filed a motion to dismiss the complaint which is pending.
NOTE 9: COMMITMENTS AND CONTINGENCIESOn June 20, 2018, a complaint against the Company and certain affiliates was filed by a former consultant in the U.S. District Court - Northern District of California. The complaint refers to an advisory agreement dated January 1, 2015 with Ecoark, Inc., a subsidiary of the Company, in which the former consultant was to provide advice and consultation to Ecoark, Inc. in exchange for consulting fees, expenses and a warrant to purchase equity in Ecoark, Inc. The matter was settled in January 2019. The Company recorded a charge of $20 in connection with the settlement of the matter.
Operating Leases
The Company leases many of its operating and office facilities for various terms under long-term, non-cancelable operating lease agreements. These leases expire at various dates through 2019.2020. Rent expense was approximately $98 and $71as follows for the three monthsyears ended March 31, 2016 and 2015. 31:
| 2019 | 2018 | |||||||
| Continuing operations | $ | 242 | $ | 346 | ||||
| Discontinued operations | 96 | 25 | ||||||
| Total | $ | 338 | $ | 371 | ||||
Future minimum lease payments required under the operating leases for continuing operations are as follows: 20162020 - $270, 2017 - $310, 2018 - $296 and$127. On adoption of ASC 842 Leases beginning April 1, 2019, - $155.the Company currently expects to recognize additional operating liabilities of approximately $121, with corresponding right of use assets of $112 based on the present value of the remaining minimum rental payments under leasing standards for existing operating leases.
Contract Related FeesRoyalties
Prior to the Merger, a subsidiary of the Company, as part of the contract to develop its products, has agreed to pay the contractor 1.5% of future New York state manufactured sales, and 5% of future non-New York state manufactured sales until the entire funds paid by the contractor have been repaid, or 15 years, whichever comes first. As of March 31, 2016, the subsidiary has $1,252 of contract related expenses, all of which will be owed to the contractor, contingent upon the sale of the subsidiary’s product related to that contract.
The Company has determinedcross-licensing agreements with several technology companies that a liability has not been accrued because management has determined that it is not probable sales will occur prior torequire payment of royalties upon the 15 year expirationsale and or use of certain patented technologies. One of these agreements requires minimum annual payments of $50 until the last of the obligation.patents expire.
SettlementF-41
In March 2016 the Company agreed to settle a dispute regarding a contract. The agreement required the Company to pay $100 to certain parties within 30 days of the agreement. The amount was recorded as an operating expense and included in accrued expenses as of March 31, 2016. The amount was paid in April 2016.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 20162019
NOTE 15: INCOME TAXES
The Company accounts for income taxes under ASC Topic 740: Income Taxes which requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. ASC Topic 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The Company has a net operating loss carryforward for tax purposes totaling approximately $98,293 at March 31, 2019, expiring through the year 2039. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after certain ownership shifts. During fiscal year 2019, the Company has not reviewed, if an ownership change has occurred, as of the statement date. If such a change has occurred, the new operation losses could be limited or eliminated.
The table below summarizes the differences between the tax benefit computed at the statutory federal tax rate and the Company’s net income tax benefit for the years ended March 31:
| 2019 | 2018 | |||||||
| Tax benefit computed at expected statutory rate | $ | (2,867 | ) | $ | (10,343 | ) | ||
| State income taxes | 2 | 22 | ||||||
| Permanent differences: | ||||||||
| Share-based compensation | 182 | 1,288 | ||||||
| Goodwill impairment | - | 226 | ||||||
| Change in fair value of derivative liabilities | (664 | ) | (3,261 | ) | ||||
| Temporary differences: | ||||||||
| Share-based compensation | 546 | 2,289 | ||||||
| Property and equipment | (48 | ) | 399 | |||||
| Intangible assets | 640 | 232 | ||||||
| Other adjustments | 42 | (66 | ) | |||||
| Increase in valuation allowance | 2,169 | 9,214 | ||||||
| Net income tax benefit | $ | - | $ | - | ||||
The table below summarizes the differences between the statutory federal rate and the Company’s effective tax rate as follows for the years ended March 31:
| 2019 | 2018 | |||||||
| Federal statutory rate (benefit) | (21.0 | )% | (31.5 | )% | ||||
| Temporary differences | (3.5 | )% | (15.2 | )% | ||||
| Permanent differences | 8.6 | % | 24.8 | % | ||||
| Change in valuation allowance | 15.9 | % | 21.9 | % | ||||
| Effective Tax Rate | 0 | % | 0 | % | ||||
The Company has deferred tax assets which are summarized as follows at March 31:
| 2019 | 2018 | |||||||
| Net operating loss carryover | $ | 23,327 | $ | 23,230 | ||||
| Depreciable and amortizable assets | 1,761 | 1,168 | ||||||
| Share-based compensation | 3,586 | 2,858 | ||||||
| Accrued liabilities | 57 | 58 | ||||||
| Inventory reserve | - | 3 | ||||||
| Allowance for bad debts | 120 | 13 | ||||||
| Change in fair value of derivative liabilities | (2,884 | ) | (1,956 | ) | ||||
| Effect of reduction in tax rate | - | (994 | ) | |||||
| Other | 381 | 328 | ||||||
| Less: valuation allowance | (26,348 | ) | (24,708 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
After consideration of all the evidence, both positive and negative, management has recorded a full valuation allowance at March 31, 2019, due to the uncertainty of realizing the deferred income tax assets. The valuation was increased by approximately $1,640 as a result of $3,874 of differences relating to fiscal 2019 operations. The Company has not identified any uncertain tax positions and has not received any notices from tax authorities.
On December 22, 2017, the Tax Cuts and Jobs Act, (the “TCJA”) was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate tax rate from 35% to 21%, for tax years beginning after December 31, 2017. The Company has recorded a full valuation allowance against its net deferred tax asset, and therefore, the tax effects of the of enactment of the TCJA as written did not result in a remeasurement of the Company’s net deferred tax asset.
NOTE 16: CONCENTRATIONS
Concentration of Credit Risk. The Company’s customer base for its Zest Lab products is concentrated with a small number of customers. The Company does not generally require collateral or other security to support accounts receivable. To reduce credit risk, the Company performs ongoing credit evaluations on its customers’ financial condition. The Company establishes allowances for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. J. Terrence Thompson accounted for more than 10% of the Company’s accounts receivable as of March, 2019 and 2018.
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.
NOTE 17: ACQUISITION OF 440labs
On May 18, 2017, the Company entered into an exchange agreement (the “Exchange Agreement”) with Zest Labs, 440labs, SphereIt, LLC, a Massachusetts limited liability company (“SphereIt”) and three of 440labs’ executive employees. Pursuant to the Exchange Agreement, on May 23, 2017 the Company acquired all of the shares of 440labs in exchange for 300 shares of the Company’s common stock issued to SphereIt. 440labs’ three executive employees signed employment agreements pursuant to which each of the three executive employees received 100 shares of the Company’s common stock and became employed by Zest Labs.
No cash was paid relating to the acquisition of 440labs. 440labs is a software development and information solutions provider for cloud, mobile, and IoT applications. 440labs’ experienced leadership and engineering teams will augment Zest Labs’ development of modern, enterprise scale solutions that robustly connect to distributed IoT deployments. 440labs blends onshore and offshore resources to optimize development and provide extended runtime operations coverage, critical to broad-based deployments. The Company acquired the assets and liabilities noted below in exchange for the 300 shares and accounted for the acquisition in accordance with ASC 805. Based on the fair values at the effective date of acquisition the purchase price was recorded as follows:
| Identifiable intangible assets | $ | 1,435 | ||
| Goodwill | 65 | |||
| $ | 1,500 |
The primary business of 440labs is providing development services to Zest Labs. In consolidation, the revenues of 440labs prior to the acquisition would have been eliminated against the expenses of Zest Labs that were paid to 440labs, resulting in an insignificant impact to the net losses of the Company. The goodwill is not expected to be deductible for tax purposes. The goodwill was tested for impairment and written off in the quarter ended March 31, 2018 along with the intangible asset related to one of the executive employees who resigned from the Company.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2019
NOTE 18: 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 years ended March 31, 2019 and 2018. 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 Note 9 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 and for the year ended March 31:
| Level 1 | Level 2 | Level 3 | Total Gains and (Losses) | |||||||||||||
| 2019 | ||||||||||||||||
| Warrant derivative liabilities | - | - | $ | 3,104 | $ | 3,160 | ||||||||||
| 2018 | ||||||||||||||||
| Warrant derivative liabilities | - | - | $ | 3,694 | $ | 9,316 | ||||||||||
NOTE 19: SUBSEQUENT EVENTS
Subsequent to March 31, 2019, the Company has drawn an additional $905 on the credit facility described in Note 10. Gary Metzger, Lead Director, has advanced to the Company $328 under a note that bears 10% simple interest per annum and is payable July 30, 2020. The Company collected the remaining amounts due from Kal-Polymers Americas for the sale of the Sable assets.
The Company acquired Trend Discovery Holdings, Inc., a fund management company on May 31, 2019.
On July 12, 2019, the Company entered into an Exchange Agreement with investors (the “Investors”) that are the holders of warrants issued in the Company’s purchase agreements entered into on (i) March 14, 2018 (the “March Purchase Agreement” and such warrants, the “March Warrants”) and (ii) August 9, 2018 (the “August Purchase Agreement” and such warrants, the “August Warrants”, and the March Warrants and the August Warrants, collectively, the “Existing Securities”). The Investors are entitled to, with respect to the March Warrants and the August Warrants, due to the Agreement and Plan of Merger with Trend Discovery the Company entered into on May 31, 2019, an exchange for the March Warrants and August Warrants. As a result of a cashless exercise, the Company issued 4,277 shares of the Company’s common stock to the Investors. Upon the issuance of the 4,277 shares, warrants for 5,677 shares issued in the March Purchase Agreement and August Purchase Agreement were extinguished.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| (Dollars in thousands, | ||||||||
| except per share data) | ||||||||
| June 30, | March 31, | |||||||
| 2019 | 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash ($15 pledged as collateral for credit) | $ | 34 | $ | 244 | ||||
| Accounts receivable, net of allowance of $569 and $573 as of June 30, 2019 and March 31, 2019, respectively | 133 | 520 | ||||||
| Prepaid expenses and other current assets | 272 | 900 | ||||||
| Current assets held for sale | - | 23 | ||||||
| Total current assets | 439 | 1,687 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Goodwill | 3,223 | - | ||||||
| Property and equipment, net | 747 | 824 | ||||||
| Other assets | 26 | 27 | ||||||
| Total non-current assets | 3,996 | 851 | ||||||
| TOTAL ASSETS | $ | 4,435 | $ | 2,538 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 1,292 | $ | 1,416 | ||||
| Accrued liabilities | 898 | 828 | ||||||
| Note payable | 1,810 | 1,350 | ||||||
| Notes payable – related parties | 298 | - | ||||||
| Derivative liabilities | 2,159 | 3,104 | ||||||
| Current liabilities held for sale | - | 34 | ||||||
| Total current liabilities | 6,457 | 6,732 | ||||||
| NON-CURRENT LIABILITIES | - | - | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Total liabilities | 6,457 | 6,732 | ||||||
| STOCKHOLDERS’ DEFICIT (Numbers of shares rounded to thousands) | ||||||||
| Preferred stock, $0.001 par value; 5,000 shares authorized; none issued | ||||||||
| Common stock, $0.001 par value; 100,000 shares authorized, 58,071 shares issued and 57,486 shares outstanding as of June 30, 2019 and 52,571 shares issued and 51,986 shares outstanding as of March 31, 2019 | 58 | 53 | ||||||
| Additional paid-in-capital | 117,123 | 113,310 | ||||||
| Accumulated deficit | (117,532 | ) | (115,886 | ) | ||||
| Treasury stock, at cost | (1,671 | ) | (1,671 | ) | ||||
| Total stockholders’ deficit | (2,022 | ) | (4,194 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 4,435 | $ | 2,538 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| (Dollars in thousands, | ||||||||
| except per share data) | ||||||||
| (Restated) | ||||||||
| CONTINUING OPERATIONS: | ||||||||
| REVENUES | $ | 35 | $ | 753 | ||||
| COST OF REVENUES | 45 | 430 | ||||||
| GROSS PROFIT (LOSS) | (10 | ) | 323 | |||||
| OPERATING EXPENSES: | ||||||||
| Selling, general and administrative | 1,550 | 2,091 | ||||||
| Depreciation, amortization, and impairment | 77 | 309 | ||||||
| Research and development | 897 | 870 | ||||||
| Total operating expenses | 2,524 | 3,270 | ||||||
| Loss from continuing operations before other income (expense) | (2,534 | ) | (2,947 | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Change in fair value of derivative liabilities | 945 | 321 | ||||||
| Interest expense, net of interest income | (59 | ) | (11 | ) | ||||
| Total other income (expense) | 886 | 310 | ||||||
| LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES | (1,648 | ) | (2,637 | ) | ||||
| DISCONTINUED OPERATIONS: | ||||||||
| Loss from discontinued operations | - | (590 | ) | |||||
| Gain on disposal of discontinued operations | 2 | - | ||||||
| Total discontinued operations | 2 | (590 | ) | |||||
| PROVISION FOR INCOME TAXES | - | - | ||||||
| NET LOSS | $ | (1,646 | ) | $ | (3,227 | ) | ||
| NET LOSS PER SHARE | ||||||||
| Basic and diluted: Continuing operations | $ | (0.03 | ) | $ | (0.06 | ) | ||
| Discontinued operations | $ | - | $ | (0.01 | ) | |||
| Total | $ | (0.03 | ) | $ | (0.07 | ) | ||
| SHARES USED IN CALCULATION OF NET LOSS PER SHARE | ||||||||
| Basic and diluted | 53,819 | 48,960 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2019 AND 2018
| (Dollar amounts and number of shares in thousands) | ||||||||||||||||||||||||||||||||
| Preferred | Common Stock | Additional Paid-in | Accumulated | Treasury | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | |||||||||||||||||||||||||
| Balance at March 31, 2019 | - | $ | - | 52,571 | $ | 53 | $ | 113,310 | $ | (115,886 | ) | $ | (1,671 | ) | $ | (4,194 | ) | |||||||||||||||
| Shares issued – Trend Holdings acquisition | - | - | 5,500 | 5 | 3,231 | - | - | 3,236 | ||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | 582 | - | - | 582 | ||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | (1,646 | ) | - | (1,646 | ) | |||||||||||||||||||||||
| Balance at June 30, 2019 | - | $ | - | 58,071 | $ | 58 | $ | 117,123 | $ | (117,532 | ) | $ | (1,671 | ) | $ | (2,022 | ) | |||||||||||||||
| Balance at March 31, 2018 (Restated) | - | $ | - | 49,468 | $ | 49 | $ | 108,585 | $ | (102,236 | ) | $ | (1,618 | ) | $ | 4,780 | ||||||||||||||||
| Shares-based compensation | - | - | 65 | 1 | 1,086 | - | - | 1,087 | ||||||||||||||||||||||||
| Shares purchased from employees in lieu of taxes | - | - | - | - | - | - | (23 | ) | (23 | ) | ||||||||||||||||||||||
| Net loss for the period | - | - | - | - | (3,227 | ) | - | (3,227 | ) | |||||||||||||||||||||||
| Balance at June 30, 2018 (Restated) | - | $ | - | 49,533 | $ | 50 | $ | 109,671 | $ | (105,463 | ) | $ | (1,641 | ) | $ | 2,617 | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-47
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| (Dollars in thousands) | ||||||||
| (Restated) | ||||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,646 | ) | $ | (3,227 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation, amortization and impairment | 77 | 362 | ||||||
| Share-based compensation - services rendered | 175 | 136 | ||||||
| Share-based compensation – employees | 407 | 951 | ||||||
| Change in fair value of derivative liabilities | (945 | ) | (321 | ) | ||||
| Loss from discontinued operations | - | 590 | ||||||
| Gain on sale of discontinued operations | (2 | ) | - | |||||
| Cash acquired in acquisition | 3 | |||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 387 | 573 | ||||||
| Inventory | - | (437 | ) | |||||
| Prepaid expenses and other current assets | 664 | 59 | ||||||
| Other assets | 1 | - | ||||||
| Accounts payable | (124 | ) | 158 | |||||
| Accrued liabilities | 30 | (167 | ) | |||||
| Net cash used in operating activities of continuing operations | (973 | ) | (1,323 | ) | ||||
| Net cash used in discontinued operations | - | (590 | ) | |||||
| Net cash used in operating activities | (973 | ) | (1,913 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of Magnolia Solar | 5 | - | ||||||
| Purchases of property and equipment of discontinued operations | - | (46 | ) | |||||
| Net cash provided by investing activities of continuing operations | 5 | - | ||||||
| Net cash used in investing activities of discontinued operations | - | (46 | ) | |||||
| Net cash provided by (used in) investing activities | 5 | (46 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from credit facility | 460 | - | ||||||
| Advances from related parties | 298 | - | ||||||
| Purchase of treasury shares from employees for tax withholdings | - | (23 | ) | |||||
| Net cash provided by (used in) financing activities | 758 | (23 | ) | |||||
| NET DECREASE IN CASH | (210 | ) | (1,982 | ) | ||||
| Cash - beginning of period | 244 | 3,730 | ||||||
| Cash - end of period | $ | 34 | $ | 1,748 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | - | $ | 11 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| SUMMARY OF NONCASH ACTIVITIES: | �� | |||||||
| Assets acquired via acquisition of Trend Discovery Holdings, Inc.: | ||||||||
| Receivables | $ | 10 | $ | - | ||||
| Other assets | $ | 1 | $ | - | ||||
| Goodwill | $ | 3,223 | $ | - | ||||
The accompanying notes are an integral part of these condensed 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)
JUNE 30, 2019
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ecoark Holdings, Inc. (“Ecoark Holdings” or the “Company”) is an innovative AgTech company that is focused on modernizing the post-harvest fresh food supply chain for a wide range of organizations including growers, distributors and retailers. Ecoark Holdings is a holding company that supports the businesses of its subsidiaries. Ecoark Holdings is the parent company of Trend Discovery Holdings, Inc., Ecoark, Inc. and Magnolia Solar Inc. (through its sale in May 2019).
Trend Discovery Holdings, Inc.(“Trend Holdings”) is a holding company which earns management fees and whose primary asset is Trend Discovery Capital Management. Trend Discovery Capital Management manages several entities including Trend Discovery LP and Trend Discovery SPV I. Trend Discovery LP is a hybrid hedge fund. Trend Discovery LP primarily invests in early-stage startups.
Ecoark, Inc.(“Ecoark”) is the parent company of Zest Labs, Inc. and Pioneer Products, LLC.
Zest Labs, Inc. (“Zest Labs”) is located in San Jose, California and offers freshness management solutions for food retailers, restaurants, growers, processors and suppliers. It is the parent company of 440labs, Inc.
440labs, Inc.(“440labs”) is located near Boston, Massachusetts and is a software development and information solutions provider for cloud, mobile, and IoT (Internet of Things) applications.
Pioneer Products, LLC (“Pioneer Products” or “Pioneer”) was involved in the selling of recycled plastic products and the owner of Sable Polymer Solutions, LLC. Pioneer ceased operations in early 2019.
Sable Polymer Solutions, LLC (“Sable”) was located in Flowery Branch, Georgia and specialized in the sale, purchase, and processing of post-consumer and post-industrial plastic materials. The key assets of Sable were sold in March 2019.
Magnolia Solar Inc.(“Magnolia Solar”) is principally engaged in the development of nanotechnology-based, high-efficiency, thin-film technology that can be deposited on a variety of substrates, including glass and flexible structures. Magnolia Solar was sold in May 2019.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
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 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, 2019. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.
Reclassifications
The Company has reclassified certain amounts in the June 30, 2018 condensed consolidated financial statements to be consistent with the June 30, 2019 presentation. Reclassifications relating to the discontinued operations are described in Note 2. The reclassifications had no impact on net loss or net cash flows for the three months ended June 30, 2018.
Segment Information
The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280-10Segment 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 now consist of two segments, Trend Holdings and Zest Labs.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02 and later updated with ASU 2019-01 in March 2019Leases (Topic 842).The ASU’s change the accounting for leased assets, principally by requiring balance sheet recognition of assets under lease arrangements. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. On adoption, the Company recognized additional operating liabilities of approximately $99, with corresponding right of use assets of $99 based on the present value of the remaining minimum rental payments under leasing standards for existing operating leases.
In June 2018, the FASB issued ASU 2018-07 Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. The Company adopted ASU 2018-07 effective April 1, 2019. The adoption did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements
There were other updates recently issued which represent technical corrections to the accounting literature or application to specific industries or transactions that are not expected to have a material impact, if any impact, on the Company’s financial position, results of operations or cash flows.
Going Concern
The Company has experienced losses from operations resulting in an accumulated deficit of $117,532 since inception. The accumulated deficit together with losses of $1,646 for the three months ended June 30, 2019, and net cash used in operating activities in the three months ended June 30, 2019 of $973, have resulted in the uncertainty of the Company’s ability to continue as a going concern.
These condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable period of time.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
The Company has raised additional capital through various offerings in addition to a credit facility. The Company’s ability to raise additional capital through future equity and debt securities issuances is unknown. Obtaining additional financing and the successful development of the Company’s strategic plan to achieve profitability are necessary for the Company to continue operations. There can be no assurance that such capital will be available or on terms acceptable to the Company. There can also be no assurance that the Company will have met the SEC’s Form S-3 eligibility requirements to use its shelf registration. The Company intends to further develop its product offerings and customer bases and has opportunities from the Trend Holdings acquisition. The Company’s plans to achieve profitability include evaluating the cost structure and processes of its operations, both at the margin and operating expense levels, as well as pursuing additional strategic acquisitions and dispositions. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern as determined by management. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the uncertainties.
NOTE 2: DISCONTINUED OPERATIONS
As a result of receiving letters of intent for the sale of key assets of Sable, Pioneer and Magnolia Solar, and the approval by the Company’s Board in May 2018 to sell the assets, those assets were included in assets held for sale and their operations included in discontinued operations. All discontinued operations have been sold or ceased operations by June 30, 2019, so there are no remaining assets or liabilities of the discontinued operations.
Carrying amounts of major classes of assets and liabilities classified as held for sale and included as part of discontinued operations in the condensed consolidated balance sheet as of March 31, 2019 consisted of the following:
| Other current assets | $ | 23 | ||
| Current assets – held for sale | $ | 23 | ||
| Accounts payable | 23 | |||
| Accrued liabilities | 11 | |||
| Current liabilities – held for sale | $ | 34 |
Major line items constituting loss from discontinued operations in the condensed consolidated statements of operations consisted of the following:
| Three months ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Revenue | $ | - | $ | 2,479 | ||||
| Cost of revenue | - | 2,845 | ||||||
| Gross loss | - | (366 | ) | |||||
| Operating expenses | - | 224 | ||||||
| Loss from discontinued operations | $ | - | $ | (590 | ) | |||
| Non-cash expenses | $ | - | $ | 61 | ||||
After consideration of all the evidence, both positive and negative, management has recorded a full valuation allowance due to the uncertainty of realizing income tax benefit for all periods presented, and the income tax provision for all periods presented was considered immaterial. Thus, no separate tax provision or benefit relating to discontinued operations is included here or on the face of the condensed consolidated statements of operations.
Non-cash expenses above consist principally of depreciation, amortization and impairment expense. Capital expenditures of discontinued operations were principally at Sable and amounted to $0 and $46 for the three months ended June 30, 2019 and 2018, 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, 2019
NOTE 3: RESTATEMENTS
In connection with the preparation of the Company’s consolidated financial statements as of and for the fiscal year ended March 31, 2019, the Company identified inadvertent errors in the accounting for certain embedded derivative liabilities associated with warrants issued as a part of capital raises in 2017 and 2018. In connection with those capital raises, proceeds (net of fees) were accounted for as equity. Upon further evaluation, the Company determined that a portion of the capital raised should have been accounted for as liabilities with fair value changes recorded in the Company’s consolidated statements of operations. Accordingly, the Company restated its previously issued consolidated financial statements and the related disclosures for the fiscal year ended March 31, 2018 and interim periods in fiscal years 2018 and 2019 as well as an adjustment to the opening balance sheet for the first interim period of fiscal 2018 (the “Restated Periods”). The adjustment to the opening balance sheet as of April 1, 2017 consisted of establishing a current derivative liability of $3,351, offset by a reduction in additional paid-in-capital of $4,180 and a reduction of accumulated deficit of $829.
The categories of misstatements and their impact on previously reported consolidated financial statements are described below:
Derivative Liability:The recognition, measurement and presentation and disclosure related to the warrants issued in conjunction with reserved private placements of the Company’s common stock.
Stockholders’ Deficit:The measurement and presentation and disclosure related to the derivative liability associated with the warrants issued in conjunction with the reserved private placements originally classified as additional paid in capital.
Change in Fair Value of Derivative Liabilities:The recognition, measurement and presentation and disclosure related to changes in the fair value of the derivative liability
In addition to the restatement of the financial statements, certain information within the notes to the financial statements referred to below that were included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019 were impacted. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.
Note 1: Organization and Summary of Significant Accounting Policies
Note 9: Warrant Derivative Liabilities
Note 13: Stockholders’ Equity (Deficit)
Note 18: Fair Value Measurements
The financial statement misstatements reflected in previously issued consolidated financial statements did not impact cash flows from operations, investing, or financing activities in the Company’s consolidated statements of cash flows for any period previously presented, however they did impact individual line items.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
Comparison of restated financial statements to financial statements as previously reported
The following tables compare the Company’s previously issued Consolidated Balance Sheet, Consolidated Statement of Operations and Consolidated Statement of Cashflows for the three months ended June 30, 2018 to the corresponding restated consolidated financial statements for that period.
CONSOLIDATED BALANCE SHEET
| June 30, | Restatement | June 30, | ||||||||||
| 2018 | Adjustments | 2018 | ||||||||||
| (As Reported) | (Restated) | |||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash ($100 pledged as collateral for credit) | $ | 1,748 | $ | 1,748 | ||||||||
| Accounts receivable, net of allowance of $87 | 2,014 | 2,014 | ||||||||||
| Prepaid expenses | 208 | 208 | ||||||||||
| Current assets held for sale | 1,087 | 1,087 | ||||||||||
| Total current assets | 5,057 | 5,057 | ||||||||||
| NON-CURRENT ASSETS | ||||||||||||
| Property and equipment, net | 2,448 | 2,448 | ||||||||||
| Intangible assets, net | 1,407 | 1,407 | ||||||||||
| Non-current assets held for sale | 1,018 | 1,018 | ||||||||||
| Other assets | 26 | 26 | ||||||||||
| Total non-current assets | 4,899 | 4,899 | ||||||||||
| TOTAL ASSETS | $ | 9,956 | $ | 9,956 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Accounts payable | $ | 2,537 | $ | 2,537 | ||||||||
| Accrued liabilities | 914 | 914 | ||||||||||
| Current portion of long-term debt | 500 | 500 | ||||||||||
| Warrant derivative liabilities | $ | 3,373 | 3,373 | |||||||||
| Current liabilities held for sale | 15 | 15 | ||||||||||
| Total current liabilities | 3,966 | 3,373 | 7,339 | |||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||
| Total liabilities | 3,966 | 3,373 | 7,339 | |||||||||
| STOCKHOLDERS’ EQUITY (Numbers of shares rounded to thousands) | ||||||||||||
| Preferred stock, $0.001 par value; 5,000 shares authorized; none issued | ||||||||||||
| Common stock, $0.001 par value; 100,000 shares authorized, 49,533 shares issued and 48,972 shares outstanding | 50 | 50 | ||||||||||
| Additional paid-in-capital | 123,510 | (13,839 | ) | 109,671 | ||||||||
| Accumulated deficit | (115,929 | ) | 10,466 | (105,463 | ) | |||||||
| Treasury stock, at cost | (1,641 | ) | (1,641 | ) | ||||||||
| Total stockholders’ equity | 5,990 | (3,373 | ) | 2,617 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 9,956 | - | $ | 9,956 | |||||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
CONSOLIDATED STATEMENT OF OPERATIONS
| Three Months Ended | ||||||||||||
| June 30, 2018 | ||||||||||||
| (As Reported) | Restatement Adjustments | (Restated) | ||||||||||
| CONTINUING OPERATIONS: | ||||||||||||
| REVENUES | $ | 753 | $ | 753 | ||||||||
| COST OF REVENUES | 430 | 430 | ||||||||||
| GROSS PROFIT (LOSS) | 323 | 323 | ||||||||||
| OPERATING EXPENSES: | ||||||||||||
| Selling, general and administrative | 2,091 | 2,091 | ||||||||||
| Depreciation, amortization, and impairment | 309 | 309 | ||||||||||
| Research and development | 870 | 870 | ||||||||||
| Total operating expenses | 3,270 | 3,270 | ||||||||||
| Loss from continuing operations before other expenses | (2,947 | ) | (2,947 | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||
| Change in fair value of derivative liability | - | $ | 321 | 321 | ||||||||
| Interest expense, net of interest income | (11 | ) | (11 | ) | ||||||||
| Total other expenses | (11 | ) | 321 | 310 | ||||||||
| LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES | (2,958 | ) | 321 | (2,637 | ) | |||||||
| DISCONTINUED OPERATIONS: | ||||||||||||
| Loss from discontinued operations | (590 | ) | (590 | ) | ||||||||
| Gain on disposal of discontinued operations | - | - | ||||||||||
| Total discontinued operations | (590 | ) | (590 | ) | ||||||||
| PROVISION FOR INCOME TAXES | - | - | ||||||||||
| NET LOSS | $ | (3,548 | ) | $ | 321 | $ | (3,227 | ) | ||||
| NET LOSS PER SHARE | ||||||||||||
| Basic and diluted: Continuing operations | $ | (0.06 | ) | $ | (0.06 | ) | ||||||
| Discontinued operations | $ | (0.01 | ) | $ | (0.01 | |||||||
| Total | $ | (0.07 | ) | $ | (0.07 | ) | ||||||
| SHARES USED IN CALCULATION OF NET LOSS PER SHARE | ||||||||||||
| Basic and diluted | 48,960 | 48,960 | ||||||||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
CONSOLIDATED STATEMENT OF CASH FLOWS
| Three Months Ended | ||||||||||||
| June 30, 2018 | ||||||||||||
| As Reported | Restatement Adjustments | Restated | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | (3,548 | ) | $ | 321 | $ | (3,227 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation, amortization and impairment | 362 | 362 | ||||||||||
| Shares of common stock issued for services rendered | 136 | 136 | ||||||||||
| Share-based compensation – stock – employees | 951 | 951 | ||||||||||
| Loss from discontinued operations | 590 | 590 | ||||||||||
| Change in fair value of derivative liabilities | - | (321 | ) | (321 | ) | |||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts receivable | 573 | 573 | ||||||||||
| Inventory | (437 | ) | (437 | ) | ||||||||
| Prepaid expenses | 46 | 46 | ||||||||||
| Other current assets | 13 | 13 | ||||||||||
| Accounts payable | 158 | 158 | ||||||||||
| Accrued liabilities | (167 | ) | (167 | ) | ||||||||
| Net cash used in operating activities of continuing operations | (1,323 | ) | (1,323 | ) | ||||||||
| Net cash used in discontinued operations | (590 | ) | (590 | ) | ||||||||
| Net cash used in operating activities | (1,913 | ) | (1,913 | ) | ||||||||
| Cash flows from investing activities: | ||||||||||||
| Net cash used in investing activities of discontinued operations | (46 | ) | (46 | ) | ||||||||
| Net cash used in investing activities | (46 | ) | (46 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||
| Purchase of treasury shares from employees for tax withholdings | (23 | ) | (23 | ) | ||||||||
| Net cash provided by (used in) financing activities | (23 | ) | (23 | ) | ||||||||
| NET INCREASE (DECREASE) IN CASH | (1,982 | ) | (1,982 | ) | ||||||||
| Cash - beginning of period | 3,730 | 3,730 | ||||||||||
| Cash - end of period | $ | 1,748 | $ | 1,748 | ||||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||||||
| Cash paid for interest | $ | 11 | $ | 11 | ||||||||
| Cash paid for income taxes | $ | - | $ | - | ||||||||
F-55
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
NOTE 4: REVENUE
The Company accounts for revenue in accordance with ASC Topic 606,Revenue from Contracts with Customers. Professional services revenue for the three months ended June 30, 2019 were from management fees earned by Trend Holdings and in 2018 from a project with a major retailer. Several Software as a Service (“SaaS”) projects earned revenue in 2019 and 2018.
The following table disaggregates the Company’s revenue by major source:
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2018 | 2017 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Revenue: | ||||||||
| Professional services | $ | 23 | $ | 750 | ||||
| Software as a Service | 12 | 3 | ||||||
| $ | 35 | $ | 753 | |||||
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
June 30, 2019 | March 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Zest Labs freshness hardware | $ | 2,493 | $ | 2,493 | ||||
| Computers and software costs | 222 | 222 | ||||||
| Machinery and equipment | 200 | 200 | ||||||
| Total property and equipment | 2,915 | 2,915 | ||||||
| Accumulated depreciation and impairment | (2,168 | ) | (2,091 | ) | ||||
| Property and equipment, net | $ | 747 | $ | 824 | ||||
Depreciation expense for the three months ended June 30, 2019 and 2018 was $77 and $171, respectively.
Property and equipment for Sable was reclassified as assets held for sale as more fully described in Note 2 and accordingly depreciation expense for Sable through May 2018 was included in the loss from discontinued operations.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
NOTE 6: INTANGIBLE ASSETS
Intangible assets consisted of the following:
| June 30, 2019 | March 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Goodwill | $ | 3,223 | $ | - | ||||
| Patents | 1,013 | 1,013 | ||||||
| Outsourced vendor relationships | 1,017 | 1,017 | ||||||
| Non-compete agreements | 340 | 340 | ||||||
| Total intangible assets | 5,593 | 2,370 | ||||||
| Accumulated amortization and impairment | (2,370 | ) | (2,370 | ) | ||||
| Intangible assets, net | $ | 3,223 | $ | - | ||||
The goodwill was recorded as part of the acquisition of Trend Holdings more fully described in Note 15. The patents were recorded as part of the acquisition of Zest Labs. The outsourced vendor relationships and non-compete agreements were recorded as part of the acquisition of 440labs. The intangible assets of Zest Labs and 440labs were fully impaired as of March 31, 2019.
Amortization expense for the three months ended June 30, 2019 and 2018 was $0 and $138, respectively.
NOTE 7: ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| June 30, 2019 | March 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Vacation and paid time off | $ | 283 | $ | 345 | ||||
| Professional fees and consulting costs | 218 | 150 | ||||||
| Accrued interest | 84 | 11 | ||||||
| Lease liability | 73 | 95 | ||||||
| Payroll and employee expenses | 47 | 50 | ||||||
| Legal fees | 81 | 108 | ||||||
| Other | 112 | 69 | ||||||
| $ | 898 | $ | 828 | |||||
NOTE 8: WARRANT DERIVATIVE LIABILITIES
As described in Note 3, the Company issued common stock and warrants in several private placements in March 2017, May 2017, March 2018 and August 2018. The March and May 2017 and March and August 2018 warrants (collectively the “Derivative Warrant Instruments”) are 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).
F-57
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
The Company identified embedded features in the March and May 2017 warrants which caused the warrants to be classified as a liability. These embedded features included 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. 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.
The Company identified embedded features in the March and August 2018 warrants which caused the warrants to be classified as a liability. These embedded features 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. 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.
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 June 30, 2019. 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 in June 30, 2019 and March 31, 2019 and at inception:
| Three Months Ended | Year Ended | |||||||||||
| June 30, 2019 | March 31, 2019 | Inception | ||||||||||
| Expected term | 2.75 - 4.17 years | 3.00 - 4.42 years | 5.00 years | |||||||||
| Expected volatility | 97 | % | 96 | % | 91% - 107 | % | ||||||
| Expected dividend yield | - | - | - | |||||||||
| Risk-free interest rate | 1.76 | % | 2.23 | % | 1.80% - 2.77 | % | ||||||
The Company’s derivative liabilities associated with the warrants are as follows:
| June 30, 2019 | March 31, 2019 | Inception | ||||||||||
| Fair value of 1,000 March 17, 2017 warrants | $ | 162 | $ | 256 | $ | 4,609 | ||||||
| Fair value of 1,850 May 22, 2017 warrants | 325 | 505 | 7,772 | |||||||||
| Fair value of 2,565 March 16, 2018 warrants | 736 | 1,040 | 3,023 | |||||||||
| Fair value of 2,969 August 14, 2018 warrants | 936 | 1,303 | 2,892 | |||||||||
| $ | 2,159 | $ | 3,104 | $ | 18,296 | |||||||
During the three months ended June 30, 2019 and 2018 the Company recognized changes in the fair value of the derivative liabilities of $945 and $321, respectively. See additional details on warrant transactions subsequent to June 30, 2019 in Note 19 below.
F-58
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
NOTE 9: NOTE PAYABLE
On December 28, 2018, the Company entered into a $10,000 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 a demand note executed by the Company. The Company is able to request draws from the lender up to $1,000 with a cap of $10,000, including the $1,000 advanced on December 28, 2018 and an additional $350 advanced through March 31, 2019, and an additional $460 advanced during the three months ended June 30, 2019. If principal is prepaid, the loans may not be re-borrowed and the cap of $10,000 shall be reduced. The Company may make a request for a loan or loans from the lender, at any one time and from time to time, from the date of the Agreement until the earlier of (i) demand by the lender or (ii) December 27, 2020 or the earlier termination of the Agreement pursuant to the terms thereof. Loans made pursuant to the Agreement are secured by a security interest in the Company’s collateral held with the lender and guaranteed by the Company’s subsidiary, Zest Labs.
The Company pays to the lender a commitment fee on the principal amount of each loan requested thereunder in the amount of 3.5% of the amount thereof. The Company also paid an arrangement fee of $300 to the lender which was paid upon execution of the Agreement. The aforementioned fees were and are netted from proceeds advanced and are recorded as interest expense. Zest Labs is a plaintiff in a litigation styled asZest Labs, Inc. vs Walmart, Inc., Case Number 4:18-cv-00500 filed in the United States District Court for the Eastern District of Arkansas (the “Zest Litigation”). The Company agrees that within five days of receipt by Zest Labs or the Company of any settlement proceeds from the Zest Litigation, the Company will pay or cause to be paid over to lender an additional fee in an amount equal to (i) 0.50 multiplied by (ii) the highest aggregate principal balance of the loans over the life of the loans through the date of the payment from settlement proceeds; provided, however, that such additional fee shall not exceed the amount of the settlement proceeds.
Subject to customary carve-outs, the Agreement contains customary negative covenants and restrictions for agreements of this type on actions by the Company including, without limitation, restrictions on indebtedness, liens, investments, loans, consolidation, mergers, dissolution, asset dispositions outside the ordinary course of business, change in business and restriction on use of proceeds. In addition, the Agreement requires compliance by the Company of covenants including, but not limited to, furnishing the lender with certain financial reports and protecting and maintaining its intellectual property rights. The Agreement contains customary events of default, including, without limitation, non-payment of principal or interest, violation of covenants, inaccuracy of representations in any material respect and cross defaults with certain other indebtedness and agreements.
Interest expense on the note for the three months ended June 30, 2019 was $62.
NOTE 10: PROVISION FORNOTES PAYABLE - RELATED PARTIES
A board member advanced $268 to the Company through June 30, 2019, under the terms of a note payable that bears 10% simple interest per annum, and the principal balance along with accrued interest is payable July 30, 2020 or upon demand. Interest expense on the note for the three months ended June 30, 2019 was $2.
William B. Hoagland, Principal Financial Officer, advanced $30 to the Company in May 2019 pursuant to a note with the same terms as the note with the board member.
NOTE 11: LONG-TERM DEBT
The Company had a secured convertible promissory note (“convertible note”) bearing interest at 10% per annum, entered into on January 10, 2017 for $500 with the principal due in one lump sum payment on or before July 10, 2018. The principal along with accrued interest of $11 was paid on July 2, 2018.
Interest expense on debt for the three months ended June 30, 2019 and 2018 was $0 and $11, respectively.
NOTE 12: STOCKHOLDERS’ EQUITY
Ecoark Holdings Preferred Stock
On March 18, 2016, the Company created 5,000 shares of “blank check” preferred stock, par value $0.001. No preferred shares had been issued through June 30, 2019. On August 21, 2019, the Company and two accredited investors entered into a securities purchase agreement pursuant to which the Company sold and issued to the investors an aggregate of 2 shares of Series B Convertible Preferred Stock, par value $0.001 per share at a price of $1,000 per share. See additional details in Note 19 below.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
Ecoark Holdings Common Stock
The Company has 100,000 shares of common stock, par value $0.001 which were authorized on March 18, 2016. The Company has outstanding warrants as of June 30, 2019 that are exercisable into 8,384 shares of common stock.
On July 12, 2019, the Company entered into an exchange agreement with investors that are the holders of warrants. As a result of a cashless exercise, the Company issued 4,277 shares of the Company’s common stock to the investors. Upon the issuance of the 4,277 shares, warrants for 5,677 shares were extinguished. See additional details in Note 19 below. On August 21, 2019, the Company issued 300 shares to advisors that assisted with the securities purchase agreement and exchange agreement.
Share-based Compensation
Share-based compensation expense is included in selling, general and administrative expense in the condensed consolidated statements of operations as follows:
| 2013 Incentive Stock Plan | 2017 Omnibus Incentive Plan | Non-Qualified Stock Options | Common Stock | Total | ||||||||||||||||
| Three months ended June 30, 2019 | ||||||||||||||||||||
| Directors | $ | - | $ | 100 | $ | - | $ | - | $ | 100 | ||||||||||
| Employees | - | 101 | 306 | - | 407 | |||||||||||||||
| Services | - | 75 | - | - | 75 | |||||||||||||||
| $ | - | $ | 276 | $ | 306 | $ | - | $ | 582 | |||||||||||
| Three months ended June 30,2018 | ||||||||||||||||||||
| Directors | $ | - | $ | 100 | $ | - | $ | - | $ | 100 | ||||||||||
| Employees | 202 | 98 | 651 | - | 951 | |||||||||||||||
| Services | - | 36 | - | - | 36 | |||||||||||||||
| $ | 202 | $ | 234 | 651 | $ | - | $ | 1,087 | ||||||||||||
NOTE 13: INCOME TAXES
The Company has a net operating loss carryforward for tax purposes totaling approximately $98,472 at June 30, 2019. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after certain ownership shifts.
The provision (benefit) for income taxes for the three months ended March 31, 2016June 30, 2019 and 20152018 differs from the amount which would be expected as a result of applying the statutory tax rates to the losses before income taxes principally due primarily to theestablishing a valuation allowance to fully reserve net deferredoffset the potential income tax assets.
benefit. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income. As the achievement of required future taxable income is uncertain, the Company has recorded a valuation allowance.
| As of March 31, 2016 | As of December 31, 2015 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss before non-deductible items | $ | (38,244 | ) | $ | (36,028 | ) | ||
| Tax rate | 34 | % | 34 | % | ||||
| Total deferred tax assets | 13,003 | 12,250 | ||||||
| Less: Valuation allowance | (13,003 | ) | (12,250 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
As of March 31, 2016, the Company has a net operating loss carry forward of $38,244 expiring through 2036. The Company has provided afull valuation allowance against the full amount of the deferred tax asset due to management’s uncertainty about its realization. Furthermore, the net operating loss carry forward may be subject to further limitation pursuant to Section 382 of the Internal Revenue Code. The valuation allowance was increased by $753 in the three months ended March 31, 2016.assets.
nOTE 11: SEGMENT INFORMATION AND CONCENTRATIONSThe Company’s deferred tax assets are summarized as follows:
The Company follows the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”. This standard requires that companies disclose operating segments based on the manner in which Management disaggregates the Company in making operating decisions. As of March 31, 2016 and for the three months ended March 31, 2016 and 2015, the Company operates in two segments. The segments are Products (principally consisting of Pioneer Products’ operations consisting of sales of recycled plastic products) and Services (principally consisting of Eco3D’s mapping, modeling and consulting services business plus costs associated with developing Intelleflex and Eco360 solutions). Home office costs are allocated to the two segments based on the relative support provided to those segments.
| March 31, 2016 | Products | Services | Total | |||||||||
| Segmented operating revenues | $ | 1,207 | $ | 757 | $ | 1.964 | ||||||
| Cost of revenues | 1,182 | 277 | 1,459 | |||||||||
| Gross profit | 25 | 480 | 505 | |||||||||
| Total operating expenses net of depreciation and amortization, and interest expense, net | 59 | 2,497 | 2,556 | |||||||||
| Depreciation and amortization | - | 75 | 75 | |||||||||
| Interest expense, net | 1 | 94 | 95 | |||||||||
| Net (loss) applicable to common shares | (35 | ) | (2,186 | ) | (2,221 | ) | ||||||
| Non-controlling interest | - | 2 | 2 | |||||||||
| Net (loss) – controlling interest | $ | (35 | ) | $ | (2,188 | ) | $ | (2,223 | ) | |||
| Segmented assets | ||||||||||||
| Property and equipment, net | $ | - | $ | 360 | $ | 360 | ||||||
| Intangible assets, net | $ | 15 | $ | 892 | $ | 907 | ||||||
| Capital expenditures | $ | - | $ | 49 | $ | 49 | ||||||
| March 31, 2015 | Products | Services | Total | |||||||||
| Segmented operating revenues | $ | 1,483 | $ | 742 | $ | 2,225 | ||||||
| Cost of revenues | 1,417 | 224 | 1,641 | |||||||||
| Gross profit | 66 | 518 | 584 | |||||||||
| Total operating expenses net of depreciation and amortization, and interest expense, net | 45 | 2,884 | 2,929 | |||||||||
| Depreciation and amortization | 332 | 84 | 416 | |||||||||
| Interest expense, net | 2 | 204 | 206 | |||||||||
| Net (loss) applicable to common shares | (313 | ) | (2,654 | ) | (2,967 | ) | ||||||
| Non-controlling interest | - | 51 | 51 | |||||||||
| Net (loss) – controlling interest | $ | (313 | ) | $ | (2,705 | ) | $ | (3,018 | ) | |||
| Segmented assets | ||||||||||||
| Property and equipment, net | $ | - | $ | 403 | $ | 403 | ||||||
| Intangible assets, net | $ | 661 | $ | 894 | $ | 1,555 | ||||||
| Capital expenditures | $ | - | $ | 8 | $ | 8 | ||||||
| June 30, 2019 | March 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Net operating loss carryover | $ | 20,679 | $ | 23,327 | ||||
| Depreciable and amortizable assets | 1,748 | 1,761 | ||||||
| Share-based compensation | 3,708 | 3,586 | ||||||
| Accrued liabilities | 57 | 57 | ||||||
| Allowance for bad debts | 120 | 120 | ||||||
| Warrant derivative liabilities | (2,686 | ) | (2,884 | ) | ||||
| Other | 382 | 381 | ||||||
| Less: valuation allowance | (24,008 | ) | (26,348 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2016
JUNE 30, 2019
DuringAfter consideration of all the evidence, both positive and negative, management has recorded a full valuation allowance at June 30, 2019 and March 31, 2019, due to the uncertainty of realizing the deferred income tax assets. The valuation allowance decreased by $2,340 in the three months ended March 31, 2016June 30, 2019. The Company has not identified any uncertain tax positions and 2015, the Company had one majorhas not received any significant notices from tax authorities.
NOTE 14: CONCENTRATIONS
Concentration of Credit Risk.The Company’s customer comprising 62% and 65%base for its Zest Lab products is concentrated with a small number of revenue. A major customer is defined as a customer that represents 10% or greater of total sales. Additionally, the Company had two customers as of March 31, 2016 and December 31, 2015 with accounts receivable balances of 46% and 32% of the total accounts receivable.customers. The Company does not believe thatgenerally require collateral or other security to support accounts receivable. To reduce credit risk, the Company performs ongoing credit evaluations on its customers’ financial condition. The Company establishes allowances for doubtful accounts based upon factors surrounding the credit risk associated withof customers, historical trends and other information. J. Terrence Thompson accounted for more than 10% of the Company’s accounts receivable as of June 30, 2019 and March 31, 2019.
Supplier Concentration.Certain of the components and equipment used by the Company in the manufacture of its hardware are available from single-sourced vendors. Shortages could occur in these customers willessential materials and components due to an interruption of supply or increased demand in the industry. If the Company were unable to procure certain components or equipment at acceptable prices, it would be required to reduce its operations, which could have ana material adverse effect on its results of operations. In addition, the business.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 maintainedoccasionally maintains cash balances in excess of the FDIC insured limit in both years.limit. The Company does not consider this risk to be material.
nOTE 12: SUBSEQUENT EVENTS
The settlement referred to in Note 9 was paid in April 2016.NOTE 15: ACQUISITION OF TREND DISCOVERY HOLDINGS, INC.
On April 28, 2016,May 31, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Trend Discovery Holdings Inc., a Delaware corporation (“Trend Holdings”) for the Company to acquire 100% of Trend Holdings pursuant to a merger of Trend Holdings with and into the Company (the “Merger”). The Merger was completed as agreed in the Merger Agreement, the Company is the surviving entity in the Merger and the separate corporate existence of Trend Holdings has ceased to exist. Pursuant to the Merger, each of the 1,000 issued 625and outstanding shares of common stock to legal and other consultants who advised the Company on the Merger.
The private placement offering described in Note 2of Trend Holdings was closed on April28, 2016. The offering raised $17,347 in capital. The company issued an additional 1,949 shares of its common stock and an additional 1,949 warrants on April 28, 2016. These warrants have a strike price of $5.00 per share and expire on December 31, 2018.
On May 3, 2016, the Company enteredconverted into a Share Exchange Agreement (the “Agreement”) by and among the Company, Pioneer Products, Sable Polymer Solutions, LLC, an Arkansas limited liability company (“Sable”), and the holder of all of Sable’s membership interests.
The Company issued 2,0005,500 shares of the Company’s common stock (the “Shares”) in exchange for all of Sable’s membership interests. Sable will be a wholly-owned subsidiary of Pioneer Products.
The seller shall be subject to a lock-up agreement (the “Lock-Up Agreement”) that releases shares from the Lock-Up Agreement over a period of one year (the “Lock-Up Period”). Under the Lock-Up Agreement, the seller shall be permitted to sell 33.3% of the Shares received by the seller after the six-month anniversary of the closing of the transaction. Thereafter, an additional 33.3% of the Shares shall be released at the end of each subsequent three-month period until the end of the Lock-Up Period.
stock. No cash was paid relating to the acquisition of Sable. Sable operates a polymer manufacturing facility north of Atlanta, Georgia.acquisition.
The Company acquired the assets and liabilities noted below in exchange for the 2,0005,500 shares and is accountingaccounted for the acquisition in accordance with ASC 805. Based on the fair values at the effective date of acquisition the purchase price was recorded as follows:follows (subject to adjustment):
| Cash | $ | 3 | ||
| Receivables | 10 | |||
| Other assets | 1 | |||
| Goodwill | 3,223 | |||
| $ | 3,237 |
The Acquisition has been accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total acquisition consideration price was allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values. The fair value measurements utilize estimates based on key assumptions of the Acquisition, and historical and current market data. The excess of the purchase price over the total of estimated fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed is recognized as goodwill. In order to ultimately determine the fair values of tangible and intangible assets acquired and liabilities assumed for Trend Holdings , we may engage a third party independent valuation specialist, however as of the date of this report, the valuation has not been undertaken. The Company has estimated the preliminary purchase price allocations based on historical inputs and data as of May 31, 2019. The preliminary allocation of the purchase price is based on the best information available and is pending, amongst other things: (i) the finalization of the valuation of the fair values and useful lives of tangible assets acquired; (ii) finalization of the valuations and useful lives for intangible assets; (iii) finalization of the valuation of accounts payable and accrued expenses; and (iv) finalization of the fair value of non-cash consideration.
| Cash | $ | 81 | ||
| Receivables, net | 1,275 | |||
| Inventory | 909 | |||
| Property and equipment, net | 2,822 | |||
| Intangible assets | 1,028 | |||
| Goodwill | 1,238 | |||
| Other assets | 36 | |||
| Accounts payable and other liabilities | (981 | ) | ||
| Notes payable and current debt | (2,251 | ) | ||
| Long-term debt | (280 | ) | ||
| $ | 3,877 |
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The Company expects the purchase price allocations for the acquisition of Trend Holdings to be completed by the end of the fourth quarter of fiscal 2020. The Company estimated the fair value of the Company’s shares issued on a preliminary basis based on an average of quoted market value.
The intangible assets represent customer lists and willgoodwill is not expected to be amortized over three years. The goodwill will not be amortized but will be tested annuallydeductible for impairment.tax purposes.
The following table shows pro-forma results for the three months ended March 31, 2016 and 2015June 30, 2019 as if the acquisition had occurred on JanuaryApril 1, 2015.2019. These unaudited pro forma results of operations are based on the historical financial statements and related notes of SableTrend Holdings and the Company.
| Revenues | $ | 46 | ||
| Net loss | $ | (1,644 | ) | |
| Net loss per share | $ | (0.03 | ) |
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
| For the three months ended March 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenues | $ | 3,200 | $ | 4,412 | ||||
| Net loss attributable to controlling interest | $ | 2,529 | $ | 3,104 | ||||
| Net loss per share | $ | (0.08 | ) | $ | (0.13 | ) | ||
NOTE 16: COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On August 1, 2018, Ecoark Holdings, Inc. and Zest Labs, Inc. filed a complaint against Walmart Inc. in the United States District Court for the Eastern District of Arkansas, Western Division. The complaint includes claims for violation of the Arkansas Trade Secrets Act, violation of the federal Defend Trade Secrets Act, breach of contract, unfair competition, unjust enrichment, breach of the covenant of good faith and fair dealing, conversion and fraud. Ecoark Holdings and Zest Labs are seeking monetary damages and other related relief to the extent it is deemed proper by the court. The Company does not believe that expenses incurred in pursuing the complaint will have a material effect on the Company’s net income or financial condition for the fiscal year ended March 31, 2020 or any individual fiscal quarter. On October 22, 2018, the Court issued an order setting a trial date of June 1, 2020. The order also established deadlines for the completion of fact discovery by October 15, 2019, opening expert reports on October 24, 2019, and dispositive motions, on January 22, 2020. The case is presently in the fact discovery phase.
On December 12, 2018, a complaint was filed against the Company in the Twelfth Judicial Circuit in Sarasota County, Florida by certain investors who invested in the Company before it was public. The complaint alleges that the investment advisors who solicited the investors to invest into the Company made omissions and misrepresentations concerning the Company and the shares. The Company filed a motion to dismiss the complaint which is pending.
Operating Leases
The Company leased operating and office facilities for various terms under long-term, non-cancelable operating lease agreements. The only remaining lease obligation at June 30 is for the Zest Labs facility in San Jose, California that expires in December 2019. Rent expense was as follows for the three months ended June 30:
| 2019 | 2018 | |||||||
| Continuing operations | $ | 54 | $ | 72 | ||||
| Discontinued operations | - | 96 | ||||||
| Total | $ | 54 | $ | 168 | ||||
Future minimum lease payments required under the Zest Labs operating lease is $76. On adoption of ASC 842Leases beginning April 1, 2019, the Company recognized additional operating liabilities of approximately $99, with corresponding right of use assets of $99 based on the present value of the remaining minimum rental payments under leasing standards for existing operating leases.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMNOTE 17: FAIR VALUE MEASUREMENTS
To the Member of
Sable Polymer Solutions, LLC
Rogers, Arkansas
We have audited the accompanying balance sheets of Sable Polymer Solutions, LLC (the “Company”) as of December 31, 2015 and 2014 and the related statements of operations, changes in member’s equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an auditmeasures and discloses the estimated fair value of financial assets and liabilities using the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates madefair value hierarchy prescribed by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sable Polymer Solutions, LLC as of December 31, 2015 and 2014, and the results of its statements of operations, changes in member’s equity (deficit), and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Companyfair value hierarchy has sustained operating losses and needs to obtain additional financing to continue the development of their product. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KBL, LLP
New York, NY
June 10, 2016
BALANCE SHEETS
DECEMBER 31, 2015 and 2014
| (Dollars in thousands) | ||||||||
| December 31, 2015 | December 31, 2014 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 31 | $ | 80 | ||||
| Accounts receivable, net of allowance | 1,025 | 977 | ||||||
| Accounts receivable – related parties | - | 32 | ||||||
| Inventory, net of reserves | 1,238 | 1,040 | ||||||
| Prepaid expenses | 40 | - | ||||||
| Other current assets | 25 | - | ||||||
| Total current assets | 2,359 | 2,129 | ||||||
| Property and equipment, net | 1,391 | 1,358 | ||||||
| Total non-current assets | 1,391 | 1,358 | ||||||
| TOTAL ASSETS | $ | 3,750 | $ | 3,487 | ||||
| LIABILITIES AND MEMBER’S EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Current portion of long-term debt | $ | 175 | $ | 166 | ||||
| Note payable | 1,500 | 500 | ||||||
| Advances - related parties | - | 1,929 | ||||||
| Accounts payable | 470 | 721 | ||||||
| Accounts payable – related parties | 63 | - | ||||||
| Accrued expenses | 126 | 4 | ||||||
| Accrued interest | 6 | 5 | ||||||
| Total current liabilities | 2,340 | 3,325 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| Commitments and contingencies | - | - | ||||||
| Long-term debt | 327 | 503 | ||||||
| Total non-current liabilities | 327 | 503 | ||||||
| Total liabilities | 2,667 | 3,828 | ||||||
| MEMBER’S EQUITY (DEFICIT) | ||||||||
| Member’s equity (deficit) | 1,083 | (341 | ) | |||||
| Total member’s equity (deficit) | 1,083 | (341 | ) | |||||
| TOTAL LIABILITIES AND MEMBER’S EQUITY (DEFICIT) | $ | 3,750 | $ | 3,487 | ||||
The accompanying notes are an integral part of these financial statements
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
| (Dollars in thousands) | ||||||||
| 2015 | 2014 | |||||||
| REVENUES | $ | 14,047 | $ | 10,821 | ||||
| COST OF REVENUES | 14,635 | 11,020 | ||||||
| GROSS (LOSS) | (588 | ) | (199 | ) | ||||
| OPERATING EXPENSES: | ||||||||
| General and administrative | 305 | 298 | ||||||
| Depreciation and amortization | 266 | 213 | ||||||
| Total operating expenses | 571 | 511 | ||||||
| Loss from operations | (1,159 | ) | (710 | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Other income, net of other expenses | 74 | - | ||||||
| Loss on abandonment of leasehold improvements | (43 | ) | - | |||||
| Interest expense | (77 | ) | (65 | ) | ||||
| Total other income (expense) | (46 | ) | (65 | ) | ||||
| NET LOSS | $ | (1,205 | ) | $ | (775 | ) | ||
The accompanying notes are an integral part of these financial statements
STATEMENT OF CHANGES IN MEMBER’S EQUITY (DEFICIT)FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
| (Dollars in thousands) | ||||
| Total | ||||
| Balance at January 1, 2014 | $ | 434 | ||
| Net loss for the year | (775 | ) | ||
| Balance at December 31, 2014 | (341 | ) | ||
| Conversion of related party note payable to equity | 2,629 | |||
| Net loss for the year | (1,205 | ) | ||
| Balance at December 31, 2015 | $ | 1,083 | ||
The accompanying notes are an integral part of these financial statements
STATEMENTs OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
| (Dollars in thousands) | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,205 | ) | $ | (775 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 266 | 213 | ||||||
| Loss on abandonment of leasehold improvements | 43 | - | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (48 | ) | (275 | ) | ||||
| Accounts receivable – related parties | 32 | (32 | ) | |||||
| Inventory | (198 | ) | (84 | ) | ||||
| Prepaid expenses | (40 | ) | - | |||||
| Other current assets | (25 | ) | - | |||||
| Accounts payable | (251 | ) | 119 | |||||
| Accounts payable – related parties | 59 | - | ||||||
| Accrued expenses | 125 | 2 | ||||||
| Accrued interest | 1 | 5 | ||||||
| Net cash used in operating activities | (1,241 | ) | (827 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (392 | ) | (619 | ) | ||||
| Proceeds from sale of equipment | 50 | - | ||||||
| Net cash used in investing activities | (342 | ) | (619 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from borrowings | 1,000 | 667 | ||||||
| Repayments of debt | (166 | ) | - | |||||
| Proceeds from advances - related parties | 700 | 753 | ||||||
| Net cash provided by financing activities | 1,534 | 1,273 | ||||||
| NET (DECREASE) IN CASH | (49 | ) | (173 | ) | ||||
| Cash - beginning of the year | 80 | 253 | ||||||
| Cash - end of the year | $ | 31 | $ | 80 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | 76 | $ | 60 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| SUMMARY OF NONCASH ACTIVITIES: | ||||||||
| Advances from related parties contributed to capital | $ | 2,629 | $ | - | ||||
The accompanying notes are an integral part of these financial statements
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, 2015
NOTE1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Organization
Sable Polymer Solutions, LLC, an LLC formed in Arkansas on September 10, 2012 (“Sable” or the “Company”) has expertise in the recycling and reclamation of resin materials. It operates a plastics recycling plant in Flowery Branch, Georgia. Sable principally purchases plastic and resin materials and after conversions and reformulation sells those products. In addition to those product sales, the Company performs limited tolling services for other customers. The Company operated as a partnership until March 2013 when it became a single member LLC.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with U.S generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “Commission”). It is Management's opinion, that all material adjustments (consisting of normal recurring adjustments) have been madethree levels, which are necessary for a fair financial statement presentation.
Use of Estimates
The preparation of 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 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 non-collectible accounts receivable, an amount per pound of material processed for labor and overhead, and adjustments for lower of cost or market, obsolete or slow-moving inventory, which are shown net. Actual results could differ from those estimates.
Cash
Cash consists of cash and demand deposits.
Inventory
Inventory is stated at the lower of cost or market. Inventory cost is determined on a first in first out basis, and provisions are made to reduce slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values.
Property and Equipment and Long-Lived Assets
Property and equipment is stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to ten years.
FASB Codification Topic 360 “Property, Plant and Equipment” (“ASC 360”), requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The application of ASC 360 has not materially affected the Company’s reported earnings, financial condition or cash flows.
The Company did not consider it necessary to record any impairment charges during the years ended December 31, 2015 and 2014.
Subsequent Events
Subsequent events were evaluated through the date the financial statements were issued.
Shipping and Handling Costs
The Company reports shipping and handling revenues and their associated costs in cost of revenue, respectively. Shipping revenues and costs for the years ended December 31, 2015 and 2014 were nominal and included in cost of revenues.
SABLE POLYMER SOLUTIONS, llc
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, 2015
Revenue Recognition
Revenue primarily consists of the sale of recycled plastics products and is presented net of discounts and returns. Revenue is recognized when the following criteria have been met:
Evidence of an arrangement exists.The Company considers a customer purchase order, service agreement, contract, or equivalent document to be evidence of an arrangement.
Delivery has occurred. The Company’s standard transfer terms are free on board (FOB) shipping point. Thus, delivery is considered to have occurred when title and risk of loss have passed to the customer at the time of shipment.
The fee is fixed or determinable.The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard, which is generally 30-60 days.
Collection is deemed reasonably assured. Collection is deemed reasonably assured if it is expected that the customer will be able to pay amounts under the arrangement as payments become due. If it is determined that collection is not reasonably assured, then revenue is deferred and recognized upon cash collection.
Accounts Receivable and Concentration of Credit Risk
The Company considers accounts receivable, net of allowance for returns and doubtful accounts, to be fully collectible. The allowance is based on management’s estimatereliable available inputs of the overall collectability of accounts receivable, considering historical losses 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. Past-due status is based on contractual terms. Management has determined that the allowance for doubtful accounts at December 31, 2015 and 2014 was $23 and $0, respectively. Provision for doubtful accounts was $35 and $0 for the years ended December 31, 2015 and 2014, respectively.
Income Taxes
observable data. The Company is a limited liability company treated as a disregarded entity for federal and state income tax purposes with all income tax liabilities and/or benefits of the Company being passed through to the member. As such, no recognition of federal or state income taxes for the Company has been provided for in the accompanying financial statements. Any uncertain tax position taken by the member is not an uncertain position of the Company.
Fair Value of Financial Instruments
ASC 825, "Financial Instruments,"hierarchy requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments:use of observable market data when available. The carrying amount of cash, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses, and accounts payable to related parties, approximate fair value because of the short-term maturity of those instruments. The Company does not utilize derivative instruments.
Recoverability of Long-Lived Assets
The Company reviews recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairmentthree-level hierarchy is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell.
SABLE POLYMER SOLUTIONS, llc
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, 2015
Fair Value Measurements
ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. ASC 820 classifies these inputs into the following hierarchy:defined as follows:
Level 1 inputs: Quoted– quoted prices for identical instruments in active markets.markets;
Level 2 inputs: Quoted– quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derivedmodel derived valuations whosein which significant inputs are observable or whoseand significant value drivers are observable.observable in active markets; and
Level 3 inputs: Instruments with primarily unobservable– fair value drivers.
Related Party Transactions
Parties are considered to be related to the Company if the parties directly or indirectly, throughmeasurements derived from valuation techniques in which one or more intermediaries, control,significant inputs or significant value drivers are controlled by, or are under common control with the Company. Related parties also include principal stockholdersunobservable.
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
Financial instruments consist principally of the Company, its management, members of the immediate families of principal stockholders of the Company and its managementcash, accounts receivable and other partiesreceivables, 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 years ended March 31, 2019 and 2018. 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 whichprecision. Changes in assumptions could significantly affect the Company may deal where one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.estimates. The Company discloses all related party transactions. All transactions shall be recorded atrecords the fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related partywarrant derivative liabilities disclosed in Note 8 in accordance with ASC 815,Derivatives and any payment to or on behalfHedging. The fair values of the related party in excessderivatives were calculated using the Black-Scholes Model. The fair value of the costderivative liabilities is reflected as compensation or distribution to related parties dependingrevalued on each balance sheet date with corresponding gains and losses recorded in other income (expense) in the transaction.
A related party receivableconsolidated statement of $32 was outstanding at December 31, 2014 related to freight charges paid on behalfoperations. Other income recorded based upon the change in fair value of the related party. Related party payables of $63, net were outstanding at December 31, 2015 related to equipment purchases.
Recently Issued Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842)”.ASU 2016-02 changes the accounting for leased assets, principally by requiring balance sheet recognition of assets under lease arrangements. It is effective for annual reporting periods,derivative liabilities was $945 and interim periods within those years, beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-02 on its financial statements.
In November 2014, the FASB issued ASU No. 2014-17, “Business Combinations – Pushdown Accounting.” The provisions of ASU 2014-17 require management to determining whether and at what threshold an acquiree (acquired entity) can reflect the acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. Since neither unit of this business combination is in the development stage, nor had recognizable revenues during this period the application of push down accounting would not be of significant value to the readers of these consolidated financial statements. The Company has not elected to apply pushdown accounting in its separate financial statements upon occurrence of this event.
During August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern.” The provisions of ASU 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
SABLE POLYMER SOLUTIONS, llc
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, 2015
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in ASU 2014-09 will be applied using one of two retrospective methods. The effective date will be the first quarter of the fiscal year ending December 31, 2018. The Company has not determined the potential effects on its financial statements.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Going Concern
The Company commenced operations in 2012, and has experienced typical start-up costs and losses from operations resulting in an accumulated deficit of $2,716 since inception. The accumulated deficit as well as recurring losses of $1,205 and $775 for the years ended December 31, 2015 and 2014, and the limited working capital surplus of $19 as of December 31, 2015, have resulted in the uncertainty of the Company to continue as a going concern.
These financial statements of the Company have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable period of time.
The Company was acquired by Ecoark Holdings, Inc. on May 3, 2016 (see Note 10 below). The Company’s ability to raise additional funds is unknown. Obtaining additional financing, the successful development of the Company’s contemplated plan of operations, ultimately, to profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of the uncertainties.
NOTE 2:INVENTORY
Inventory, net of reserves, consisted of the following as of December 31, 2015 and 2014:
| 2015 | 2014 | |||||||
| Raw Materials | $ | 702 | $ | 930 | ||||
| Finished Goods | 536 | 110 | ||||||
| Inventory | $ | 1,238 | $ | 1,040 | ||||
NOTE 3:PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2015 and 2014:
| 2015 | 2014 | |||||||
| Furniture and fixtures | $ | 116 | $ | 116 | ||||
| Computers and software costs | 4 | 3 | ||||||
| Machinery and equipment | 1,834 | 1,539 | ||||||
| Leasehold improvements | 25 | 48 | ||||||
| Total property and equipment | 1,979 | 1,706 | ||||||
| Accumulated depreciation, amortization | (588 | ) | (348 | ) | ||||
| Property and equipment, net | $ | 1,391 | $ | 1,358 | ||||
Depreciation expense for 2015 and 2014 was $266 and $213, respectively. There was no impairment on these assets for this two-year period. There was a loss on the abandonment of leasehold improvements of $43 for the year ended December 31, 2015. The Company also sold $71 of equipment that had $21 of accumulated depreciation in 2015 for $50.
SABLE POLYMER SOLUTIONS, llc
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, 2015
NOTE 4: ACCOUNTS RECEIVABLE AND PAYABLE – RELATED PARTIES
The Company at times conducts business with related parties controlled by the sole member. At December 31, 2014 amounts receivable from related parties for these transactions was $32. At December 31, 2015 amounts owed to related parties was $63.
NOTE 5: NOTES PAYABLE
The Company has a note payable pursuant to a line of credit maintained with Generations Bank. The notes are secured by the accounts receivable, inventory and equipment of the Company, with monthly interest only at 5.5%, and a balloon payment at maturity. The note at December 31, 2015 originated July 15, 2015 with a maximum amount of $1,500 and is due in one year. The note at December 31, 2014 originated July 15, 2014 with a maximum amount of $500 and was due on July 15, 2015. The balance of the notes was $1,500 and $500 at December 31, 2015 and 2014, respectively. Average amounts outstanding under the line of credit were $818 and $428 for 2015 and 2014, respectively.
Interest expense on the notes for the years ended December 31, 2015 and 2014 was $44 and $24, respectively.
NOTE 6: ADVANCES – RELATED PARTIES
The advances – related parties represent non-interest bearing, unsecured, advances from the principal of the Company for working capital needs. The advances – related party had a balance outstanding at December 31, 2014 of $1,900 and there were $700 additional advances in 2015. On June 30, 2015, the principal of the Company converted $2,000 of the advances to a capital contribution in the Company. On December 31, 2015 the principal of the Company converted the remaining outstanding balance of $629 to a capital contribution in the Company.
NOTE 7: LONG-TERM DEBT
The following is a summary of long-term debt as of December 31, 2015 and 2014:
| 2015 | 2014 | |||||||||
| Note payable – Generations Bank | (a) | $ | 258 | $ | 356 | |||||
| Note payable – Generations Bank | (b) | 244 | 313 | |||||||
| Total | 502 | 669 | ||||||||
| Less: current portion | (175 | ) | (166 | ) | ||||||
| Long-term debt | $ | 327 | $ | 503 | ||||||
Interest expense on the long-term debt for the years ended December 31, 2015 and 2014 was $33 and $41, respectively. Principal payments required are as follows: 2016 - $175, 2017 - $185, 2018 - $128 and 2019 - $14.
SABLE POLYMER SOLUTIONS, llc
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, 2015
NOTE8: COMMITMENTS AND CONTINGENCIES
Operating Leases and Relocation
The Company leases its operating facilities under a long-term, non-cancelable operating lease agreement. In 2015 the Company relocated to a larger plant facility. The lease term for the new facility began on September 1, 2015 and expires on January 31, 2021. Four months of free rent were provided under the new lease, and rent expense is recorded on a straight-line basis over the lease term. Rent expense was $230 and $147 for 2015 and 2014, respectively. Future minimum lease payments required under the operating lease are as follows: 2016 - $300, 2017 - $300, 2018 -$300, 2019 - $300, 2020 - $300 and 2021 - $25.
When the Company moved from the previous facility $48 of leasehold improvements were written off resulting in a loss of $43. In addition, the Company incurred approximately $50 of direct costs and approximately $210 of labor costs associated with the move.
nOTE 9: CONCENTRATIONS
During the years ended December 31, 2015 and 2014, the Company had three and four major customers comprising 54% and 72% of sales, respectively. A major customer is defined as a customer that represents 10% or greater of total sales. Additionally, the Company had four and six customers as of December 31, 2015 and 2014 with accounts receivable balances of 57% and 99%, respectively, of the total accounts receivable.
In addition, during the years ended December 31, 2015 and 2014, the Company had one and two major vendors comprising 10% and 21% of purchases, respectively. A major vendor is defined as a vendor that represents 10% or greater of total purchases. Additionally, the Company had two and one vendor as of December 31, 2015 and 2014 with accounts payable balances of 32% and 10%, respectively, of total accounts payable.
The Company does not believe that the risk associated with these customers and vendors will have an adverse effect on the business.
nOTE 10: SUBSEQUENT EVENTS
On May 3, 2016, the Company entered into a Share Exchange Agreement (the “Agreement”) by and among Ecoark Holdings, Inc. (“Ecoark”), Pioneer Products (an indirect subsidiary of Ecoark), and the holder of all of Sable’s membership interests.
Ecoark issued 2,000,000 shares of its common stock in exchange for all of Sable’s membership interests. Sable became a wholly-owned subsidiary of Pioneer Products.
No cash was paid relating to the acquisition of Sable. In April 2016, Ecoark advanced $600 to Sable for working capital purposes.
BALANCE SHEETS (UNAUDITED)
MARCH 31, 2016 AND DECEMBER 31, 2015
| (Dollars in thousands) | ||||||||
| March 31, 2016 | December 31, 2015 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | - | $ | 31 | ||||
| Accounts receivable, net of allowance | 1,303 | 1,025 | ||||||
| Inventory, net of reserves | 1,367 | 1,238 | ||||||
| Prepaid expenses | 14 | 40 | ||||||
| Other current assets | 25 | 25 | ||||||
| Total current assets | 2,709 | 2,359 | ||||||
| Property and equipment, net | 1,321 | 1,391 | ||||||
| Total non-current assets | 1,321 | 1,391 | ||||||
| TOTAL ASSETS | $ | 4,030 | $ | 3,750 | ||||
| LIABILITIES AND MEMBER’S EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Current portion of long-term debt | $ | 178 | $ | 175 | ||||
| Notes payable | 1,500 | 1,500 | ||||||
| Cash overdraft | 388 | - | ||||||
| Accounts payable | 615 | 470 | ||||||
| Accounts payable – related parties | 63 | 63 | ||||||
| Accrued expenses | 135 | 126 | ||||||
| Accrued interest | 6 | 6 | ||||||
| Total current liabilities | 2,885 | 2,340 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| Commitments and contingencies | - | - | ||||||
| Long-term debt | 282 | 327 | ||||||
| Total non-current liabilities | 282 | 327 | ||||||
| Total liabilities | 3,167 | 2,667 | ||||||
| MEMBER’S EQUITY (DEFICIT) | ||||||||
| Member’s equity (deficit) | 863 | 1,083 | ||||||
| Total member’s equity (deficit) | 863 | 1,083 | ||||||
| TOTAL LIABILITIES AND MEMBER’S EQUITY (DEFICIT) | $ | 4,030 | $ | 3,750 | ||||
The accompanying notes are an integral part of these unaudited financial statements
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| REVENUES | $ | 1,811 | $ | 2,892 | ||||
| COST OF REVENUES | 1,859 | 2,862 | ||||||
| GROSS PROFIT (LOSS) | (48 | ) | 30 | |||||
| OPERATING EXPENSES: | ||||||||
| General and administrative | 75 | 37 | ||||||
| Depreciation and amortization | 70 | 61 | ||||||
| Total operating expenses | 145 | 98 | ||||||
| Loss from operations | (193 | ) | (68 | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Interest expense | (27 | ) | (17 | ) | ||||
| Total other income (expense) | (27 | ) | (17 | ) | ||||
| NET LOSS | $ | (220 | ) | $ | (85 | ) | ||
The accompanying notes are an integral part of these unaudited financial statements
STATEMENTs OF CASH FLOWS (UNAUDITED)FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (220 | ) | $ | (85 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 70 | 61 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (278 | ) | (192 | ) | ||||
| Accounts receivable – related parties | - | 22 | ||||||
| Inventory | (129 | ) | (491 | ) | ||||
| Prepaid expenses | 26 | (9 | ) | |||||
| Accounts payable | 145 | 463 | ||||||
| Accounts payable – related parties | - | (4 | ) | |||||
| Accrued expenses | 9 | 39 | ||||||
| Accrued interest | - | 1 | ||||||
| Net cash used in operating activities | (377 | ) | (195 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | - | (19 | ) | |||||
| Net cash used in investing activities | - | (19 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Increase in cash overdraft | 388 | 175 | ||||||
| Repayments of debt | (42 | ) | (41 | ) | ||||
| Net cash provided by financing activities | 346 | 134 | ||||||
| NET (DECREASE) IN CASH | (31 | ) | (80 | ) | ||||
| Cash - beginning of period | 31 | 80 | ||||||
| Cash - end of period | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | 27 | $ | 16 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
The accompanying notes are an integral part of these unaudited financial statements
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
MARCH 31, 2016
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Organization
Sable Polymer Solutions, LLC, an LLC formed in Arkansas on September 10, 2012 (“Sable” or the “Company”) has expertise in the recycling and reclamation of resin materials. It operates a plastics recycling plant in Flowery Branch, Georgia. Sable principally purchases plastic and resin materials and after conversions and reformulation sells those products. In addition to those product sales, the Company performs limited tolling services for other customers. The Company operated as a partnership until March 2013 when it became a single member LLC.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with U.S generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission. It is Management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The results of operations$321 for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year. The accounting policiesJune 30, 2019 and procedures employed in the preparation of these financial statements have been derived from the audited financial statements of the Company for the fiscal year ended December 31, 2015. The consolidated balance sheet as of December 31, 2015, contained herein, was derived from those financial statements.2018, respectively.
Use of Estimates
The preparation of 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 offollowing table presents assets and liabilities that are measured and disclosure of contingent assets and liabilitiesrecognized at the date of the 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 non-collectible accounts receivable, an amount per pound of material processed for labor and overhead, and adjustments for lower of cost or market, obsolete or slow-moving inventory, which are shown net. Actual results could differ from those estimates.fair value on a recurring basis:
Cash
Cash consists of cash and demand deposits.
| Level 1 | Level 2 | Level 3 | ||||||||||
| June 30, 2019 | ||||||||||||
| Warrant derivative liabilities | - | - | $ | 2,159 | ||||||||
| March 31, 2019 | ||||||||||||
| Warrant derivative liabilities | - | - | $ | 3,104 | ||||||||
Inventory
Inventory is stated at the lower of cost or market. Inventory cost is determined on a first in first out basis, and provisions are made to reduce slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values.
Property and Equipment and Long-Lived Assets
Property and equipment is stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to ten years.
FASB Codification Topic 360 “Property, Plant and Equipment” (“ASC 360”), requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The application of ASC 360 has not materially affected the Company’s reported earnings, financial condition or cash flows.NOTE 18: SEGMENT INFORMATION
The Company did not consider it necessary to record any impairment charges duringfollows the three months ended March 31, 2016, norprovisions of ASC 280-10Disclosures about Segments of an Enterprise and Related Information. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the years ended December 31, 2015Company in making operating decisions. As of June 30, 2019, and 2014.
Subsequent Events
Subsequent events were evaluated through the date the financial statements were issued.
SABLE POLYMER SOLUTIONS, llc
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
MARCH 31, 2016
Shipping and Handling Costs
The Company reports shipping and handling revenues and their associated costs in cost of revenue. Shipping revenues and costs for the three months ended MarchJune 30, 2019, the Company operated in two segments. The segments are Trend Holdings and Zest Labs. Amounts related to discontinued operations are excluded from the amounts in the tables below. The acquisition of Trend holdings on May 31, 2016 and 2015 were nominal and included2019, caused the reportable segments to change from the previous reporting as a single segment in cost of revenues.fiscal 2019. Home office costs are allocated to the two segments based on the relative support provided to those segments.
| June 30, 2019 | Trend Holdings | Zest Labs | Total | |||||||||
| Segmented operating revenues | $ | 23 | $ | 12 | $ | 35 | ||||||
| Cost of revenues | - | 45 | 45 | |||||||||
| Gross profit (loss) | 23 | (33 | ) | (10 | ) | |||||||
| Total operating expenses net of depreciation, amortization, and impairment | 139 | 2,308 | 2,447 | |||||||||
| Depreciation and amortization | - | 77 | 77 | |||||||||
| Other (income) expense | (148 | ) | (738 | ) | (886 | ) | ||||||
| Income (loss) from continuing operations | $ | 32 | $ | (1,680 | ) | $ | (1,648 | ) | ||||
| Segmented assets | ||||||||||||
| Property and equipment, net | $ | - | $ | 747 | $ | 747 | ||||||
| Intangible assets, net | $ | 3,223 | $ | - | $ | 3,223 | ||||||
| Capital expenditures | $ | - | $ | - | $ | - | ||||||
F-63
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2019
Revenue RecognitionNOTE 19: SUBSEQUENT EVENTS
Revenue primarily consistsSubsequent to June 30, 2019, the Company has drawn an additional $525 on the credit facility described in Note 9. A board member has advanced to the Company an additional $60 under the note described in Note 10.
On July 12, 2019, the Company entered into an Exchange Agreement with investors (the “Investors”) that are the holders of warrants issued in the Company’s purchase agreements entered into on (i) March 14, 2018 (the “March Purchase Agreement” and such warrants, the “March Warrants”) and (ii) August 9, 2018 (the “August Purchase Agreement” and such warrants, the “August Warrants”, and the March Warrants and the August Warrants, collectively, the “Existing Securities”). The Investors are entitled to, with respect to the March Warrants and the August Warrants, due to the Agreement and Plan of Merger with Trend Holdings the Company entered into on May 31, 2019, an exchange for the March Warrants and August Warrants. As a result of a cashless exercise, the Company issued 4,277 shares of the saleCompany’s common stock to the Investors. Upon the issuance of recycled plastics productsthe 4,277 shares, warrants for 5,677 shares issued in the March Purchase Agreement and is presented net of discounts and returns. Revenue is recognized when the following criteria have been met:August Purchase Agreement were extinguished.
EvidenceOn August 21, 2019 (the “Effective Date”), the Company and two accredited investors (each an “Investor” and, collectively, the “Investors”) entered into a securities purchase agreement (the “Securities Purchase Agreement”) pursuant to which the Company sold and issued to the Investors an aggregate of an arrangement exists. The Company considers2,000 shares of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”), at a customer purchase order, service agreement, contract, or equivalent document to be evidenceprice of an arrangement.$1,000 per share (the “Private Placement”).
Delivery has occurred. The Company’s standard transfer terms are free on board (FOB) shipping point. Thus, delivery is considered to have occurred when title and risk of loss have passedPursuant to the customer atSecurities Purchase Agreement, the timeCompany issued to each Investor a warrant (a “Warrant”) to purchase a number of shipment.
The fee is fixed or determinable.The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard, which is generally 30-60 days.
Collection is deemed reasonably assured. Collection is deemed reasonably assured if it is expected that the customer will be able to pay amounts under the arrangement as payments become due. If it is determined that collection is not reasonably assured, then revenue is deferred and recognized upon cash collection.
Accounts Receivable and Concentrationshares of Credit Risk
The Company considers accounts receivable, net of allowance for returns and doubtful accounts, to be fully collectible. The allowance is based on management’s estimate of the overall collectability of accounts receivable, considering historical losses 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. Past-due status is based on contractual terms. Management has determined that the allowance for doubtful accounts at both March 31, 2016 and December 31, 2015 was $23.
Income Taxes
The Company is a limited liability company treated as a disregarded entity for federal and state income tax purposes with all income tax liabilities and/or benefitscommon stock of the Company, being passed throughpar value $0.001 per share (“Common Stock”), equal to the member. As such, no recognitionnumber of federal or state income taxes forshares of Common Stock issuable upon conversion of the Company has been provided for in the accompanying financial statements. Any uncertain tax position takenSeries B Preferred Stock purchased by the member is notInvestor. Each Warrant has an uncertain positionexercise price equal to $0.51, subject to full ratchet price only anti-dilution provisions in accordance with the terms of the Company.
Fair Value of Financial Instruments
ASC 825, "Financial InstrumentsWarrants (the “Exercise Price”)," requires and is exercisable for five years after the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below forEffective Date. In addition, if the Company's financial instruments: The carrying amount of cash, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses, and accounts payable to related parties, approximate fair value becausemarket price of the short-term maturity of those instruments. The Company does not utilize derivative instruments.
Recoverability of Long-Lived Assets
The Company reviews recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarilyCommon Stock on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value11 month anniversary of the assets exceeds the fair valueclosing date of the assets. Fixed assets to be disposed of by sale will be carried at the loweroffering is less than $0.51, holder of the then current carrying value or fair value less estimated costs to sell.
SABLE POLYMER SOLUTIONS, llc
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
MARCH 31, 2016
Fair Value Measurements
ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, 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.
Related Party Transactions
Parties are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal stockholders of the Company, its management, members of the immediate families of principal stockholders of the Company and its management and other parties with which the Company may deal where one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactionswarrants shall be recorded at fair valueentitled to receive additional shares of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as compensation or distribution to related parties depending on the transaction.
Related party payables related to equipment purchases of $63, net were outstanding at March 31, 2016 and December 31, 2015.
Recently Issued Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842)”.ASU 2016-02 changes the accounting for leased assets, principally by requiring balance sheet recognition of assets under lease arrangements. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-02 on its financial statements.
In November 2014, the FASB issued ASU No. 2014-17, “Business Combinations – Pushdown Accounting.” The provisions of ASU 2014-17 require management to determining whether and at what threshold an acquiree (acquired entity) can reflect the acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. Since neither unit of this business combination is in the development stage, nor had recognizable revenues during this period the application of push down accounting would not be of significant value to the readers of these consolidated financial statements. The Company has not elected to apply pushdown accounting in its separate financial statements upon occurrence of this event.
During August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern.” The provisions of ASU 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
SABLE POLYMER SOLUTIONS, llc
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
MARCH 31, 2016
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and most industry-specific guidance. ASU 2014-09 iscommon stock based on the principlenumber of shares of common stock that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in ASU 2014-09 will be applied using one of two retrospective methods. The effective date will be the first quarterwould have been issuable upon conversion of the fiscal year ending December 31, 2018. The Company has not determinedSeries B Convertible Preferred Stock had the potential effects on its financial statements.
There were other updates recently issued, most of which represented technical correctionsinitial conversion price been equal to the accounting literaturemarket price at such time (but not less than $0.25) less the number of shares of common stock issued or application to specific industries and are not expected to have a material impactissuable upon exercise of the Series B Convertible Preferred Stock based on the Company’s financial position, results of operations or cash flows.
Going Concern
The Company commenced operations in 2012, and has experienced typical start-up costs and losses from operations resulting in an accumulated deficit of $2,936 since inception. The accumulated deficit as well as recurring losses of $220 for the three months ended March 31, 2016 and $1,205 and $775 for the years ended December 31, 2015 and 2014, respectively, and a working capital deficit of $176 as of March 31, 2016, have resulted in the uncertainty of the Company to continue as a going concern.
These financial statements of the Company have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable period of time.$0.51 conversion price.
The Company was acquired by Ecoark Holdings, Inc. on May 3, 2016. The Company’s abilityalso agreed to raise additional funds is unknown. Obtaining additional financing,amend the successful developmentcurrent exercise price of the Company’s contemplated planwarrants that the investors received in connection with the Securities Purchase Agreements dated March 14, 2017 (the “March Warrants”) and May 22, 2017 (the “May Warrants” and, together with the March Warrants, the “Existing Securities”). The Existing Securities have a current exercise price of operations, ultimately, to profitable operations are necessary$0.59, which was amended from $2.50 on July 12, 2019. The current exercise price for the CompanyExisting Securities shall be amended to continue operations. The abilityreduce the exercise price to successfully resolve these factors raises substantial doubt about$0.51, subject to adjustment pursuant to the Company’s ability to continue as a going concern. The financial statementsprovisions of the Company do not include any adjustments that may result from the outcomeExisting Securities.
Each share of the uncertainties.
NOTE 2:INVENTORY
Inventory, netSeries B Preferred Stock has a par value of reserves, consisted$0.001 per share and a stated value equal to $1,000 (the “Stated Value”) and is convertible at any time at the option of the following asholder into the number of March 31, 2016shares of Common Stock determined by dividing the stated value by the conversion price of $0.51, subject to certain limitations and December 31, 2015:
| March 31, 2016 | December 31, 2015 | |||||||
| Raw materials | $ | 544 | $ | 702 | ||||
| Finished goods | 823 | 536 | ||||||
| Inventory | $ | 1,367 | $ | 1,238 | ||||
SABLE POLYMER SOLUTIONS, llc
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
MARCH 31, 2016
NOTE 3:PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of March 31, 2016 and December 31, 2015:
| March 31, 2016 | December 31, 2015 | |||||||
| Furniture and fixtures | $ | 116 | $ | 116 | ||||
| Computers and software costs | 4 | 4 | ||||||
| Machinery and equipment | 1,834 | 1,834 | ||||||
| Leasehold improvements | 25 | 25 | ||||||
| Total property and equipment | 1,979 | 1,979 | ||||||
| Accumulated depreciation, amortization | (658 | ) | (588 | ) | ||||
| Property and equipment, net | $ | 1,321 | $ | 1,391 | ||||
Depreciation expense for the three months ended March 31, 2016 and 2015 was $70 and $61, respectively. There was no impairment on these assets for the periods presented.
NOTE 4: ACCOUNTS PAYABLE – RELATED PARTIESadjustments (the “Conversion Price”).
The Company at times conducts business with related parties controlledreceived gross proceeds from the Private Placement of $2,000, before deducting transaction costs, fees and expenses payable by the sole member. At March 31, 2016 and December 31, 2015 amounts owedCompany. The Company intends to related parties were $63.
NOTE 5: NOTES PAYABLEuse the net proceeds of the Private Placement to support the Company’s general working capital requirements.
The Company has a note payable pursuant to a line of credit maintained with Generations Bank. The note is securedAs required by the accounts receivable, inventorySecurities Purchase Agreement, each director and equipmentofficer of the Company with monthly interest only at 5.5%, and a balloon payment at maturity. The note at March 31, 2016 and December 31, 2015 originated July 15, 2015 with a maximum amount of $1,500 and is due in one year. The balance of the notes was $1,500 and $1,500 at both March 31, 2016 and December 31, 2015. Average amounts outstanding under the line of credit were $1,500 and $500 for the three months ended March 31, 2016 and 2015, respectively.
Interest expense on the notes for the three months ended March 31, 2016 and 2015 was $20 and $8, respectively.
NOTE 6: LONG-TERM DEBT
The following is a summary of long-term debt as of March 31, 2016 and December 31, 2015:
| March 31, 2016 | December 31, 2015 | |||||||||||
| Note payable – Generations Bank | (a) | $ | 234 | $ | 258 | |||||||
| Note payable – Generations Bank | (b) | 226 | 244 | |||||||||
| Total | 460 | 502 | ||||||||||
| Less: current portion | (178 | ) | (175 | ) | ||||||||
| Long-term debt | $ | 282 | $ | 327 | ||||||||
SABLE POLYMER SOLUTIONS, llc
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
MARCH 31, 2016
Interest expense on the long-term debt for the three months ended March 31, 2016 and 2015 was $7 and $9, respectively. Principal payments required in the two years following March 31, 2017 are $188 and $94.
NOTE 7: COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its operating facilities under a long-term, non-cancelable operating lease agreement. In 2015 the Company relocated to a larger plant facility. The lease term for the new facility began on September 1, 2015 and expires on January 31, 2021. Four months of free rent were provided under the new lease, and rent expense is recorded on a straight-line basis over the lease term. Rent expense was $70 and $37 for the three months ended March 31, 2016 and 2015, respectively. Future minimum lease payments required under the operating lease are as follows: 2016 - $225, 2017 - $300, 2018 -$300, 2019 - $300, 2020 - $300 and 2021 - $25.
nOTE 8: CONCENTRATIONS
During the three months ended March 31, 2016 and 2015, the Company had two and three major customers comprising 62% and 63% of sales, respectively. A major customer is defined as a customer that represents 10% or greater of total sales. Additionally, the Company had three customers as of March 31, 2016 and December 31, 2015 with accounts receivable balances of 57% and 68%, respectively, of the total accounts receivable.
In addition, during the three months ended March 31, 2016 and 2015, the Company had two major vendors comprising 27% and 21% of purchases, respectively. A major vendor is defined as a vendor that represents 10% or greater of total purchases. Additionally, the Company had one and two vendors as of March 31, 2016 and December 31, 2015 with accounts payable balances of 12% and 32%, respectively, of total accounts payable.
The Company does not believe that the risk associated with these customers and vendors will have an adverse effect on the business.
nOTE 9: SUBSEQUENT EVENTS
On May 3, 2016, the Companyhas previously entered into a Share Exchange Agreement (the “Agreement”) bylock-up agreement with the Company whereby each director and among Ecoark Holdings, Inc. (“Ecoark”), Pioneer Products (an indirect subsidiaryofficer has agreed that during the period commencing from the Effective Date until 120 days after the Effective Date, such director or officer will not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of Ecoark), and the holderor enter into any transaction to dispose of, allor establish or increase a put position or liquidate or decrease a call position, with respect to any share of Sable’s membership interests.
Ecoark issued 2,000,000Common Stock or securities convertible, exchangeable or exercisable into, shares of its common stock in exchange for all of Sable’s membership interests. Sable became a wholly-owned subsidiary of Pioneer Products.
No cash was paid relating toCommon Stock. On August 21, 2019, the acquisition of Sable. In April 2016, Ecoark advanced $600 to Sable for working capital purposes.
ECOARK HOLDINGS, INC.
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and number of shares in thousands)
The following unaudited pro forma consolidated financial statements (the “pro formas”) give effect to the acquisition on March 24, 2016 of the outstanding common shares of EcoArk Inc. and Subsidiaries, (“EcoArk”) by Magnolia Solar Corporation and a subsidiary (collectively “Magnolia”), with the surviving parent company now known as Ecoark Holdings, Inc. (“EARK”) The pro formas also give effect to the acquisition of Sable Polymer Solutions (“Sable”) by Ecoark Holdings, Inc. on May 3, 2016. The pro formas are based on estimates and assumptions set forth herein and in the notes to such pro forma statements.
The following unaudited pro forma consolidated statements of operations for the three months ended March 31, 2016 and for the year ended December 31, 2015 of Ecoark Holdings, Inc. give effect to the above as if the transactions had occurred at the beginning of the period. The unaudited pro forma consolidated balance sheet at March 31, 2016 assumes the effects of the above as if this transaction had occurred as of March 31, 2016.
ECOARK HOLDINGS, INC.
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements are based upon, and should be read in conjunction with Magnolia’s audited financial statements as of and for the year ended December 31, 2015 and 2014 and the audited consolidated financial statements of EcoArk as of and for the years ended December 31, 2015 and 2014, the audited financial statements of Sable as of and for the years ended December 31, 2015 and 2014, the unaudited interim financial statements of Ecoark Holdings, Inc. for the three months ended March 31, 2016, and the unaudited financial statements of Sable for the three months ended March 31, 2016.
The unaudited pro forma consolidated financial statements and notes thereto contain forward-looking statements that involve risks and uncertainties. Therefore, our actual results may vary materially from those discussed herein. The unaudited pro forma consolidated financial statements do not purport to be indicative of the results that would have been reported had such events actually occurred on the dates specified, nor is it indicative of our future results.
Ecoark Holdings, Inc. and Subsidiaries
Unaudited Proforma Consolidated Balance SheetMarch 31, 2016 (Dollars in Thousands)
| EARK | SABLE | ADJUSTMENTS | CONSOLIDATED | |||||||||||||||||||
| ASSETS | ||||||||||||||||||||||
| CURRENT ASSETS | ||||||||||||||||||||||
| Cash | $ | 8,848 | $ | - | A | $ | 7,792 | $ | - | $ | 16,640 | |||||||||||
| Accounts receivable, net of allowance | 1,421 | 1,303 | - | - | 2,724 | |||||||||||||||||
| Inventory, net of reserves | 809 | 1,367 | - | B | 445 | 1,731 | ||||||||||||||||
| Prepaid expenses | 156 | 14 | - | - | 170 | |||||||||||||||||
| Other current assets | - | 25 | - | - | 25 | |||||||||||||||||
| Total current assets | 11,234 | 2,709 | 7,792 | 445 | 21,290 | |||||||||||||||||
| Property and equipment, net | 360 | 1,321 | B | 1,501 | - | 3,182 | ||||||||||||||||
| Intangible assets, net | 907 | - | B | 1,028 | - | 1,935 | ||||||||||||||||
| Goodwill | - | - | B | 1,238 | - | 1,238 | ||||||||||||||||
| Other assets | 26 | - | - | - | 26 | |||||||||||||||||
| Total non-current assets | 1,293 | 1,321 | 3,767 | - | 6,381 | |||||||||||||||||
| TOTAL ASSETS | $ | 12,527 | $ | 4,030 | $ | 11,559 | $ | 445 | $ | 27,671 | ||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||||||||||
| Current portion of long-term debt | $ | 3,000 | $ | 178 | - | - | $ | 3,178 | ||||||||||||||
| Debt - related parties | 742 | - | - | - | 742 | |||||||||||||||||
| Note payable | - | 1,500 | - | - | 1,500 | |||||||||||||||||
| Cash overdraft | - | 388 | - | - | 388 | |||||||||||||||||
| Accounts payable | 1,244 | 615 | - | - | 1,859 | |||||||||||||||||
| Accounts payable - related parties | - | 63 | - | - | 63 | |||||||||||||||||
| Accrued expenses | 687 | 135 | - | - | 822 | |||||||||||||||||
| Accrued interest | 58 | 6 | - | - | 64 | |||||||||||||||||
| Deferred revenue | 61 | - | - | - | 61 | |||||||||||||||||
| Total current liabilities | 5,792 | 2,885 | - | - | 8,677 | |||||||||||||||||
| NON-CURRENT LIABILITIES | ||||||||||||||||||||||
| Long-term debt | - | 282 | - | - | 282 | |||||||||||||||||
| Total non-current liabilities | - | 282 | - | - | 282 | |||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | - | - | - | - | - | |||||||||||||||||
| Total liabilities | 5,792 | 3,167 | - | - | 8,959 | |||||||||||||||||
| STOCKHOLDERS' EQUITY (Numbers of shares rounded to thousands) | ||||||||||||||||||||||
| Common Stock | 31 | - | - | B | 2 | 33 | ||||||||||||||||
| A | 1 | 1 | ||||||||||||||||||||
| Additional paid-in-capital | 49,897 | - | - | B | 4,183 | 54,080 | ||||||||||||||||
| A | 3,501 | 3,501 | ||||||||||||||||||||
| Member's equity | - | 863 | B | 863 | - | - | ||||||||||||||||
| Subscription receivable | (4,290 | ) | - | - | A | 4,290 | - | |||||||||||||||
| Accumulated deficit | (38,810 | ) | - | - | - | (38,810) | ||||||||||||||||
| Total stockholders' equity before non-controlling interest | 6,828 | 863 | 863 | 11,977 | 18,805 | |||||||||||||||||
| Non-controlling interest | (93 | ) | - | - | - | (93) | ||||||||||||||||
| Total stockholders' equity | 6,735 | 863 | 863 | 11,977 | 18,712 | |||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 12,527 | $ | 4,030 | $ | 863 | $ | 11,977 | $ | 27,671 | ||||||||||||
Ecoark Holdings, Inc. and Subsidiaries
Unaudited Proforma Consolidated Statement of OperationsThree Months Ended March 31, 2016 (Dollars in Thousands, Except per Share)
| EARK | SABLE | ADJUSTMENTS | CONSOLIDATED | |||||||||||||||
| REVENUES | ||||||||||||||||||
| Revenue from product sales | $ | 1,207 | $ | 1,811 | C | $ | (575 | ) | $ | 2,443 | ||||||||
| Revenue from services | 757 | - | - | 757 | ||||||||||||||
| 1,964 | 1,811 | (575 | ) | 3,200 | ||||||||||||||
| COST OF REVENUES | ||||||||||||||||||
| Cost of product sales | 1,182 | 1,859 | C | (575 | ) | 2,466 | ||||||||||||
| Cost of services | 277 | - | - | 277 | ||||||||||||||
| 1,459 | 1,859 | (575 | ) | 2,743 | ||||||||||||||
| GROSS PROFIT (LOSS) | 505 | (48 | ) | - | 457 | |||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||
| Salaries and salary related costs, including stock based compensation | 1,020 | - | - | 1,020 | ||||||||||||||
| Professional fees and consulting | 267 | - | - | 267 | ||||||||||||||
| General and administrative | 517 | 75 | - | 592 | ||||||||||||||
| Depreciation and amortization | 75 | 70 | D | 86 | 231 | |||||||||||||
| Research and development | 752 | - | - | 752 | ||||||||||||||
| Total operating expenses | 2,631 | 145 | 86 | 2,862 | ||||||||||||||
| Loss from operations | (2,126 | ) | (193 | ) | (86 | ) | (2,405 | ) | ||||||||||
| OTHER EXPENSE: | ||||||||||||||||||
| Interest expense, net of interest income | (95 | ) | (27 | ) | - | (122 | ) | |||||||||||
| Loss from before provision for income taxes | (2,221 | ) | (220 | ) | (86 | ) | (2,527 | ) | ||||||||||
| `` | ||||||||||||||||||
| PROVISION FOR INCOME TAXES | - | - | - | - | ||||||||||||||
| NET LOSS | (2,221 | ) | (220 | ) | (86 | ) | (2,527 | ) | ||||||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | 2 | - | - | 2 | ||||||||||||||
| NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST | $ | (2,223 | ) | $ | (220 | ) | $ | (86 | ) | $ | (2,529 | ) | ||||||
| NET LOSS PER SHARE | ||||||||||||||||||
| Basic | $ | (0.08 | ) | $ | (0.08 | ) | ||||||||||||
| Diluted | $ | (0.08 | ) | $ | (0.08 | ) | ||||||||||||
| SHARES USED IN CALCULATION OF NET LOSS PER SHARE | (Number of shares in thousands) | |||||||||||||||||
| Basic | 27,847 | E | 4,574 | 32,421 | ||||||||||||||
| Diluted | 27,847 | E | 4,574 | 32,421 | ||||||||||||||
Ecoark Holdings, Inc. and Subsidiaries
Unaudited Proforma Consolidated Statement of OperationsYear Ended December 31, 2015 (Dollars in Thousands, Except per Share)
| Magnolia | EcoArk | Sable | Adjustments | Consolidated | ||||||||||||||||||
| Net Sales | $ | 160 | $ | 7,868 | $ | 14,047 | C | $ | (2,181 | ) | $ | 19,894 | ||||||||||
| Cost of Sales | 102 | 6,138 | 14,635 | C | (2,181 | ) | 18,694 | |||||||||||||||
| Gross Profit (Loss) | 58 | 1,730 | (588 | ) | - | 1,200 | ||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||
| Salaries and related expenses | 161 | 3,791 | - | - | 3,952 | |||||||||||||||||
| Professional fees | 150 | 3,651 | - | - | 3,801 | |||||||||||||||||
| Other general and administrative expenses | 37 | 1,636 | 305 | - | 1,978 | |||||||||||||||||
Depreciation and amortization | 36 | 1,226 | 266 | D | 343 | 1,871 | ||||||||||||||||
| Research and development | - | 1,114 | - | - | 1,114 | |||||||||||||||||
| Total operating expenses | 384 | 11,418 | 571 | 343 | 12,716 | |||||||||||||||||
| Total operating income (loss) | (326 | ) | (9,688 | ) | (1,159 | ) | (343 | ) | (11,516 | ) | ||||||||||||
| Other income (loss) | (240 | ) | (785 | ) | (46 | ) | - | (1,071 | ) | |||||||||||||
| Total income (loss) before income taxes | (566 | ) | (10,473 | ) | (1,205 | ) | (343 | ) | (12,587 | ) | ||||||||||||
| Provision for income taxes | - | - | - | - | - | |||||||||||||||||
| Net income (loss) | (566 | ) | (10,473 | ) | (1,205 | ) | (343 | ) | (12,587 | ) | ||||||||||||
| Non-controlling interest | - | 29 | - | - | 29 | |||||||||||||||||
| Net income (loss) - controlling interest | $ | (566 | ) | $ | (10,502 | ) | $ | (1,205 | ) | $ | (343 | ) | $ | (12,616 | ) | |||||||
| Per share, basic and diluted | $ | (3.29 | ) | $ | (0.36 | ) | - | - | $ | (0.37 | ) | |||||||||||
| Weighted average number of common shares outstanding (in thousands) | ||||||||||||||||||||||
| Basic | 172 | 29,172 | - | E | 4,574 | 33,918 | ||||||||||||||||
| Diluted | 172 | 29,223 | - | E | 4,574 | 33,969 | ||||||||||||||||
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2016, FOR THE THREE MONTHS THEN ENDED AND FOR THE YEAR ENDED DECEMBER 31, 2015
(Dollars in thousands except per share)
NOTE A – ACCOUNTING TREATMENT APPLIED AS A RESULT OF THIS TRANSACTION
The acquisition of EcoArk is being accounted for as a reverse merger, whereby EcoArk is considered to be the accounting acquirer. Ecoark Holdings, Inc. acquired the assets and liabilities of Sable Polymer Solutions in exchange for 2,000,000Company issued 300 shares of common stock.stock to advisors that assisted with the securities purchase agreement and exchange agreement.
NOTE B – ADJUSTMENTSF-64
8,673,250
[11,921,569] Shares of
Common Stock
ECOARK HOLDINGS, INC.
PRELIMINARY PROSPECTUS
October 1, 2019
Prospectus dated , 2016
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forthindicates the costs and expenses to be incurred in connection with the offering described in this registration statement, other than underwriting discounts and commissions, payable in connection with the registrationall of the common stock hereunder. None of the following expenses are payablewhich will be paid by the selling security holders.us. All amounts are estimates,estimated except the SECSecurities and Exchange Commission registration fee, the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee and the Nasdaq Capital Market listing fee.
| Amount | ||||
| SEC registration fee | $ | 15,722 | ||
| Accountants’ fees and expenses | 10,000 | |||
| Legal fees and expenses | 45,000 | |||
| Miscellaneous | 5,000 | |||
| Total | $ | 75,722 | ||
| Amount to be Paid | ||||
| SEC registration fee | $ | |||
| Accounting fees and expenses | $ | |||
| Legal fees and expenses | $ | |||
| Transfer agent and registrar fees | $ | |||
| Miscellaneous fees and expenses | $ | |||
| Total | $ | |||
Item 14. Indemnification of Directors and Officers.
Section 78.138
Nevada Revised Statutes 78.7502 and 78.751 provide broad authority for the indemnification of the NRS provides that a director or officer will not be individually liable unless it is proven that (i) the director’s or officer’s acts or omissions constituted a breach of his or her fiduciary duties,directors, officers and (ii) such breach involved intentional misconduct, fraud or a knowing violation of the law.certain other persons.
Section 78.7502 of NRSthe Nevada Revised Statutes permits a companycorporation to indemnify its directors and officersany person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he:
| (a) | is not liable pursuant to Nevada Revised Statute 78.138, or |
| (b) | acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. |
In addition, Section 78.7502 permits a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he:
| (a) | is not liability pursuant to Nevada Revised Statute 78.138; or |
| (b) | acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. |
To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding if the officerreferred to above, or director (i) is not liable pursuant to NRS 78.138in defense of any claim, issue or (ii) acted in good faith and in a manner the officer or director reasonably believed to be in or not opposed to the best interests ofmatter, the corporation is required to indemnify him against expenses, including attorneys’ fees, actually and if a criminal action or proceeding, had no reasonable cause to believereasonably incurred by him in connection with the conduct of the officer or director was unlawful.defense.
Section 78.751 of NRS permits athe Nevada company to indemnify its officers and directors againstRevised Statutes provides that such indemnification may also include payment by the Company of expenses incurred by them in defending a civil or criminal action suit or proceeding as they are incurred and in advance of the final disposition thereof,of such action or proceeding upon receipt of an undertaking by or on behalf of the officer or directorperson indemnified to repay such payment if he shall be ultimately found not to be entitled to indemnification under Section 78.751. Indemnification may be provided even though the amount if it is ultimately determined by a court of competent jurisdiction that such officer or director is not entitledperson to be indemnified byis no longer a director, officer, employee or agent of the company. Section 78.751 of NRS further permits the company to grant its directors and officers additional rights of indemnification under its articles of incorporationCompany or bylaws or otherwise.such other entities.
Section 78.752 of NRS provides thatthe Nevada Revised Statutes allows a Nevada company maycorporation to purchase and maintain insurance or make other financial arrangements on behalf of any person who is or was a director, officer, employee or agent of the company,corporation or is or was serving at the request of the companycorporation as a director, officer, employee or agent of another company,corporation, partnership, joint venture, trust or other enterprise for any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer, employee or agent, or arising out of his status as such, whether or not the companycorporation has the authority to indemnify him against such liability and expenses.
Our Articles
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Other financial arrangements made by the corporation pursuant to Section 78.752 may include the following:
| (a) | the creation of a trust fund; |
| (b) | the establishment of a program of self-insurance; |
| (c) | the securing of its obligations of indemnification by granting a security interest or other lien on any assets of the corporation; and |
| (d) | the establishment of a letter of credit, guaranty or surety. |
No financial arrangement made pursuant to Section 78.752 may provide protection for a person adjudged by a court of Incorporation providecompetent jurisdiction, after exhaustion of all appeals, to be liable for intentional misconduct, fraud or a knowing violation of law, except with respect to the advancement of expenses of indemnification ordered by a court.
Any discretionary indemnification pursuant to Section 78.7502 of the Nevada Revised Statutes, unless ordered by a court or advanced pursuant to an undertaking to repay the amount if it is determined by a court that nothe indemnified party is not entitled to be indemnified by the corporation, may be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made:
| (a) | by the stockholders; |
| (b) | by the board of directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding; |
| (c) | if a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding so orders, by independent legal counsel in a written opinion, or |
| (d) | if a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. |
Subsection 7 of Section 78.138 of the Nevada Revised Statutes provides that, subject to certain very limited statutory exceptions, a director or officer of our company will be personallyis not individually liable to our companythe corporation or any of its stockholders or creditors for any damages for breachas a result of fiduciary dutyany act or failure to act in his or her capacity as a director or officer; provided, however,officer, unless it is proven that the foregoing provision shall not eliminateact or limit the liabilityfailure to act constituted a breach of his or her fiduciary duties as a director or officer (i) for acts or omissions which involveand such breach of those duties involved intentional misconduct, fraud or a knowing violation of law. The statutory standard of liability established by Section 78.138 controls even if there is a provision in the corporation’s articles of incorporation unless a provision in the corporation’s articles of incorporation provides for greater individual liability.
Our bylaws provide that each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any threatened, pending, or completed action, suit or proceeding, whether formal or informal, civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she is or was a director of or who is or was serving at our request as a director, officer, employee or agent of this or another corporation or of a partnership, joint venture, trust, other enterprise, or employee benefit plan (a “covered person”), whether the basis of such proceeding is alleged action in an official capacity as a covered person shall be indemnified and held harmless by us to the fullest extent permitted by applicable law, as then in effect, against all expense, liability and loss (including attorneys’ fees, costs, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who ceased to be a covered person and shall inure to the benefit of his or her heirs, executors and administrators.
However, no indemnification shall be provided hereunder to any covered person to the extent that such indemnification would be prohibited by Nevada state law or (ii)other applicable law as then in effect, nor, with respect to proceedings seeking to enforce rights to indemnification, shall we indemnify any covered person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person except where such proceeding (or part thereof) was authorized by our board of directors, nor shall we indemnify any covered person who shall be adjudged in any action, suit or proceeding for which indemnification is sought, to be liable for any negligence or intentional misconduct in the unlawful paymentperformance of dividends. In addition, our bylaws permita duty.
Our directors may cause us to purchase and maintain insurance for the indemnificationbenefit of a person who is or was serving as a director, officer, employee or agent of us or of a corporation of which we are or were a stockholder and insurance provisions in Chapter 78 of the NRS.his heirs or personal representatives against a liability incurred by him as a director, officer, employee or agent.
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Insofar as indemnification by us for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers or persons controlling our companyus pursuant to the foregoing provisions, of our articles of incorporation and bylaws, or otherwise, we have been advised that in the opinion of the SEC,Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by suchthe registrant of expenses incurred or paid by a director, officer or controlling person of usthe registrant in the successful defense of any action, suit or proceedingproceeding) is asserted by such director, officer or controlling person in connection with the securities being offered, weregistered, the registrant will, unless in the opinion of ourits counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by usit is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of ours in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding, which may result in a claim for such indemnification.
Further, in the normal course of business, we may have in our contracts indemnification clauses, written as either mutual where each party will indemnify, defend, and hold each other harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties; or single where we have agreed to hold certain parties harmless against losses etc.
Our Bylaws
Our bylaws provide that we will indemnify our directors and officers to the fullest extent not prohibited by Nevada law.
The general effect of the foregoing is to indemnify a control person, officer or director from liability, thereby making us responsible for any expenses or damages incurred by such control person, officer or director in any action brought against them based on their conduct in such capacity, provided they did not engage in fraud or criminal activity.
Item 15. Recent Sales of Unregistered Securities.
From March 31, 2016
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
The exhibits to April 28, 2016, we sold 4,336,625 sharesthe registration statement are listed in the Exhibit Index attached hereto and are incorporated by reference herein.
(b) Financial Statement Schedules.
All other schedules are omitted because they are not required, are not applicable, or the information is included in the financial statements or the related notes to 214 accredited investors through the Private Offering, which raised a total of $17,347. A portion of the proceeds has been used to retire debt with the remainder to be usedfinancial statements thereto.
Item 17. Undertakings.
Insofar as indemnification for working capital purposes. There was no underwriter, no underwriting discounts or commissions, no general solicitation, no advertisement, and resale restrictions are being imposed by placing a Rule 144 legend on the certificate(s). The Company relied on Rule 506 of Regulation Dliabilities arising under the Securities Act of 1933, as amended, (the “Securities Act”), foror the offerSecurities Act, may be permitted to directors, officers and sale as (i)controlling persons of the investors were accredited investors; and (ii)registrant pursuant to the Company did not use general solicitationforegoing provisions, or advertising to marketotherwise, the securities issued.
On April 28, 2016,registrant has been advised that in the Company issued 625,000 shares to legal and other consultants who advised the Company on the merger. The transactions did not involve any public offering within the meaning of Section 4(a)(2)opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act since (a) eachand is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the transactions involvedregistrant in the offeringsuccessful defense of any action, suit or proceeding) is asserted by such securities to a substantially limited number of persons; (b) eachdirector, officer or controlling person took the securities as an investment for his/her/its own account and not with a view to distribution; (c) each person had access to information equivalent to that which would be included in a registration statement on the applicable form under the Securities Act; and (d) each person had knowledge and experience in business and financial matters to understand the merits and risk of the investment.
On May 3, 2016, Ecoark Holdings entered into a Share Exchange Agreement by and among Ecoark Holdings, Pioneer Products, LLC, Sable Polymer Solutions, LLC, an Arkansas limited liability company (“Sable”), and the holder of all of Sable’s membership interests. Ecoark Holdings issued 2,000,000 shares of its common stock in exchange for all of Sable’s membership interests. Sable is a wholly-owned subsidiary of Pioneer. In connection with the shares of common stock issued undersecurities being registered, the Agreement, the Company relied on Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
See the Index to Exhibits attached to this registration statement, which is incorporated by reference herein.
(b) Financial Statement Schedules
No financial statement schedules are provided, because the information called for is not required or is shown eitherregistrant will, unless in the financial statements oropinion of its counsel the notes thereto. matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; andstatement.
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.statement;
(2) That, for the purpose of determining any liability |
Insofar as indemnification for liabilities arising under the Securities Act mayof 1933, each such post-effective amendment shall be permitteddeemed to our directors, officers and controlling persons pursuantbe a new registration statement relating to the provisions above, or otherwise, we have been advisedsecurities offered therein, and the offering of such securities at that intime shall be deemed to be the opinioninitial bona fide offering thereof.
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(3) To remove from registration by means of the SEC such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by uspost-effective amendment any of expenses incurred or paid by one of our directors, officers, or controlling persons in the successful defense of any action, suit or proceeding, is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered we will, unless inwhich remain unsold at the opiniontermination of our counsel the matter has been settled by controlling precedent, submit to a courtoffering.
(4) That, for the purpose of appropriate jurisdiction the question of whether such indemnification is against public policy as expressed indetermining liability under the Securities Act and we will be governedof 1933 to any purchaser:
(i) Each prospectus filed by the final adjudicationregistrant pursuant to Rule 424(b)(3) shall be deemed to be part of such issue.
SIGNATURESthe date the filed prospectus was deemed part of and included in the registration statement; and
Pursuant(ii) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the requirementspurpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as amended,of the registrant has duly causedearlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
(5) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement on Form S-1 to be signed on its behalfin reliance upon Rule 430A and contained in a form of prospectus filed by the undersigned, thereunto duly authorized on this 6th day of July, 2016.
Pursuantregistrant pursuant to the requirements ofRule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of 1933, as amended, this registration statement has been signed byas of the following persons on behalf of theregistrant and in the capacities and on the dates indicated:
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time it was declared effective.
(6) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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INDEX TO EXHIBITSItem 15. Exhibits, Financial Statement Schedules.
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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.
| /s/ RANDY MAY | ||
| Randy May | |
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: October 1, 2019 | By: | /s/ WILLIAM B. HOAGLAND |
| William B. Hoagland | ||
| Principal Financial Officer | ||
| Date: October 1, 2019 | By: | /s/ STEVEN K. NELSON |
| Steven K. Nelson | ||
| Director | ||
| Date: October 1, 2019 | By: | /s/ PETER MEHRING |
| Peter Mehring | ||
| Director | ||
| Date: October 1, 2019 | By: | /s/ GARY METZGER |
| Gary Metzger | ||
| Director | ||
| Date: October 1, 2019 | By: | /s/ MICHAEL GREEN |
| Michael Green | ||
| Director | ||
| Date: October 1, 2019 | By: | /s/ JOHN CAHILL |
| John Cahill | ||
| Director | ||
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