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ZEST Ecoark

Filed: 13 Aug 21, 4:02pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission File Number 000-53361

 

 

ECOARK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 30-0680177
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
   
303 Pearl Parkway, Suite 200, San Antonio, TX 78215
(Address of principal executive offices) (Zip Code)

 

(800) 762-7293

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol Name of each exchange on which registered

Common Stock

 

ZEST

 

The Nasdaq Stock Market LLC

(The Nasdaq Capital Market)

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
 Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐   No ☒

 

As of August 13, 2021, there were 26,349,099 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

 

 

 

Ecoark Holdings, Inc.

 

INDEX

 

  Page No.
Part I. Financial Information1
   
Item 1.Condensed Consolidated Financial Statements1
 Condensed Consolidated Balance Sheets2
 Condensed Consolidated Statements of Operations3
 Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)4
 Condensed Consolidated Statements of Cash Flows5
 Notes to Condensed Consolidated Financial Statements6
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations32
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk43
   
Item 4.Controls and Procedures44
   
Part II. Other Information45
   
Item 1.Legal Proceedings45
   
Item 1A.Risk Factors45
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds45
   
Item 3.Default Upon Senior Securities45
   
Item 4.Mine Safety Disclosures45
   
Item 5.Other Information45
   
Item 6.Exhibits46
   
Signatures47

 

i

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

Table of Contents

 

Unaudited Condensed Consolidated Balance Sheets2
Unaudited Condensed Consolidated Statements of Operations3
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)4
Unaudited Condensed Consolidated Statements of Cash Flows5
Notes to Unaudited Condensed Consolidated Financial Statements6 - 31

 

1

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2021 (UNAUDITED) AND MARCH 31, 2021

(in thousands, except per share data)

 

  JUNE 30,  MARCH 31, 
  2021  2021 
  (unaudited)    
ASSETS      
CURRENT ASSETS:      
Cash ($85 and $85 pledged as collateral for credit as of June 30, 2021 and March 31, 2021, respectively and $250 restricted as of June 30, 2021 and March 31, 2021, respectively) $842  $1,316 
Accounts receivable, net of allowance of $209 and $109 as of June 30, 2021 and March 31, 2021, respectively  1,047   1,136 
Inventories - Crude Oil  115   122 
Prepaid expenses and other current assets  2,603   1,995 
         
Total current assets  4,607   4,569 
         
NON-CURRENT ASSETS:        
Property and equipment, net  3,714   3,695 
Intangible assets, net  1,978   2,065 
Oil and gas properties, full cost-method  11,908   12,352 
Capitalized drilling costs, net of depletion  2,293   2,567 
Goodwill  10,225   10,225 
Right of use assets - financing leases  409   445 
Right of use assets - operating leases  456   479 
Non-current assets of discontinued operations  -   194 
         
Total non-current assets  30,983   32,022 
         
TOTAL ASSETS $35,590  $36,591 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)        
         
LIABILITIES        
CURRENT LIABILITIES        
Accounts payable $3,192  $3,614 
Accrued liabilities  4,005   3,591 
Warrant derivative liabilities  2,813   7,213 
Current portion of long-term debt  953   1,056 
Note payable - related parties  578   578 
Current portion of lease liability - financing leases  142   141 
Current portion of lease liability - operating leases  218   212 
Current liabilities of discontinued operations  -   9 
         
Total current liabilities  11,901   16,414 
         
NON-CURRENT LIABILITIES        
Lease liability - financing leases, net of current portion  259   295 
Lease liability - operating leases, net of current portion  276   309 
Long-term debt, net of current portion  901   1,012 
Asset retirement obligations  1,563   1,532 
         
Total non-current liabilities  2,999   3,148 
         
Total Liabilities  14,900   19,562 
         
COMMITMENTS AND CONTINGENCIES        
         
STOCKHOLDERS’ EQUITY (DEFICIT) (Numbers of shares rounded to thousands)        
Preferred stock, $0.001 par value; 5,000 shares authorized; 0 shares issued and outstanding as of June 30, 2021 and March 31, 2021, respectively  -   - 
Common stock, $0.001 par value, 30,000 shares authorized, 22,840 and 22,723 shares issued and 22,840 and 22,705 shares outstanding as of June 30, 2021 and March 31, 2021, respectively  23   23 
Additional paid in capital  168,690   167,588 
Accumulated deficit  (146,352)  (148,911)
Treasury stock, at cost  (1,671)  (1,671)
         
Total stockholders’ equity  20,690   17,029 
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $35,590  $36,591 

 

See notes to consolidated financial statements.

 

2

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED JUNE 30, 2021 AND 2020

(in thousands, except per share data)

 

  THREE MONTHS ENDED
JUNE 30,
 
  2021  2020 
  (unaudited)  (unaudited) 
CONTINUING OPERATIONS:      
REVENUES $6,879  $2,313 
COST OF REVENUES  3,942   1,093 
GROSS PROFIT  2,937   1,220 
         
OPERATING EXPENSES        
Salaries and salaries related costs  1,569   2,012 
Professional and consulting fees  137   262 
Oilfield supplies and repairs  344   5 
Selling, general and administrative costs  2,272   605 
Depreciation, amortization, depletion, and accretion  1,016   301 
Research and development  -   230 
         
Total operating expenses  5,338   3,415 
         
LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES)  (2,401)  (2,195)
         
OTHER INCOME (EXPENSE)        
Change in fair value of derivative liabilities  4,945   (17,393)
Gain (loss) on exchange of warrants for common stock  -   1,630 
Loss on conversion of long-term debt and accrued expenses  -   (2,194)
Gain (loss) on disposal of fixed assets  -   (105)
Loss on abandonment of oil and gas property  -   (83)
Gain on disposal of ARO related to sale of oil and gas property  7   - 
Gain on sale of oil and gas property  592   - 
Interest expense, net of interest income  (584)  (841)
         
Total other income (expense)  4,960   (18,986)
         
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE BENEFIT (PROVISION) FOR INCOME TAXES  2,559   (21,181)
         
DISCONTINUED OPERATIONS:        
Loss from discontinued operations  -   - 
Gain on disposal of discontinued operations  -   - 
         
Total discontinued operations  -   - 
         
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE BENEFIT (PROVISION) FOR INCOME TAXES  2,559   (21,181)
         
BENEFIT (PROVISION) FOR INCOME TAXES  -   - 
         
NET INCOME (LOSS) $2,559  $(21,181)
         
NET INCOME (LOSS) PER SHARE - BASIC $0.112  $(1.154)
         
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC  22,804   18,357 
         
NET INCOME (LOSS) PER SHARE - DILUTED $0.097  $(1.154)
         
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED  26,372   18,357 

 

See notes to consolidated financial statements.

 

3

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2021 AND 2020
(Dollar amounts and number of shares in thousands)

 

           Additional          
  Preferred  Common Stock  Paid-In  Accumulated  Treasury    
  Shares  Amount  Shares  Amount  Capital  Deficit  Stock  Total 
Balance - March 31, 2020    1  $     -   17,175  $17  $135,424  $(128,023) $(1,671) $5,747 
                                 
Shares issued in the exercise of warrants, net of expenses  -   -   1,531   2   6,674   -   -   6,676 
Shares issued in the exercise of stock options  -   -   89   -   349   -   -   349 
Shares issued in conversion of debt and accrued interest  -   -   524   1   3,941   -   -   3,942 
Shares issued in conversion of accounts payable and accrued expenses  -   -   93   -   677   -   -   677 
Conversion of preferred shares (Series C) to common shares  (1)  -   308   -   -   -   -   - 
Share-based compensation  -   -   -   -   1,114   -   -   1,114 
                                 
Net loss for the period  -   -   -   -   -   (21,181)  -   (21,181)
                                 
Balance - June 30, 2020  -  $-   19,720  $20  $148,179  $(149,204) $(1,671) $(2,676)
                                 
Balance - March 31, 2021  -  $-   22,705  $23  $167,588  $(148,911) $(1,671) $17,029 
                                 
Shares issued in the exercise of stock options, including cashless exercises  -   -   20   -   28   -   -   28 
Shares issued for services rendered  -   -   115   -   675   -   -   675 
Share-based compensation  -   -   -   -   399   -   -   399 
                                 
Net income for the period  -   -   -   -   -   2,559   -   2,559 
                                 
Balance - June 30, 2021  -  $-   22,840  $23  $168,690  $(146,352) $(1,671) $20,690 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2021 AND 2020
(in thousands, except per share data)

 

 

  2021  2020 
  (unaudited)  (unaudited) 
CASH FLOW FROM OPERATING ACTIVIITIES      
Net income (loss) $2,559  $(21,181)
Adjustments to reconcile net loss to net cash used in operating activities        
Depreciation, amortization, depletion, and accretion  1,016   301 
Share-based compensation  399   1,114 
Bad debt, net of recovery  -   41 
Change in fair value of derivative liabilities  (4,945)  17,393 
(Gain) on disposal of ARO related to sale of oil and gas property  (7)  - 
(Gain) loss on exchange of warrants  -   (1,630)
Common shares issued for services  675   - 
(Gain) loss on sale of fixed assets  -   105 
Loss on abandonment of oil and gas property  -   83 
Warrants granted for interest expense  545   524 
(Gain) loss on conversion of debt and liabilities to common stock  -   2,194 
Amortization of debt discount  -   149 
Changes in assets and liabilities        
Accounts receivable  89   (118)
Inventory  7   (248)
Prepaid expenses and other current assets  (608)  (1,262)
Amortization of right of use asset - financing leases  36   39 
Amortization of right of use asset - operating leases  23   20 
Interest on lease liability - financing leases  (35)  (34)
Interest on lease liability - operating leases  (27)  (21)
Accounts payable  (431)  (52)
Accrued liabilities  414   (252)
Total adjustments  (2,849)  18,346 
Net cash used in operating activities of continuing operations  (290)  (2,835)
Net cash used in discontinued operations  -   (2)
Net cash used in operating activities  (290)  (2,837)
         
CASH FLOWS FROM INVESTING ACTIVITES        
Advance of note receivable  -   (200)
Purchases of oil and gas properties, net of asset retirement obligations  -   (2)
Proceeds from the sale of fixed assets  2   43 
Purchase of fixed assets  -   (50)
Net cash provided by (used in) investing activities  2   (209)
         
CASH FLOWS FROM FINANCING ACTIVITES        
Proceeds from exercise of warrants, net of fees  -   6,677 
Proceeds from exercise of stock options  28   349 
Proceeds from notes payable - related parties  -   400 
Repayments of notes payable - related parties  -   (1,042)
Proceeds from long-term debt  -   1,869 
Repayment of long-term debt  (214)  (3,554)
Repayment to prior owners  -   (266)
Net cash (used in) provided by financing activities  (186)  4,433 
         
NET (DECREASE) INCREASE IN CASH AND RESTRICTED CASH  (474)  1,387 
         
CASH AND RESTRCITED CASH - BEGINNING OF PERIOD  1,316   406 
         
CASH AND RESTRICTED CASH - END OF PERIOD $842  $1,793 
         
SUPPLEMENTAL DISCLOSURES        
Cash paid for interest expense $23  $333 
Cash paid for income taxes $-  $- 
         
SUMMARY OF NON-CASH ACTIVITIES:        
Reclassification of assets of discontinued operations to current operations in fixed assets $194  $- 
Preferred stock converted into common stock $-  $2 
Conversion of long-term debt and notes payable and accrued interest into common stock $-  $3,942 
Conversion of accounts payable and accrued liabilities into common stock $-  $677 

 

See notes to consolidated financial statements.

 

5

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Dollar amounts and numbers of shares that follow in this report are presented in thousands, except per share amounts.

 

Ecoark Holdings Inc. (“Ecoark Holdings” or the “Company”) is a diversified holding company, incorporated in the State of Nevada on November 19, 2007. Through Ecoark Holdings wholly owned subsidiaries, the Company has operations in three areas: (i) oil and gas, including exploration, production and drilling operations on over 20,000 cumulative acres of active mineral leases in Texas, Louisiana, and Mississippi and transportation services, (ii) post-harvest shelf-life and freshness food management technology, and (iii) financial services including investments in a select number of early stage startups each year. Since the acquisition of Banner Midstream Corp. on March 27, 2020, which currently comprises the exploration, production and drilling operations, the Company has focused its efforts to a considerable extent on expanding its exploration and production footprint and capabilities by acquiring real property and working interests in oil and gas mineral leases. The Company’s subsidiaries consist of Ecoark, Inc. (“Ecoark”), a Delaware corporation which is the parent of Zest Labs, Inc. (“Zest Labs”), Banner Midstream Corp., a Delaware corporation (“Banner Midstream”) and Trend Discovery Holdings Inc., a Delaware corporation (“Trend Holdings”).

 

On March 27, 2020, the Company and Banner Energy Services Corp., a Nevada corporation (“Banner Parent”), entered into a Stock Purchase and Sale Agreement (the “Banner Purchase Agreement”) to acquire Banner Midstream Corp., a Delaware corporation (“Banner Midstream”). Pursuant to the acquisition, Banner Midstream became a wholly-owned subsidiary of the Company and Banner Parent received shares of the Company’s common stock in exchange for all of the issued and outstanding shares of Banner Midstream.

 

Banner Midstream has four operating subsidiaries: Pinnacle Frac Transport LLC (“Pinnacle Frac”), Capstone Equipment Leasing LLC (“Capstone”), White River Holdings Corp. (“White River”), and Shamrock Upstream Energy LLC (“Shamrock”). Pinnacle Frac provides transportation of frac sand and logistics services to major hydraulic fracturing and drilling operations. Capstone procures and finances equipment to oilfield transportation service contractors. These two operating subsidiaries of Banner Midstream are revenue producing entities. White River and Shamrock are engaged in oil and gas exploration, production, and drilling operations on over 20,000 cumulative acres of active mineral leases in Texas, Louisiana, and Mississippi.

 

On June 11, 2020, the Company acquired certain energy assets from SR Acquisition I, LLC for $1 as part of the ongoing bankruptcy reorganization of Sanchez Energy Corporation. The transaction includes the transfer of 262 total wells in Mississippi and Louisiana, approximately 9,000 acres of active mineral leases, and drilling production materials and equipment. The 262 total wells include 57 active producing wells, 19 active disposal wells, 136 shut-in with future utility wells, and 50 shut-in pending plugging wells. Included in the assignment are 4 wells in the Tuscaloosa Marine Shale formation. One of the leases acquired in this transaction was sold in November 2020.

 

On June 18, 2020, the Company acquired certain energy assets from SN TMS, LLC for $1 as part of the ongoing bankruptcy reorganization of Sanchez Energy Corporation. The transaction includes the transfer of wells, active mineral leases, and drilling production materials and equipment.

 

On August 14, 2020, the Company entered into an Asset Purchase Agreement by and among the Company, White River E&P LLC, a Texas Limited Liability Company and a wholly-owned subsidiary of the Company Rabb Resources, LTD. and Claude Rabb, the sole owner of Rabb Resources, LTD. Pursuant to the Asset Purchase Agreement, the Company completed the acquisition of certain assets of Rabb Resources, LTD. The acquired assets consisted of certain real property and working interests in oil and gas mineral leases. The Company in June 2020 previously provided for bridge financing to Rabb Resources, LTD under the $225 Senior Secured Convertible Promissory Note. As consideration for entering into the Asset Purchase Agreement, the Company agreed to pay Rabb Resources, LTD. A total of $3,500 consisting of (i) $1,500 in cash, net of $304 in outstanding amounts related to the note receivable and accrued interest receivable, and (ii) $2,000 payable in common stock of the Company, which based on the closing price of the common stock as of the date of the Asset Purchase Agreement equaled 103 shares. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the Rabb Resources, LTD historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.

 

6

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

On September 4, 2020, White River SPV 3, LLC, a wholly-owned subsidiary of Banner Midstream entered into an Agreement and Assignment of Oil, Gas and Mineral Lease with a privately held limited liability company (the “Assignor”). Under the Lease Assignment, the Assignor assigned a 100% working interest (75% net revenue interest) in a certain oil and gas lease covering in excess of 1,600 acres (the “Lease”), and White River paid $1,500 in cash to the Assignor. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.

 

On October 9, 2020, the Company and White River SPV, entered into a Participation Agreement (the “Participation Agreement”) by and among the Company, White River SPV, BlackBrush Oil & Gas, L.P. (“BlackBrush”) and GeoTerre, LLC, an unrelated privately-held limited liability company (the “Assignor”), to conduct drilling of wells in the Austin Chalk formation.

 

Pursuant to the Participation Agreement, the Company and White River SPV pre-funded a majority of the cost, approximately $5,800, associated with the drilling and completion of an initial deep horizontal well in the Austin Chalk formation of which $3,387 was expensed as drilling costs. The Participation Agreement required the drilling costs that were paid into a designated escrow account at the commencement of the drilling in January 2021, which it was. BlackBrush agreed to assign to the other parties to the Participation Agreement, subject to certain exceptions and limitations specified therein, specified portions of its leasehold working interest in certain Austin Chalk formation units. The Participation Agreement provides for an initial allocation of the working interests and net revenue interests among the assignor, BlackBrush and the Company and then a re-allocation upon payout or payment of drilling and completion costs for each well drilled. Prior to payout, the Company will own 90% of the working interest and 67.5% of the net revenue interest in each well. Following payout, the Company will own 70% of working interest and 52.5% net revenue interest in each well.

 

The Parties to the Participation Agreement, except for the Company, had previously entered into a Joint Operating Agreement, dated September 4, 2020 (the “Operating Agreement”) establishing an area of mutual interest, including the Austin Chalk formation, and governing the parties’ rights and obligations with respect to drilling, completion and operation of wells therein. The Participation Agreement and the Operating Agreement require, among other things, that White River SPV and the Company drill and complete at least one horizontal Austin Chalk well with a certain minimum lateral each calendar year and/or maintain leasehold by paying its proportionate share of any rental payments.

 

On September 30, 2020, the Company and White River Energy, LLC (“White River Energy”), a wholly-owned subsidiary of the Company entered into three Asset Purchase Agreements (the “Asset Purchase Agreements”) with privately-held limited liability companies to acquire working interests in the Harry O’Neal oil and gas mineral lease (the “O’Neal OGML”), the related well bore, crude oil inventory and equipment. Immediately prior to the acquisition, White River Energy owned an approximately 61% working interest in the O’Neal OGML oil well and a 100% working interest in any future wells.

 

The purchase prices of these leases were $126, $312 and $312, respectively, totaling $750. The consideration paid to the Sellers was in the form of 68 shares of common stock. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.

 

In February and March 2021, the Company acquired additional leases for $916 under the Blackbrush/Deshotel lease related to the Participation Agreement.

 

Effective with the opening of trading on December 17, 2020, the Company effected a one-for-five reverse split of its issued and outstanding common stock and a simultaneous proportionate reduction of its authorized common stock. The reverse stock split was implemented without obtaining stockholder approval as permitted by Nevada law, and the authorized common stock was proportionately reduced to 40,000 shares. All share and per share figures are reflected on a post-split basis herein.

 

Effective December 29, 2020, the Company amended its Articles of Incorporation to reduce the authorized common stock from 40,000 shares to 30,000 shares.

 

7

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

On December 31, 2020, the Company completed a registered direct offering, whereby the Company issued 889 shares of common stock and 889 accompanying warrants to one institutional investor under the effective Form S-3 at $9.00 per share and accompanying warrant for a total of $8,000 in gross proceeds, before placement agent fees and other offering expenses. The warrants are exercisable for a two-year term at a strike price of $10.00 per share. The Company granted 62 warrants to the placement agent as compensation in addition to the $560 cash commission received by the placement agent. The placement agent warrants are exercisable at $11.25 per share and expire on January 2, 2023.

 

On April 9, 2021, a Little Rock, Arkansas jury awarded Ecoark and Zest a total of $115 million in damages which includes $65 million in compensatory damages and $50 million in punitive damages and found Walmart Inc. liable on three counts. The federal jury found that Walmart Inc. misappropriated Zest’s trade secrets, failed to comply with a written contract, and acted willfully and maliciously in misappropriating Zest’s trade secrets. The Company has filed post-trial motions to add an award for their attorneys’ fees as the prevailing party in the litigation. 

 

Trend formed three subsidiaries, Bitstream Mining, LLC, a Texas Limited Liability Corp. on May 16, 2021, ReStream Processing LLC, a Texas Limited Liability Corp. on May 16, 2021, and Trend Discovery Exploration LLC, a Texas Limited Liability Corp. on May 27, 2021.

 

The Company plans to enter the digital asset mining business through its newly formed wholly-owned subsidiary BitStream Mining LLC (“BitStream”). The Company expects that BitStream will deploy and operate modularized data centers with the sole purpose of mining digital assets, with Bitcoin as the main focus. The Company anticipates powering these data centers by acquiring a long-term power contract to purchase electric power from the electric grid in Texas. Once the business is operational, the Company intends to continuously add data center platforms by reinvesting cash and potentially utilizing leverage in order to scale operations. All data centers will be remotely managed with onsite personnel for servicing and troubleshooting any operational issues. BitStream plans to utilize the energy to power its energy intensive operations of digital asset mining. Additionally, if Texas experiences another power shortage during the winter or summer months from extreme weather conditions, the Company would be able to arbitrage power at favorable margins.

 

Principles of Consolidation

 

The condensed consolidated financial statements of Ecoark Holdings and its subsidiaries and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature.

 

The unaudited condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021. Therefore, the interim unaudited condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.

 

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, and Trend Holdings is now included in the consolidated financial statements.

 

On March 27, 2020, the Company and Banner Parent, entered into the Banner Purchase Agreement to acquire Banner Midstream. Pursuant to the acquisition, Banner Midstream became a wholly-owned subsidiary of the Company and Banner Parent received shares of the Company’s common stock in exchange for all of the issued and outstanding shares of Banner Midstream.

 

The Company applies the guidance of Topic 810 Consolidation of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—are consolidated except when control does not rest with the parent. Pursuant to ASC Paragraph 810-10-15-8, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.

 

Reclassifications

 

The Company has reclassified certain amounts in the June 30, 2020 unaudited condensed consolidated financial statements to be consistent with the June 30, 2021 presentation.

 

8

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, management’s estimate of provisions required for uncollectible accounts receivable, fair value of assets held for sale and assets and liabilities acquired, impaired value of equipment and intangible assets, including goodwill, asset retirement obligations, estimates of discount rates in lease, liabilities to accrue, fair value of derivative liabilities associated with warrants, cost incurred in the satisfaction of performance obligations, permanent and temporary differences related to income taxes and determination of the fair value of stock awards.

 

Actual results could differ from those estimates.

 

The estimates of proved, probable and possible oil and gas reserves are used as significant inputs in determining the depletion of oil and gas properties and the impairment of proved and unproved oil and gas properties. There are numerous uncertainties inherent in the estimation of quantities of proven, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves and commodity price outlooks. Actual results could differ from the estimates and assumptions utilized.

 

Oil and Gas Properties

 

The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under the full cost method of accounting, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs are capitalized. General and administrative costs related to production and general overhead are expensed as incurred.

 

All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit of production method using estimates of proved reserves. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in operations. Unproved properties and development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the loss from operations before income taxes and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method.

 

There was $718 and $53 in depreciation, depletion and amortization expense for the Company’s oil and gas properties for the three months ended June 30, 2021 and 2020, respectively.

 

Limitation on Capitalized Costs

 

Under the full-cost method of accounting, we are required, at the end of each reporting period, to perform a test to determine the limit on the book value of our oil and gas properties (the “Ceiling” test). If the capitalized costs of our oil and natural gas properties, net of accumulated amortization and related deferred income taxes, exceed the Ceiling, the excess or impairment is charged to expense. The expense may not be reversed in future periods, even though higher oil and gas prices may subsequently increase the Ceiling. The Ceiling is defined as the sum of: (a) the present value, discounted at 10% and assuming continuation of existing economic conditions, of (1) estimated future gross revenues from proved reserves, which is computed using oil and gas prices determined as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month hedging arrangements pursuant to Staff Accounting Bulletin (“SAB”) 103, less (2) estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves; plus, (b) the cost of properties being amortized; plus, (c) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; net of (d) the related tax effects related to the difference between the book and tax basis of our oil and natural gas properties. A ceiling test was performed as of June 30, 2021 and there was no indication of impairment on the oil and gas properties.

 

9

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

Oil and Gas Reserves

 

Reserve engineering is a subjective process that is dependent upon the quality of available data and interpretation thereof, including evaluations and extrapolations of well flow rates and reservoir pressure. Estimates by different engineers often vary sometimes significantly. In addition, physical factors such as results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using recent prices of the evaluation, estimated reserve quantities can be significantly impacted by changes in product prices.

 

Joint Interest Activities

 

Certain of our exploration, development and production activities are conducted jointly with other entities and, accordingly, the consolidated financial statements reflect only our proportionate interest in such activities.

 

Inventories

 

Crude oil, products and merchandise inventories are carried at the lower of cost (last-in-first-out (LIFO)) or net realizable value. Inventory costs include expenditures and other charges directly and indirectly incurred in bringing the inventory to its existing condition and location.

 

Accounting for Asset Retirement Obligation

 

Asset retirement obligations (“ARO”) primarily represent the estimated present value of the amount the Company will incur to plug, abandon and remediate its producing properties at the projected end of their productive lives, in accordance with applicable federal, state and local laws. The Company determined its ARO by calculating the present value of the estimated cash flows related to the obligation. The retirement obligation is recorded as a liability at its estimated present value as of the obligation’s inception, with an offsetting increase to proved properties or to exploration costs in cost of revenue.

 

Revenue Recognition

 

The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

 

The Company accounts for a contract when it has been approved and committed to, each party’s rights regarding the goods or services to be transferred have been identified, the payment terms have been identified, the contract has commercial substance, and collectability is probable. Revenue is generally recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.

 

Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.

 

Revenue from software license agreements of Zest Labs is recognized over time or 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 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 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. The Company did not have material revenue from software license agreements in the three months ended June 30, 2021 and 2020, respectively.

 

Revenue under master service agreements is recorded upon the performance obligation being satisfied. Typically, the satisfaction of the performance obligation occurs upon the frac sand load being delivered to the customer site and this load being successfully invoiced and accepted by the Company’s factoring agent.

 

10

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

The Company recognizes revenue under ASC 606 for their proportionate share of revenue when: (i) the Company receives notification of the successful sale of a load of crude oil to a buyer; (ii) the buyer will provide a price based on the average monthly price of crude oil in the most recent month; and (iii) cash is received the following month from the crude oil buyer.

 

The Company accounts for contract costs in accordance with ASC Topic 340-40, Contracts with Customers. The Company recognizes the cost of sales of a contract as expense when incurred or at the time a performance obligation is satisfied. The Company recognizes an asset from the costs to fulfil a contract only if the costs relate directly to a contract, the costs generate or enhance resources that will be used in satisfying a performance obligation in the future and the costs are expected to be recovered. The incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained.

 

Cost of sales for Pinnacle Frac includes all direct expenses incurred to produce the revenue for the period. This includes, but is not limited to, direct employee labor, direct contract labor and fuel.

 

Accounts Receivable and Concentration of Credit Risk

 

The Company considers accounts receivable, net of allowance for doubtful accounts, to be fully collectible. The allowance is based on management’s estimate of the overall collectability of accounts receivable, considering historical losses, credit insurance and economic conditions. Based on these same factors, individual accounts are charged off against the allowance when management determines those individual accounts are uncollectible. Credit extended to customers is generally uncollateralized, however credit insurance is obtained for some customers. Past-due status is based on contractual terms.

 

For Pinnacle Frac, accounts receivable is comprised of unsecured amounts due from customers that have been conveyed to a factoring agent without recourse. Pinnacle Frac receives an advance from the factoring agent of 98% of the amount invoiced to the customer within one business day. The Company recognizes revenue for 100% of the gross amount invoiced, records an expense for the 2% finance charge by the factoring agent, and realizes cash for the 98% net proceeds received. The Company has recognized an allowance for doubtful accounts of $209 and $109 as of June 30, 2021 and March 31, 2021, respectively.

 

Fair Value Measurements

 

ASC 820 Fair Value Measurements defines fair value, establishes a framework for measuring fair value in accordance with GAAP, 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 Segment Reporting. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. The Company and its chief operating decision makers determined that the Company’s operations effective with the May 31, 2019, acquisition of Trend Holdings and the March 27, 2020 acquisition of Banner Midstream now consist of three segments, Financial, Commodities and Technology.

 

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.

 

11

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

Recently Issued Accounting Standards

 

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contract’s in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU simplifies the diluted net income per share calculation in certain areas. The ASU is effective for annual and interim periods beginning after December 31, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

 

In May 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as follows: i) for a modification or an exchange that is a part of or directly related to a modification or an exchange of an existing debt instrument or line-of-credit or revolving-debt arrangements (hereinafter, referred to as a “debt” or “debt instrument”), as the difference between the fair value of the modified or exchanged written call option and the fair value of that written call option immediately before it is modified or exchanged; ii) for all other modifications or exchanges, as the excess, if any, of the fair value of the modified or exchanged written call option over the fair value of that written call option immediately before it is modified or exchanged. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

 

The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

Liquidity

 

For the three months ended June 30, 2021 and 2020, the Company had a net income (loss) of $2,559 and ($21,181), respectively, has a working capital deficit of $7,294 and $11,845 as of June 30, 2021 and March 31, 2021, and has an accumulated deficit as of June 30, 2021 of $146,352. As of June 30, 2021, the Company has $842 in cash and cash equivalents. The Company alleviated the substantial doubt regarding this uncertainty as of March 31, 2020 which continues to be alleviated at June 30, 2021 as a result of the Company’s acquisition of Banner Midstream on March 27, 2020, coupled with the raising of funds through the exercise of warrants, options and common stock during the year ended March 31, 2021 and through the three months ended June 30, 2021.

 

If the Company raises additional funds by issuing equity securities, its stockholders would experience dilution. Additional debt financing, if available, may involve covenants restricting its operations or its ability to incur additional debt. Any additional debt financing or additional equity that the Company raises may contain terms that are not favorable to it or its stockholders and require significant debt service payments, which diverts resources from other activities. If the Company is unable to obtain additional financing, it may be required to significantly scale back its business and operations. The Company’s ability to raise additional capital will be impacted by the heightened societal and regulatory focus on climate change and may also be impacted by the COVID-19 pandemic.

 

The Company believes that the current cash on hand and anticipated cash from operations is sufficient to conduct planned operations for one year from the issuance of the consolidated financial statements.

 

12

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

Impact of COVID-19

 

The COVID-19 pandemic previously had a profound effect on the U.S. and global economy and may continue to affect the economy and the industries in which we operate, depending on the vaccine rollouts and the emergence of virus mutations.

 

COVID-19 did not have a material effect on the Consolidated Statements of Operations or the Consolidated Balance Sheets included in this Form 10-Q in contrast to the material impact it had in the prior fiscal year.

 

Because the federal government and some state and local authorities are reacting to the current Delta variant of COVID-19, it is creating uncertainty on whether these actions could disrupt the operation of the Company’s business and have an adverse effect on the Company. The extent to which the COVID-19 outbreak may impact the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.

 

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small business are eligible for a loan to fund payroll expenses, rent and related costs. We had received funding under the PPP, and a majority of that has been forgiven.

 

In April 2020, the Company and one of its subsidiaries entered into PPP loans with financial institutions, Of the $1,869 in PPP loans obtained this fiscal year, the Company was informed that $1,850 (including $11 in accrued interest) has been forgiven in the three months ended December 31, 2020. The remaining $30 with accrued interest of $2 was converted into a loan that is due in May 2022, with payments of $2 per month that commenced December 19, 2020.

 

NOTE 2: DISCONTINUED OPERATIONS

 

Pursuant to ASC 205-20, Presentation of Financial Statements – Discontinued Operations, ASC-20-45-1B, paragraph 360-10-45-15, Pinnacle Vac will be disposed of other than by sale via an abandonment and termination of operations with no intent to classify the entity or assets as Available for Sale. Pursuant to ASC 205-20-45-3A, the results of operations of Pinnacle Vac from inception to discontinuation of operations will be reclassified to a separate component of income, below Net Income/(Loss), as a Loss on Discontinued Operations.

 

As of April 1, 2021, all of the equipment assets and accounts payable of Pinnacle Vac were transitioned into Capstone to continue servicing the debt. As a result, there are no assets or liabilities of discontinued operations that remain, and no income or loss from discontinued operations for the three months ended June 30, 2021 and 2020. 

 

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.

 

13

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 3: REVENUE

 

The following table disaggregates the Company’s revenue by major source for the three months ended June 30, 2021 and 2020:

 

  Three Months Ended
June 30,
 
  2021  2020 
 (unaudited)  (unaudited) 
Revenue:      
Financial Services $148  $90 
Oil and Gas Production  1,568   151 
Transportation Services  5,040   1,974 
Fuel Rebate  97   46 
Equipment Rental  26   52 
  $6,879  $2,313 

 

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.

 

Subsequent to the acquisitions of Trend Discovery and Banner Midstream, the Company in 2020 recorded revenues for financial services and oil and gas services and production and transportation. For both of these entities, revenues are billed upon the completion of the performance obligations.

 

Collections of the amounts billed are typically paid by the customers within 30 to 60 days.

 

NOTE 4: INVENTORIES

 

The Company’s inventory as of June 30, 2021 and March 31, 2021 of $115 and $122, respectively, consisted of crude oil of approximately 4,721 and 6,198 barrels of unsold crude oil, respectively, using the lower of cost (LIFO) or net realizable value.

 

NOTE 5: NOTE RECEIVABLE

 

The Company entered into a $225 senior secured convertible promissory note on June 18, 2020 with Rabb Resources, LTD. The Company had an existing note in the amount of $25 that had not been secured, and rolled an additional $200 into Rabb Resources, LTD, whereby the entire amount became secured. The note was non-interest bearing if paid or converted within forty-five days of the issuance date of June 18, 2020 (August 2, 2020, which is the maturity date). If not paid or converted, the note bore interest at 11% per annum, paid in cash on a quarterly basis.

 

This note was convertible into shares of Rabb Resources, LTD. based on a valuation of Rabb Resources, LTD. into shares of that company at a value of the $225. The Company advanced an additional $50 on July 8, 2020 and $25 on August 7, 2020 to bring the total note receivable to $300. This amount plus the accrued interest receivable of $4 was due as of August 14, 2020.

 

On August 14, 2020, the Company entered into an Asset Purchase Agreement with Rabb Resources, LTD. which included the acquisition of real property. The purchase price for this acquisition was $3,500, of which $1,196 was paid in cash (after applying the outstanding principal of the note receivable and accrued interest receivable against the $1,500 agreed upon cash consideration) and the balance was paid in common stock of the Company. The Company accounted for this acquisition as an asset purchase (see Note 16). There were no amounts outstanding as of June 30, 2021 and March 31, 2021, respectively.

 

14

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 6: PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of June 30, 2021 and March 31, 2021:

 

  

June 30,
2021

  March 31,
2021
 
  (unaudited)    
Zest Labs freshness hardware $2,493  $2,493 
Computers and software costs  222   222 
Land  140   140 
Buildings  236   236 
Leasehold improvements – Pinnacle Frac  18   18 
Machinery and equipment – Technology  200   200 
Machinery and equipment – Commodities  3,577   3,385 
Total property and equipment  6,886   6,694 
Accumulated depreciation and impairment  (3,172)  (2,999)
Property and equipment, net $3,714  $3,695 

 

As of June 30, 2021 and 2020, the Company performed an evaluation of the recoverability of these long-lived assets. The analysis resulted in no impairment as of related to these assets.

 

On April 1, 2021, the Company placed back in service equipment of $201 with accumulated depreciation of $7 which were part of discontinued operations related to Pinnacle Vac. These assets are equipment related to Capstone who is servicing the debt related to the assets.

 

The Company in April 2021 traded in a truck with a value of $5 for a new truck with a value of $3, and received cash of $2 in the exchange.

 

Depreciation expense for the three months ended June 30, 2021 and 2020 was $173 and $170, respectively.

 

NOTE 7: INTANGIBLE ASSETS AND GOODWILL

 

Intangible assets consisted of the following as of June 30, 2021 and March 31, 2021: 

 

  

June 30,
2021

  March 31,
2021
 
  (unaudited)    
Patents $1,013  $1,013 
Customer relationships  2,100   2,100 
Non-compete agreements – Banner Midstream  250   250 
Outsourced vendor relationships  1,017   1,017 
Non-compete agreements – Zest Labs  340   340 
Total intangible assets  4,720   4,720 
Accumulated amortization and impairment  (2,742)  (2,655)
Intangible assets, net $1,978  $2,065 

 

In the acquisition of Banner Midstream, the Company acquired the customer relationships and non-compete agreements valued at $2,350. The estimated useful lives of the customer relationships is ten years based on the estimated cash flows from those customer contracts, and the estimated useful lives of the non-compete agreement is five years amortized over a straight-line method.

 

Amortization expense for the three months ended June 30, 2021 and 2020 was $87 and $71, respectively.

 

15

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

The following is the future amortization of the intangibles as of June 30:

 

2022  $326 
2023   259 
2024   265 
2025   251 
2026   215 
Thereafter   662 
   $1,978 

 

In addition to the statutory based intangible assets noted above, the Company recorded a total of $10,225 of goodwill in connection with the purchase of Trend and Banner Midstream.

 

Accordingly, goodwill was as follows as of June 30, 2021:

 

Acquisition – Trend Discovery $3,223 
Acquisition – Banner Midstream  7,002 
Goodwill – March 31, 2021 $10,225 

 

The Company assessed the criteria for impairment, and there were no indicators of impairment present as of June 30, 2021, and therefore no impairment is necessary. 

 

NOTE 8: ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following:

 

  June 30,
2021
  March 31,
2021
 
  (unaudited)    
Professional fees and consulting costs $75  $801 
Vacation and paid time off  133   107 
Legal fees  66   86 
Compensation  298   734 
Interest  82   65 
Insurance  2,293   1,013 
Other  1,058   785 
Total $4,005  $3,591 

 

During the year ended March 31, 2021, the Company converted $1,228 of amounts due to prior owners into shares of common stock which resulted in a loss on conversion of $1,248, and $814 was paid in cash in the year ended March 31, 2021.

  

16

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 9: WARRANT DERIVATIVE LIABILITIES

 

The Company issued common stock and warrants in several private placements (“Derivative Warrant Instruments”) and some of these warrants have been classified as liabilities. The Derivative Warrant Instruments have been accounted for utilizing ASC 815 “Derivatives and Hedging.” The Company has incurred a liability for the estimated fair value of Derivative Warrant Instruments. The estimated fair value of the Derivative Warrant Instruments has been calculated using the Black-Scholes fair value option-pricing model with key input variables provided by management, as of the date of issuance, with changes in fair value recorded as gains or losses on revaluation in other income (expense).

 

The Company identified embedded features in some of the warrant agreements which were classified as a liability. These embedded features included (a) the implicit right for the holders to request that the Company settle the warrants in registered shares. Since maintaining an effective registration of shares is potentially outside the control of the Company, these warrants were classified as liabilities as opposed to equity; (b) included the right for the holders to request that the Company cash settle the warrant instruments from the holder by paying to the holder an amount of cash equal to the Black-Scholes value of the remaining unexercised portion of the Derivative Warrant Instruments on the date of the consummation of a fundamental transaction; and (c) certain price protections in the agreements. The accounting treatment of derivative financial instruments requires that the Company treat the whole instrument as liability and record the fair value of the instrument as derivatives as of the inception date of the instrument and to adjust the fair value of the instrument as of each subsequent balance sheet date. 

 

On November 14, 2020, the Company granted 60 warrants, for the early conversion of a portion of the September 24, 2020 warrants, with a strike price of $7.75 per share with a term of two-years. The fair value of those warrants was estimated to be $251 at inception, and $150 as of June 30, 2021.

 

On December 30, 2020, the Company granted 889 warrants, in the direct registered offering under the effective Form S-3, with a strike price of $10.00 with a term of two-years (maturity January 2, 2023). The fair value of those warrants was estimated to be $4,655 at inception and $4,653 as of December 31, 2020. During the three months ended March 31, 2021, 176 warrants were exercised for $1,760, and no shares were exercised during the three months ended June 30, 2021. The fair value of the remaining warrants at June 30, 2021 is $1,609.

 

On December 30, 2020, the Company granted 62 warrants to the placement agent as additional compensation in connection with the registered direct offering closed December 31, 2020, exercisable at a strike price of $11.25 per share for a term of two-years (expiring January 2, 2023). The fair value of those warrants was estimated to be $308 at inception and $106 as of June 30, 2021. 

 

The fair value of the 200 warrants that remain outstanding from the 250 warrants granted on September 24, 2020 as of June 30, 2021 is $403.

 

On June 30, 2021, the Company granted 200 warrants, subject to a purchase agreement entered into the same day with the warrant holder, with a strike price of $10.00 per share with a term of two-years. The fair value of those warrants was estimated to be $545 at inception, on June 30, 2021.

 

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, 2021 and March 31, 2021. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate.

 

Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each warrant is estimated using the Black-Scholes valuation model. The following assumptions were used on June 30, 2021 and March 31, 2021 and at inception: 

 

  Three Months Ended
June 30,
2021
  Year Ended
March 31,
2021
  Inception 
Expected term –0.5 – 2 years  4.58 - 5 years  5.00 years 
Expected volatility 112%  94 - 101%  91% - 107% 
Expected dividend yield -  -  - 
Risk-free interest rate 0.61 - 1.74%  0.61 - 1.74%  1.50% - 2.77% 
Market price $3.25 - $12.95  $3.05 - $10.00    

  

17

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

The Company’s remaining derivative liabilities as of June 30, 2021 and March 31, 2021 associated with warrant offerings are as follows. All fully extinguished warrants liabilities are not included in the chart below.

 

  June 30,
2021
  March 31,
2021
  Inception 
Fair value of 200 (originally 250) September 24, 2020 warrants $403  $1,349  $1,265 
Fair value of 60 November 14, 2020 warrants  150   458   251 
Fair value of 889 December 31, 2020 warrants  1,609   4,993   4,655 
Fair value of 62 December 31, 2020 warrants  106   413   308 
Fair value of 200 June 30, 2021 warrants  545   -   545 
  $2,813  $7,213     

 

During the three months ended June 30, 2021 and 2020 the Company recognized changes in the fair value of the derivative liabilities of $4,945 and $(17,393), respectively. In addition, the Company recognized $545 in derivative expense related to the June 30, 2021 warrants granted.

 

Activity related to the warrant derivative liabilities for the three months ended June 30, 2021 is as follows:

 

Beginning balance as of March 31, 2021 $7,213 
Issuances of warrants – derivative liabilities  545 
Warrants exchanged for common stock  (-)
Change in fair value of warrant derivative liabilities  (4,945)
Ending balance as of June 30, 2021 $2,813 

 

Activity related to the warrant derivative liabilities for the year ended March 31, 2021 is as follows:

 

Beginning balance as of March 31, 2020 $2,775 
Issuances of warrants – derivative liabilities  13,118 
Warrants exchanged for common stock  (27,198)
Change in fair value of warrant derivative liabilities  18,518 
Ending balance as of March 31, 2021 $7,213 

 

NOTE 10: CAPITALIZED DRILLING COSTS AND OIL AND GAS PROPERTIES

 

Capitalized Drilling Costs

 

In January 2021, the Company commenced a drilling program on their Deshotel 24H well included in their proved reserves. The Company incurred $6,084 in costs related to this program of which $3,387 was expensed directly as drilling costs. The Company, pursuant to ASC 932 will amortize the remaining $2,697 of these costs, under the full-cost method based on the units of production method. Depletion expense for the three months ended June 30, 2021 for the capitalized drilling costs was $274. As of June 30, 2021, the capitalized drilling costs were $2,293. There were no such costs for the three months ended June 30, 2020.

 

Oil and Gas Properties

 

The Company’s holdings in oil and gas mineral lease (“OGML”) properties as of June 30, 2021 and March 31, 2021 are:

 

  

June 30,
2021

  March 31,
2021
 
  (unaudited)    
Total OGML Properties Acquired $11,908  $12,352 

 

18

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

The Company acquired the following from Banner Midstream on March 27, 2020:

 

Cherry et al OGML including shallow drilling rights was acquired by Shamrock from Hartoil Company on July 1, 2018.

 

O’Neal Family OGML and Weyerhaeuser OGML including shallow drilling rights were acquired by White River on July 1, 2019 from Livland, LLC and Hi-Tech Onshore Exploration, LLC respectively in exchange for a $125 drilling credit to be applied by Livland, LLC on subsequent drilling operations.

 

Taliaferro Family OGML including shallow drilling rights was acquired by White River on June 10, 2019 from Lagniappe Operating, LLC.

 

Kingrey Family OGML including both shallow and deep drilling rights was entered into by White River and the Kingrey Family on April 3, 2019.

 

Peabody Family OGML including both shallow and deep drilling rights was acquired by White River on June 18, 2019 from SR Acquisition I, LLC, a subsidiary of Sanchez Energy Corporation, for a 1% royalty retained interest in conjunction with White River executing a lease saving operation in June 2019.

 

As discussed in Note 16, the Company acquired certain leases on June 11, 2020 and June 18, 2020 in Mississippi and Louisiana valued at $2. These assets were paid entirely in cash. In addition, the Company impaired $83 of property as it let certain leases lapse.

 

As discussed in Note 16, on August 14, 2020, the Company entered into an Asset Purchase Agreement with Rabb Resources, LTD which included the acquisition of real property. The purchase price for this acquisition was $3,500. Of this amount, $3,224, is reflected as Oil and Gas Properties.

 

As discussed in Note 16, on September 4, 2020, the Company entered into a Lease Assignment agreement. The purchase price for this acquisition was $1,500. Of this amount, $1,500, is reflected as Oil and Gas Properties.

 

As discussed in Note 16, on September 30, 2020, the Company entered into three Asset Purchase Agreements. The purchase prices for these acquisitions were $750. Of this amount, $760, is reflected as Oil and Gas Properties.

 

As discussed in Note 16, on October 1, 2020, the Company entered into three Asset Purchase Agreements. The purchase price for these acquisitions were $22. Of this amount, $22, is reflected as Oil and Gas Properties.

 

As discussed in Note 16, on October 9, 2020, the Company entered into three Asset Purchase Agreements. The purchase price for these acquisitions were $615. Of this amount, $615, is reflected as Oil and Gas Properties.

 

In February and March 2021, the Company acquired additional leases for $916 under the Blackbrush/Deshotel lease related to the Participation Agreement.

 

On May 13, 2021, the Company’s subsidiaries White River Energy LLC and White River Operating LLC entered into a Letter Agreement for a .60 of 8/8th Earned Working Interest with TSEA Partners LLC (“TSEA”) for their Harry O’Neal 20-10 lease in Holmes County, MS (“Letter Agreement”). Under the terms of the Letter Agreement, TSEA paid $600 to the Company to transfer the working interest to TSEA and TSEA received a $300 drilling or workover credit to use towards any authority for expenditure at Horseshoe Field. There were no amounts valued as oil and gas properties for this particular property, and as a result, the entire $600 is reflected as a gain on sale of property.

 

The Company had an analysis completed by an independent petroleum consulting company in March 2021 to complete the acquisition analysis within the required one-year period. There were no adjustments required from the original asset allocation on March 27, 2020.

 

19

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

The following table summarizes the Company’s oil and gas activities by classification for the three months ended June 30, 2021 and year ended March 31, 2021.

 

Activity Category March 31,
2021
  Adjustments (1)  June 30,
2021
 
Proved Developed Producing Oil and Gas Properties            
Cost $7,223  $-  $7,223 
Accumulated depreciation, depletion and amortization  (739)  (444)  (1,183)
Changes in estimates  -   -   - 
Total $6,484  $(444) $6,040 
             
Undeveloped and Non-Producing Oil and Gas Properties            
Cost $5,868  $-  $5,868 
Changes in estimates  (-)  (-)  (-)
Total $5,868  $(-) $5,868 
             
Grand Total $12,352  $(444) $11,908 

 

 

Activity Category March 31,
2020
  Adjustments (1)  March 31,
2021
 
Proved Developed Producing Oil and Gas Properties            
Cost $167  $737  $904 
Accumulated depreciation, depletion and amortization  -   (739)  (739)
Changes in estimates  -   6,319   6,319 
Total $167  $6,317  $6,484 
             
Undeveloped and Non-Producing Oil and Gas Properties            
Cost $5,968  $6,219  $12,187 
Changes in estimates  -   (6,319)  (6,319)
Total $5,968  $(100) $5,868 
             
Grand Total $6,135  $6,217  $12,352 

 

 

(1)Relates to acquisitions and dispositions of reserves.

 

20

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 11: LONG-TERM DEBT

 

Long-term debt consisted of the following as of June 30, 2021 and March 31, 2021. All debt instruments repaid during the year ended March 31, 2021 are not included in the below chart and the chart only reflects those instruments that had a balance owed as of these dates.

 

  

June 30,
2021

  March 31,
2021
 
  (unaudited)    
Note payable – Alliance Bank (a) $976  $1,033 
Commercial loan – Firstar Bank (b)  546   626 
Auto loan 1 – Firstar Bank (c)  25   29 
Auto loan 2 – Firstar Bank (d)  -   38 
Auto loan 3 – Ally Bank (e)  31   34 
Auto loan 4 – Ally Bank (f)  33   35 
Auto loan 7 – Ally Bank (g)  58   69 
Tractor loan 6 – Tab Bank (h)  165   180 
Ecoark – PPP Loan (i)  19   24 
Total long-term debt  1,853   2,068 
Less: current portion  (953)  (1,056)
Long-term debt, net of current portion $901  $1,012 

 

 

(a)Original loan date of June 14, 2019 with an original maturity date of April 14, 2020. The Company extended this loan for $1,239 at 4.95% with a new maturity date of April 14, 2025.

 

(b)Original loan date of February 28, 2018, due December 31, 2021 at 4.75%.

 

(c)On July 20, 2018, entered into a long-term secured note payable for $56 for a service truck maturing July 20, 2023. The note is secured by the collateral purchased and accrued interest annually at 6.50% with principal and interest payments due monthly. There is no accrued interest as of June 30, 2021.

 

(d)On August 3, 2018, entered into a long-term secured note payable for $73 for a service truck maturing August 3, 2023. The note is secured by the collateral purchased and accrued interest annually at 6.50% with principal and interest payments due monthly. The collateral underlying the loan was stolen in March 2021, and the Company received an insurance settlement in May 2021 and promptly used those proceeds to pay off the remainder of the loan balance.

 

(e)On July 18, 2018, entered into a long-term secured note payable for $56 for a service truck maturing August 17, 2024. The note is secured by the collateral purchased and accrued interest annually at 9.00% with principal and interest payments due monthly. There is no accrued interest as of June 30, 2021.

 

(f)On July 26, 2018, entered into a long-term secured note payable for $54 for a service truck maturing September 9, 2024. The note is secured by the collateral purchased and accrued interest annually at 7.99% with principal and interest payments due monthly. There is no accrued interest as of June 30, 2021.

 

(g)On November 5, 2018, entered into four long-term secured notes payable for $140 maturing on November 5, 2021. The notes are secured by the collateral purchased and accrued interest annually at rates ranging between 6.89% and 7.87% with principal and interest payments due monthly. There is no accrued interest as of June 30, 2021.

 

(h)On November 7, 2018, entered into a long-term secured note payable for $301 maturing on November 22, 2023. The note is secured by the collateral purchased and accrued interest annually at 10.25% with principal and interest payments due monthly. There is no accrued interest as of June 30, 2021.

 

(i)PPP loan received by Ecoark Holdings Inc. in April 2020. Loan bears interest at 1% per annum and matures April 2022. On November 19, 2020, the Company received confirmation that $356 in principal and $2 in accrued interest has been forgiven, and this amount has been reflected in forgiveness of debt. The remaining $29, will be due in monthly installments of $2 through maturity in May 2022.

 

21

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

The following is a list of maturities as of June 30:

 

2022 $953 
2023  352 
2024  315 
2025  233 
  $1,853 

 

During the three months ended June 30, 2021, the Company repaid $214 in long-term debt.

 

During the year ended March 31, 2021, the Company received proceeds of $1,869 in new long-term debt, repaid $4,100 in existing long-term debt, converted $830 in existing long-term debt that resulted in a loss on conversion of $1,337, and had $1,850 forgiven in long-term debt and accrued interest. In addition, the Company converted $65 of accrued interest and paid $361 in accrued interest during this period. The Company recognized a loss of $146 on conversion of the accrued interest to common stock in the year ended March 31, 2021.

 

Interest expense on long-term debt during the three months ended June 30, 2021 and 2020 are $25 and $69, respectively.

 

NOTE 12: NOTES PAYABLE - RELATED PARTIES

 

Notes payable to related parties consisted of the following as of June 30, 2021 and March 31, 2021. All notes payable to related parties instruments repaid during the year ended March 31, 2021 are not included in the below chart and the chart only reflects those instruments that had a balance owed as of these dates.

 

  

June 30,
2021

  March 31,
2021
 
  (unaudited)    
Ecoark Holdings Board Member (a) $578  $578 
Total Notes Payable – Related Parties  578   578 
Less: Current Portion of Notes Payable – Related Parties  (578)  (578)
Long-term debt, net of current portion $  $ 

 

 

(a)A board member advanced $578 to the Company through March 31, 2020, under the terms of notes payable that bears interest at rates ranging between 10% and 15% interest per annum. Interest expense on the notes for the three months ended June 30, 2021 and 2020 was $18 and $18, respectively, and $35 is accrued as of June 30, 2021.

 

During the year ended March 31, 2021, the Company received proceeds of $954 in notes payable – related parties, repaid $1,973 in existing notes payable – related parties, and converted $575 in existing notes payable – related parties that resulted in a loss on conversion of $1,239. In addition, the Company converted $15 of accrued interest during this period.

 

22

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 13: STOCKHOLDERS’ EQUITY (DEFICIT)

 

Ecoark Holdings Preferred Stock

 

On March 18, 2016, the Company created 5,000 shares of “blank check” preferred stock, par value $0.001. The Company has designated Series B and C out of the total Preferred Shares authorized.

 

The Company has entered into agreements to issue preferred stock over the past several years. Currently as of June 30, 2021 and March 31, 2021, there are no shares of any series of preferred stock issued and outstanding. The remaining shares of preferred shares were converted during the year ended March 31, 2021.

 

Ecoark Holdings Common Stock

 

The Company is authorized to issue 30,000 shares of common stock, par value $0.001. Effective with the opening of trading on December 17, 2020, the Company implemented a one-for-five reverse split of its issued and outstanding common stock and a simultaneous proportionate reduction of its authorized common stock. All share and per share figures are reflected on a post-split basis herein. Effective December 29, 2020, the Company amended its articles of incorporation to reduce its authorized common stock from 40,000 shares to 30,000 shares.

 

In the three months ended June 30, 2020, the Company issued 308 shares of common stock in April and May 2020 to convert the remaining shares of Series B Preferred Stock and Series C Preferred Stock; 1,531 shares of common stock in the exercise of warrants; 89 shares in the exercise of stock options; 93 shares of common stock in the conversion of accounts payable and accrued expenses; and 524 shares of common stock in the conversion of long-term debt, notes payable – related parties and accrued interest.

 

In the three months ended September 30, 2020, the Company issued 1,088 shares of common stock in the exercise of warrants; one share in the exercise of stock options; 31 shares of common stock for services rendered; 171 shares of common stock to acquire assets; and 192 shares of common stock in the conversion of long-term debt, notes payable – related parties and accrued interest.

 

In the three months ended December 31, 2020, the Company issued 376 shares of common stock in the exercise of warrants.

 

On December 31, 2020, the Company completed a registered direct offering of common stock and warrants, whereby the Company issued 889 shares of common stock and 889 accompanying warrants to purchase common stock to one institutional investor under the effective Form S-3 at $9.00 per share and accompanying warrant for a total of $8,000 in gross proceeds, before placement agent fees and other offering expenses. The warrants are exercisable for a two-year term at a strike price of $10.00 per share. The Company granted 62 warrants to the placement agent as compensation in addition to the $560 cash commission received by the placement agent. The placement agent warrants are exercisable at $11.25 per share and expire on January 2, 2023.

 

In the three months ended March 31, 2021, the Company issued 176 shares of common stock in the exercise of warrants for $1,760, and 59 shares for the exercise of stock options for $153.

 

In the three months ended June 30, 2021, the Company issued 115 shares of common stock valued at $675 which had been accrued for at March 31, 2021 in consulting fees under a contract entered into February 2, 2021. In addition, the Company issued 20 shares of common stock in exercise of stock options for cash ($28) and in a cashless exercise.

 

Share-based compensation expense of $399 and $1,114 is included in selling, general and administrative expense in the condensed consolidated statements of operations for the three months ended June 30, 2021 and 2020, respectively for the 2013 Incentive Stock Plan, 2017 Omnibus Incentive Plan and for the Company’s Non-Qualified Stock Options. There were no expenses related to warrant grants in these periods. 

 

As of June 30, 2021, 22,840 shares of common stock were issued and 22,723 shares of common stock were outstanding, net of 117 treasury shares.

 

23

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 14: COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

We are presently involved in the following legal proceeding in Arkansas. To the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties or businesses are subject, which would reasonably be likely to have a material adverse effect on the Company.

 

 On August 1, 2018, Ecoark Holdings, 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. On April 9, 2021, a Little Rock, Arkansas jury awarded Ecoark and Zest a total of $115 million in damages which includes $65 million in compensatory damages and $50 million in punitive damages and found Walmart Inc. liable on three claims. The federal jury found that Walmart Inc. misappropriated Zest’s trade secrets, failed to comply with a written contract, and acted willfully and maliciously in misappropriating Zest’s trade secrets. We expect Walmart to continue to vigorously defend the litigation and to oppose the verdict in post-trial motions and an appeal. The Company has filed post-trial motions to add an award for their attorneys’ fees as the prevailing party in the litigation. 

 

In the opinion of management, there are no legal matters involving us that would have a material adverse effect upon the Company’s financial condition, results of operations or cash flows.

 

Joint Participation Agreement

 

On October 9, 2020, the Company and White River SPV, entered into a Participation Agreement (the “Participation Agreement”) by and among the Company, White River SPV, BlackBrush Oil & Gas, L.P. (“BlackBrush”) and GeoTerre, LLC, an unrelated privately-held limited liability company (the “Assignor”), to conduct drilling of wells in the Austin Chalk formation.

 

Pursuant to the Participation Agreement, the Company and White River SPV funded 100% of the cost, approximately $5,800, associated with the drilling and completion of an initial deep horizontal well in the Austin Chalk formation. The Participation Agreement required the drilling costs that were paid into a designated escrow account at the commencement of the drilling in January 2021, which it was. BlackBrush agreed to assign to the other parties to the Participation Agreement, subject to certain exceptions and limitations specified therein, specified portions of its leasehold working interest in certain Austin Chalk formation units. The Participation Agreement provides for an initial allocation of the working interests and net revenue interests among the assignor, BlackBrush and the Company and then a re-allocation upon payout or payment of drilling and completion costs for each well drilled. Prior to payout, the Company will own 90% of the working interest and 67.5% of the net revenue interest in each well. Following payout, the Company will own 70% of working interest and 52.5% net revenue interest in each well.

 

The Parties to the Participation Agreement, except for the Company, had previously entered into a Joint Operating Agreement, dated September 4, 2020 (the “Operating Agreement”) establishing an area of mutual interest, including the Austin Chalk formation, and governing the parties’ rights and obligations with respect to drilling, completion and operation of wells therein. The Participation Agreement and the Operating Agreement require, among other things, that White River SPV and the Company drill and complete at least one horizontal Austin Chalk well with a certain minimum lateral each calendar year and/or maintain leasehold by paying its proportionate share of any rental payments.

 

24

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 15: CONCENTRATIONS

 

Customer Concentration. Three and three customers, all in the commodity segment accounted for more than 10% of the accounts receivable balance at June 30, 2021 and March 31, 2021 for a total of 66% and 76% of accounts receivable, respectively. In addition, three and two customers represent approximately 88% and 81% of total revenues for the Company for the three months ended June 30, 2021 and 2020, respectively.

 

Supplier Concentration. Certain of the raw materials, components and equipment used by the Company in the manufacture of its products are available from single-sourced vendors. Shortages could occur in these essential materials and components due to an interruption of supply or increased demand in the industry. If the Company were unable to procure certain materials, components or equipment at acceptable prices, it would be required to reduce its manufacturing operations, which could have a material adverse effect on its results of operations. In addition, the Company may make prepayments to certain suppliers or enter into minimum volume commitment agreements. Should these suppliers be unable to deliver on their obligations or experience financial difficulty, the Company may not be able to recover these prepayments.

 

The Company occasionally maintains cash balances in excess of the FDIC insured limit. The Company does not consider this risk to be material.

 

Commodity price risk

 

We are exposed to fluctuations in commodity prices for oil and natural gas. Commodity prices are affected by many factors, including but not limited to, supply and demand.

 

NOTE 16: ACQUISITIONS

 

The following represent acquisitions for the three months ended June 30, 2021 and year ended March 31, 2021.

 

Energy Assets

 

On June 11, 2020, the Company acquired certain energy assets from SR Acquisition I, LLC for $1 as part of the ongoing bankruptcy reorganization of Sanchez Energy Corporation. The transaction includes the transfer of 262 total wells in Mississippi and Louisiana, approximately 9,000 acres of active mineral leases, and drilling production materials and equipment. The 262 total wells include 57 active producing wells, 19 active disposal wells, 136 shut-in with future utility wells, and 50 shut-in pending plugging wells. Included in the assignment are 4 wells in the Tuscaloosa Marine Shale formation.

 

On June 18, 2020, the Company acquired certain energy assets from SN TMS, LLC for $1 as part of the ongoing bankruptcy reorganization of Sanchez Energy Corporation. The transaction includes the transfer of wells, active mineral leases, and drilling production materials and equipment.

 

The Company accounted for these acquisitions as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the Rabb Resources, LTD. historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.

 

25

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

Rabb Resources

 

On August 14, 2020, the Company entered into an Asset Purchase Agreement by and among the Company, White River E&P LLC, a Texas Limited Liability Company and a wholly-owned subsidiary of the Company Rabb Resources, LTD. and Claude Rabb, the sole owner of Rabb Resources, LTD. Pursuant to the Asset Purchase Agreement, the Company completed the acquisition of certain assets of Rabb Resources, LTD. The acquired assets consisted of certain real property and working interests in oil and gas mineral leases. The Company in June 2020 previously provided for bridge financing to Rabb Resources, LTD under the $225 Senior Secured Convertible Promissory Note. As consideration for entering into the Asset Purchase Agreement, the Company agreed to pay Rabb Resources, LTD. A total of $3,500 consisting of (i) $1,500 in cash, net of $304 in outstanding amounts related to the note receivable and accrued interest receivable, and (ii) $2,000 payable in common stock of the Company, which based on the closing price of the common stock as of the date of the Asset Purchase Agreement equaled 103 shares. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the Rabb Resources, LTD. historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.

 

Building $236 
Land  140 
Oil and Gas Properties  3,224 
Asset retirement obligation  (100)
  $3,500 

 

Unrelated Third Party

 

On September 4, 2020, White River SPV 3, LLC, a wholly-owned subsidiary of Banner Midstream entered into an Agreement and Assignment of Oil, Gas and Mineral Lease with GeoTerre Operating, LLC, a privately held limited liability company (the “Assignor”). Under the Lease Assignment, the Assignor assigned a 100% working interest (75% net revenue interest) in a certain oil and gas lease covering in excess of 1,600 acres (the “Lease”), and White River paid $1,500 in cash to the Assignor. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.

 

O’Neal Family

 

On September 30, 2020, the Company and White River Energy, LLC entered into three asset purchase agreements (the “Asset Purchase Agreements”) with privately-held limited liability companies to acquire working interests in the Harry O’Neal oil and gas mineral lease (the “O’Neal OGML”), the related well bore, crude oil inventory and equipment. Immediately prior to the acquisition, White River Energy owned an approximately 61% working interest in the O’Neal OGML oil well and a 100% working interest in any future wells.

 

The purchase prices of these leases were $126, $312 and $312, respectively, totaling $750. The consideration paid to the Sellers was in the form of 68 shares of common stock. The Company accounted for this acquisition as an asset acquisition under ASC 805 and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, as a result of the amendment, the presentation of the historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, were not required to be presented.

 

Oil and Gas Properties $760 
Asset retirement obligation  (10)
  $750 

 

26

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

 

NOTE 17: FAIR VALUE MEASUREMENTS

 

The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by U.S. generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:

 

Level 1 – quoted prices for identical instruments in active markets;

 

Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

Financial instruments consist principally of cash, accounts receivable and other receivables, accounts payable and accrued liabilities, notes payable, and amounts due to related parties. The fair value of cash is determined based on Level 1 inputs. There were no transfers into or out of “Level 3” during the three months ended June 30, 2021 and 2020. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The Company records the fair value of the of the warrant derivative liabilities disclosed in accordance with ASC 815, Derivatives and Hedging. The fair values of the derivatives were calculated using the Black-Scholes Model. The fair value of the derivative liabilities is revalued on each balance sheet date with corresponding gains and losses recorded in other income (expense) in the consolidated statement of operations. The following table presents assets and liabilities that are measured and recognized at fair value on a recurring basis as of:

 

  Level 1  Level 2  Level 3  Total Gains
and (Losses)
 
June 30, 2021                
Warrant derivative liabilities  -   -  $2,813  $4,945 
                 
March 31, 2021                
Warrant derivative liabilities  -   -  $7,213  $(18,518)

 

27

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 18: 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 operating decisions. As of June 30, 2021 and 2020, and for the three months ended June 30, 2021 and 2020, the Company operated in 3 segments. The segments are Financial Services (Trend Holdings), Technology (Zest Labs), and Commodities (Banner Midstream).

 

Three Months Ended June 30, 2021 Commodities  Financial  Technology  Total 
Segmented operating revenues $6,731  $148  $-  $6,879 
Cost of revenues  3,942   -   -   3,942 
Gross profit  2,789   148   -   2,937 
Total operating expenses net of depreciation, amortization, depletion and accretion  3,514   154   654   4,322 
Depreciation, amortization, depletion and accretion  960   -   56   1,016 
Other (income) expense  (3,641)  (220)  (1,099)  (4,960)
Income (loss) from continuing operations $1,956  $214  $389  $2,559 
                 
Segmented assets as of June 30, 2021                
Property and equipment, net $3,478  $-  $236  $3,714 
Oil and Gas Properties/Capitalized drilling costs $14,201  $-  $-  $14,201 
Intangible assets, net $1,978  $-  $-  $1,978 
Goodwill $7,002  $3,223  $-  $10,225 
Capital expenditures $-  $-  $-  $- 

 

Three Months Ended June 30, 2020 Commodities  Financial  Technology  Total 
Segmented operating revenues $2,223  $90  $-  $2,313 
Cost of revenues  1,093   -   -   1,093 
Gross profit  1,130   90   -   1,220 
Total operating expenses net of depreciation, amortization, and impairment  2,066   129   919   3,114 
Depreciation and amortization  238   -   63   301 
Other expense  13,738   875   4,373   18,986 
Loss from continuing operations $(14,912) $(914) $(5,355) $(21,181)
                 
Segmented assets as of June 30, 2020                
Property and equipment, net $3,219  $-  $478  $3,697 
Oil and Gas Properties/Capitalized drilling costs $6,001  $-  $-  $6,001 
Intangible assets, net $2,279  $-  $-  $2,279 
Goodwill $7,002  $3,223  $-  $10,225 
Capital expenditures $50  $-  $-  $50 

 

28

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 19: LEASES

 

The Company has adopted ASU No. 2016-02, Leases (Topic 842), as of April 1, 2019 and will account for their leases in terms of the right of use assets and offsetting lease liability obligations under this pronouncement. The Company had had only short-term leases up through the acquisition of Banner Midstream. The Company acquired a right of use asset and lease liability of $731 and $732, respectively on March 27, 2020. The Company recorded these amounts at present value, in accordance with the standard, using discount rates ranging between 2.5% and 11.36%. The right of use asset is composed of the sum of all lease payments, at present value, and is amortized straight line over the life of the expected lease term. For the expected term of the lease the Company used the initial terms ranging between 42 and 60 months. Upon the election by the Company to extend the lease for additional years, that election will be treated as a lease modification and the lease will be reviewed for remeasurement. This lease will be treated as an operating lease under the new standard. In addition, the Company entered into a new 39 month operating lease for office space in September 2020, a new 36 month operating lease in March 2021, as well as two new 36 month operating leases in June 2021 which are all included in the right of use asset and lease liabilities.

 

The Company has chosen to implement this standard using the modified retrospective model approach with a cumulative-effect adjustment, which does not require the Company to adjust the comparative periods presented when transitioning to the new guidance. The Company has also elected to utilize the transition related practical expedients permitted by the new standard. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a modified retrospective approach. Adoption of the new standard did not result in an adjustment to retained earnings for the Company.

 

The Company’s portfolio of leases contains both finance and operating leases that relate primarily to the commodity segment. As of June 30, 2021, the value of the unamortized lease right of use asset is $865, of which $409 is from financing leases (through maturity at June 30, 2024) and $456 is from operating leases (through maturity in May 31, 2024). As of June 30, 2021, the Company’s lease liability was $895, of which $401 is from financing leases and $494 is from operating leases.

 

Maturity of lease liability for the operating leases for the period ended June 30,   
2022 $226 
2023 $218 
2024 $64 
2025 $- 
Imputed interest $(14)
Total lease liability $494 

 

Disclosed as:   
Current portion $218 
Non-current portion $276 

 

Maturity of lease liability for the financing leases for the period ended June 30,  
2022 $151 
2023 $147 
2024 $118 
2025 $- 
Imputed interest $(15)
Total lease liability $401 

 

Disclosed as:  
Current portion $142 
Non-current portion $259 

 

Amortization of the right of use asset for the period ended June 30,   
2022 $346 
2023 $320 
2024 $199 
Total $865 

 

29

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

Total Lease Cost

 

Individual components of the total lease cost incurred by the Company is as follows:

 

  

Three months ended
June 30,
2021

  

Three months ended
June 30,
2020

 
  (unaudited)  (unaudited) 
Operating lease expense $54  $20 
         
Finance lease expense        
Depreciation of capitalized finance lease assets  35   35 
Interest expense on finance lease liabilities  3   4 
Total lease cost $92  $59 

 

NOTE 20: ASSET RETIREMENT OBLIGATIONS

 

In conjunction with the approval permitting the Company to resume drilling in the existing fields, the Company has recorded an asset retirement obligation (“ARO”) based upon the plan submitted in connection with the permit. The ARO results from the Company’s responsibility to abandon and reclaim their net share of all working interest properties and facilities. The following table summarizes activity in the Company’s ARO for the three months ended June 30, 2021 and year ended March 31, 2021:

 

  

June 30,
2021

  March 31,
2021
 
  (unaudited)    
Balance, beginning of period $1,532  $295 
Accretion expense  38   64 
Reclamation obligations settled  -   - 
Disposition due to sale of property  (7)  - 
Additions  -   111 
Changes in estimates  -   1,062 
Balance, end of period $1,563  $1,532 

 

Total ARO at June 30, 2021 and March 31, 2021 shown in the table above consists of amounts for future plugging and abandonment liabilities on our wellbores and facilities based on third-party estimates of such costs, adjusted for inflation for the periods ended June 30, 2021 and March 31, 2021, respectively. These values are discounted to present value at 10% per annum for the periods ended June 30, 2021 and March 31, 2021. The Company disposed of a portion of one of their properties and wrote off the balance of ARO associated with that disposal of $7.

 

30

 

 

ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2021

 

NOTE 21: RELATED PARTY TRANSACTIONS

 

On May 31, 2019 the Company entered into an Agreement and Plan of Merger with Trend Discovery Holdings Inc., a Delaware corporation (“Trend Holdings”) pursuant to which the Company acquired 100% of Trend Holdings in a merger with the Company as the surviving entity. Pursuant to the merger, the one thousand issued and outstanding shares of common stock of Trend Holdings were converted into 1,100 shares of the Company’s Common Stock with an approximate dollar value of $3,237 based on the closing price per share of Common Stock on the closing date of the merger. William B. Hoagland, the Company’s Chief Financial Officer, was President and a principal stockholder of Trend Holdings and received 550 shares of Common Stock, pursuant to the merger.

 

Jay Puchir, the Company’s Treasurer, served as a consultant to the Company from May 2019 to March 2020 and was paid solely in stock options totaling 40 stock options at an exercise price of $3.15 per share. In addition, any outstanding notes with Mr. Puchir have been repaid along with all accrued interest.

 

Gary Metzger, a director, advanced $578 to the Company through March 31, 2020, under the terms of notes payable that bears interest at rates ranging between 10% and 15% interest per annum.

 

On March 27, 2020, the Company issued 1,789 shares of its common stock to Banner Energy Services, Inc. (“Banner Energy”) and assumed approximately $11,774 in debt and lease liabilities of Banner Midstream. The Company’s Chief Executive Officer and another director, John Cahill, recused themselves from all board discussions on the acquisition of Banner Midstream as they were stockholders and/or noteholders of Banner Midstream. The transaction was approved by all of the disinterested members of the Board. The Chairman and CEO of Banner Energy is the Treasurer of the Company and Chief Executive Officer and President of Banner Midstream. Included in the shares issued in this transaction, John Cahill received 164 shares of common stock and Jay Puchir received 548 shares of common stock. At the time of this transaction, Mr. Cahill and his brother were also members of Shamrock Upstream Energy LLC, a subsidiary of Banner Midstream.

 

In the Banner Midstream acquisition, Randy S. May, Chief Executive Officer and Chairman, was the holder of approximately $1,242 in notes payable by Banner Midstream and its subsidiaries, which were assumed by the Company in the transaction. Additionally, Mr. May held a note payable by Banner Energy in the amount of $2,000 in principal and accrued interest, which was converted into 2,740 shares of Common Stock (on a pre-reverse stock split basis) as a result of the transaction. Neither of these amounts remain outstanding.

 

NOTE 22: SUBSEQUENT EVENTS 

 

Subsequent to June 30, 2021, the Company had the following transactions:

 

On July 1, 2021, the Company entered into a Consulting Agreement with a consultant and issued the consultant 30 shares of common stock.

 

On July 15, 2021, the Company and its directors entered into a Settlement and Mutual Release resolving the legal fees it agreed to pay when it settled a class action that was settled without any financial consequences other than paying agreed upon legal fees. The Company paid $50 to the Plaintiff’s attorneys.

 

On August 6, 2021, the Company closed a $20,000 registered direct offering in which H.C. Wainwright LLC acted as the exclusive placement agent. The Company sold 3,478 shares of common stock and 3,478 warrants at $5.75 per share. The warrants will be exercisable for a three- and one-half-year period beginning when the Company increases its authorized common stock to 40,000 shares. The Company also issued the placement agent 243 warrants exercisable at $7.1875 per share over the same period as the investor warrants but expiring on the earlier of the three- and one-half year anniversary of the date the placement agent warrants first become exercisable and August 4, 2026. Further information on the offering and compensation to the placement agent is contained in the prospectus supplement dated August 4, 2021.

 

In order to have sufficient authorized capital to raise the $20,000, on August 4, 2021, a director of the Company agreed to cancel stock options in exchange for a lesser number of restricted stock units, subject to future vesting. In accordance with the restricted stock agreement, the director was granted 272 RSUs that vest over 12 quarterly increments, in exchange for cancelling 672 stock options. In addition, upon shareholder approval of an amendment to the Ecoark Holdings, Inc. 2017 Omnibus Incentive Plan, this director will receive 64 additional RSUs.

 

On August 4, 2021, the Company’s common stock commenced trading on the Nasdaq Capital Market.

 

31

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto presented in this report as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2021.

 

Effective with the opening of trading on December 17, 2020, the Company implemented a one-for-five reverse split of its issued and outstanding common stock and a simultaneous proportionate reduction of its authorized common stock. All share and per share figures are reflected on a post-split basis herein.

 

Dollar amounts and number of shares in this Item 2 are expressed in thousands, except per share and per barrel amounts.

 

OVERVIEW

 

Ecoark Holdings is a diversified holding company, incorporated in the state of Nevada on November 19, 2007. Through Ecoark Holdings wholly owned subsidiaries, the Company has operations in three areas: (i) oil and gas, including exploration, production and drilling operations on over 20,000 cumulative acres of active mineral leases in Texas, Louisiana, and Mississippi and transportation services, (ii) post-harvest shelf-life and freshness food management technology, and (iii) financial services including investing in a select number of early stage startups and a recently launched proposed cryptocurrency mining business designed to assist with electric power opportunities in a deregulated market which exists in Texas.

 

The Company’s subsidiaries include Banner Midstream Corp. (“Banner Midstream”), White River Holdings Corp. (“White River”), Shamrock Upstream Energy LLC (“Shamrock”), Pinnacle Frac Transport LLC (“Pinnacle Frac”), Capstone Equipment Leasing LLC (“Capstone”), Zest Labs, Inc. (“Zest Labs”), and Trend Discovery Holdings Inc. (“Trend Holdings”). 

 

Through Pinnacle Frac the Company provides transportation of frac sand and logistics services to major hydraulic fracturing and drilling operations. Capstone procures and finances equipment to oilfield transportation service contractors.

 

Through White River and Shamrock, we are engaged in oil and gas exploration, production, and drilling operations on over 20,000 cumulative acres of active mineral leases in Texas, Louisiana, and Mississippi.

 

Zest Labs’ goal is to offer freshness management solutions for fresh food growers, suppliers, processors, distributors, grocers and restaurants. Our efforts with respect to the freshness food management solution have to a considerable degree been focused on preparing for trial and appeals in our previously disclosed lawsuit against Walmart, Inc.

 

Through Trend Holdings we provide financial services and collect fees from entities which invest in securities. Trend also owns a subsidiary which launched our new cryptocurrency mining business.

 

Commodities Segment

 

For the three months ended June 30, 2021, the Company’s consolidated revenues consisted almost exclusively of the revenues from, and most of our expenses were related to, the Commodities segment. In our Commodities segment, our activities are primarily directed at the conventional enhancement and development of all productive formations throughout our Louisiana and Mississippi leasehold positions of over 20,000 acres. We intend to continue to enhance and develop our reserves and increase production through exploration activities on our prolific inventory of potential drilling locations.

 

Key Terms and Metrics

 

In connection with the management of our businesses, we identify, measure and assess a variety of operating metrics. In the Commodities segment, the principal metrics we use in managing our businesses are set forth below:

 

“Bbl” – Bbl means barrel of crude oil. Metric used by management to specify the unit of measure (“in barrels”) from which the Company’s midstream customers use to incrementally purchase oil from the Company. Barrels are used as a unit of measure universally across the oil industry so the Company’s adoption of barrels to measure units of oil is a standard practice. 

 

“Mbbl” – Mbbl means a thousand barrels of oil. See comments on “Bbl” metric. “Mbbl” is a standard for measuring larger quantities of barrels of oil in thousands of units.

 

“Production (Gross)” – Production (Gross) is defined as barrels of oil produced before accounting for working interests from non-mineral owning parties. Metric used by management to specify the total number of barrels of oil produced from a given oil well. Gross production includes both the barrels owned by the oil and gas mineral owners as well as the drilling and investing group who funded and drilled the well which are considered the working interest owners. Gross production is a standard term used universally across the oil industry, so the Company’s adoption of this term is a standard practice.

 

“Production (Net)” – Production (Net) is defined as the net barrels of oil produced after deducting the ownership portion owned by the mineral owning parties. Unless otherwise specified, management assumes that the mineral ownership portion of a well is 25%, so a 100% working interest would result in a 75% Net Production or Net Revenue interest after accounting for the ownership portion of oil production owned by the mineral owners.

 

32

 

 

Segment Reporting for the Three Months Ended June 30, 2021 and 2020:

 

Three Months Ended June 30, 2021 Commodities  Financial  Technology  Total 
Segmented Operating Revenues $6,731  $148  $-  $6,879 
Cost of revenues  3,942   -   -   3,942 
Gross profit (loss)  2,789   148   -   2,937 
Total operating expenses, net of depreciation, amortization, depletion and accretion  3,514   154   654   4,322 
Depreciation, amortization, depletion and accretion  960   -   56   1,016 
Other (income) expense  (3,641)  (220)  (1,099)  (4,960)
Loss from continuing operations $1,956  $214  $389  $2,559 
                 
Segmented assets as of June 30, 2021                
Property and equipment, net $3,478  $-  $236  $3,714 
Oil and Gas Properties $14,121  $-  $-  $14,121 
Intangible assets, net $1,978  $-  $-  $1,978 
Goodwill $7,002  $3,223  $-  $10,225 
Capital expenditures $-  $-  $-  $- 

 

Three Months Ended June 30, 2020 Commodities  Financial  Technologies  Total 
Segmented Operating Revenues $2,223  $90  $-  $2,313 
Cost of revenues  1,093   -   -   1,093 
Gross profit (loss)  1,130   90   -   1,220 
Total operating expenses, net of depreciation, amortization, depletion and accretion  2,066   129   919   3,114 
Depreciation, amortization, depletion and accretion  238   -   63   301 
Other (income) expense  13,738   875   4,373   18,986 
Loss from continuing operations $(14,912) $(914) $(5,355) $(21,181)
                 
Segmented assets as of June 30, 2020                
Property and equipment, net $3,219  $-  $478  $3,697 
Oil and Gas Properties $6,001  $-  $-  $6,001 
Intangible assets, net $2,279  $-  $-  $2,279 
Goodwill $7,002  $3,223  $-  $10,225 
Capital expenditures $50  $-  $-  $50 

 

 Revenue for three months ended June 30, 2021 were $6,879, increase of $4,566 compared to same period in prior year.

 

 We recorded net income of $2,559 for the first quarter ended June 30, 2021.

 

 Our average production was 348 Gross (240 Net) Bbl/d during the three months ended June 30, 2021.

 

 During the three months ended June 30, 2021, we had no new drilling activity.

 

 As of June 30, 2021, we had approximately $842 of cash on hand.

 

Need for capital continued to be a concern during the three months ended June 30, 2021. On May 13, 2021, the Company entered into a Letter Agreement for a .60 of 8/8th Earned Working Interest with TSEA Partners LLC (“TSEA”) for the Harry O’Neal 20-10 lease in Holmes County, MS (“Letter Agreement”). Under the terms of the Letter Agreement, TSEA paid $600 to the Company to transfer the working interest to TSEA and TSEA received a $300 drilling or workover credit to use towards any authority for expenditure at Horseshoe Field.

 

Key Trends

 

Commodity Prices

 

In early March 2020, oil prices dropped sharply and continued to decline, briefly reaching negative levels as a result of multiple factors affecting the supply and demand in global oil and natural gas markets, including (i) actions taken by OPEC members and other exporting nations impacting commodity price and production levels and (ii) a significant decrease in demand due to the ongoing COVID-19 pandemic. However, certain restrictions on conducting business that were implemented in response to the COVID-19 pandemic have been lifted as improved treatments and vaccinations for COVID-19 have been rolled-out globally since late 2020. As a result, oil and natural gas market prices have improved in response to the increase in demand. However, as of the date of this report oil and natural gas prices have experienced increased volatility due to the uncertainty related to the Delta variant of the virus.

 

During 2020 and 2021, the posted NYMEX WTI price for crude oil ranged from $(37.63) to $76.98 per Bbl. On June 30, 2021, the NYMEX WTI price for crude oil was $73.47 per Bbl. Commodity prices have historically been volatile and we cannot predict events which may lead to future fluctuations in these prices.

 

33

 

 

Impact of COVID-19

 

The COVID-19 pandemic previously had a profound effect on the U.S. and global economy and may continue to affect the economy and the industries in which we operate, depending on the vaccine rollouts and the emergence of virus mutations.

 

COVID-19 did not have a material effect on the Consolidated Statements of Operations or the Consolidated Balance Sheets included in this Form 10-Q in contrast to the material impact it had in the prior fiscal year.

 

Because the federal government and some state and local authorities are reacting to the current Delta variant of COVID-19, it is creating uncertainty on whether these actions could disrupt the operation of the Company’s business and have an adverse effect on the Company. The extent to which the COVID-19 outbreak may impact the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.

 

The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small business are eligible for a loan to fund payroll expenses, rent and related costs. We had received funding under the PPP, and a majority of that as indicated in our Consolidated Statement of Operations has been forgiven.

 

Our Proposed Digital Asset Mining Business

 

The Company plans to enter the digital asset mining business through its newly formed wholly-owned subsidiary BitStream Mining LLC (“BitStream”). We expect that BitStream will deploy and operate modularized data centers with the sole purpose of mining digital assets, with Bitcoin as the main focus. We anticipate powering these data centers by acquiring a long-term power contract to purchase electric power from the electric grid in Texas. Once the business is operational, we intend to continuously add data center platforms by reinvesting cash and potentially utilizing leverage in order to scale operations. All data centers will be remotely managed with onsite personnel for servicing and troubleshooting any operational issues. BitStream plans to utilize the energy to power its energy intensive operations of digital asset mining. Additionally, if Texas experiences another power shortage during the winter or summer months from extreme weather conditions, we would be able to arbitrage power at favorable margins.

 

As of the date of this report, we have not commenced this business other than to engage in exploratory discussions to acquire a long-term power contract, including discussions with a number of key players in this industry. For the risks and uncertainties related to the proposed digital asset mining business, see the prospectus supplement filed on August 5, 2021.

 

Critical Accounting Policies, Estimates and Assumptions

 

The critical accounting policies listed below are those the Company deems most important to their operations.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, management’s estimate of provisions required for uncollectible accounts receivable, fair value of assets held for sale and assets and liabilities acquired, impaired value of equipment and intangible assets, including goodwill, asset retirement obligations, estimates of discount rates in lease, liabilities to accrue, fair value of derivative liabilities associated with warrants, cost incurred in the satisfaction of performance obligations, permanent and temporary differences related to income taxes and determination of the fair value of stock awards.

 

Actual results could differ from those estimates.

 

The estimates of proved, probable and possible oil and gas reserves are used as significant inputs in determining the depletion of oil and gas properties and the impairment of proved and unproved oil and gas properties. There are numerous uncertainties inherent in the estimation of quantities of proven, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves and commodity price outlooks. Actual results could differ from the estimates and assumptions utilized.

 

34

 

 

Oil and Gas Properties

 

The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under the full cost method of accounting, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs are capitalized. General and administrative costs related to production and general overhead are expensed as incurred.

 

All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit of production method using estimates of proved reserves. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in operations. Unproved properties and development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the loss from operations before income taxes and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method.

 

Limitation on Capitalized Costs

 

Under the full-cost method of accounting, we are required, at the end of each reporting period, to perform a test to determine the limit on the book value of our oil and gas properties (the “Ceiling” test). If the capitalized costs of our oil and natural gas properties, net of accumulated amortization and related deferred income taxes, exceed the Ceiling, the excess or impairment is charged to expense. The expense may not be reversed in future periods, even though higher oil and gas prices may subsequently increase the Ceiling. The Ceiling is defined as the sum of: (a) the present value, discounted at 10% and assuming continuation of existing economic conditions, of (1) estimated future gross revenues from proved reserves, which is computed using oil and gas prices determined as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month hedging arrangements pursuant to Staff Accounting Bulletin (“SAB”) 103, less (2) estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves; plus, (b) the cost of properties being amortized; plus, (c) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; net of (d) the related tax effects related to the difference between the book and tax basis of our oil and natural gas properties.

 

Oil and Gas Reserves

 

Reserve engineering is a subjective process that is dependent upon the quality of available data and interpretation thereof, including evaluations and extrapolations of well flow rates and reservoir pressure. Estimates by different engineers often vary sometimes significantly. In addition, physical factors such as results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using recent prices of the evaluation, estimated reserve quantities can be significantly impacted by changes in product prices.

 

Inventories

 

Crude oil, products and merchandise inventories are carried at the lower of cost (last-in-first-out (LIFO)) or net realizable value. Inventory costs include expenditures and other charges directly and indirectly incurred in bringing the inventory to its existing condition and location.

 

Accounting for Asset Retirement Obligation

 

Asset retirement obligations (“ARO”) primarily represent the estimated present value of the amount the Company will incur to plug, abandon and remediate its producing properties at the projected end of their productive lives, in accordance with applicable federal, state and local laws. The Company determined its ARO by calculating the present value of the estimated cash flows related to the obligation. The retirement obligation is recorded as a liability at its estimated present value as of the obligation’s inception, with an offsetting increase to proved properties or to exploration costs in cost of revenues.

 

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Revenue Recognition

 

The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

 

The Company accounts for a contract when it has been approved and committed to, each party’s rights regarding the goods or services to be transferred have been identified, the payment terms have been identified, the contract has commercial substance, and collectability is probable. Revenue is generally recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.

 

Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.

 

Revenue from software license agreements of Zest Labs is recognized over time or 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 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 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. The Company did not have material revenue from software license agreements in the three months ended June 30, 2021 and 2020, respectively.

 

Revenue under master service agreements is recorded upon the performance obligation being satisfied. Typically, the satisfaction of the performance obligation occurs upon the frac sand load being delivered to the customer site and this load being successfully invoiced and accepted by the Company’s factoring agent.

 

The Company recognizes their proportionate share of revenue under ASC 606 when: (i) the Company receives notification of the successful sale of a load of crude oil to a buyer; (ii) the buyer will provide a price based on the average monthly price of crude oil in the most recent month; and (iii) cash is received the following month from the crude oil buyer.

 

The Company accounts for contract costs in accordance with ASC Topic 340-40, Contracts with Customers. The Company recognizes the cost of sales of a contract as expense when incurred or at the time a performance obligation is satisfied. The Company recognizes an asset from the costs to fulfil a contract only if the costs relate directly to a contract, the costs generate or enhance resources that will be used in satisfying a performance obligation in the future and the costs are expected to be recovered. The incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained.

 

Cost of sales for Pinnacle Frac includes all direct expenses incurred to produce the revenue for the period. This includes, but is not limited to, direct employee labor, direct contract labor and fuel.

 

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.

 

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Segment Information

 

The Company follows the provisions of ASC 280-10 Segment Reporting. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. The Company and its chief operating decision makers determined that the Company’s operations effective with the May 31, 2019, acquisition of Trend Holdings and the March 27, 2020 acquisition of Banner Midstream now consist of three segments, Trend Holdings (Finance), Banner Midstream (Commodities) and Zest Labs (Technology).

 

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.

 

Recently Issued Accounting Standards

 

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contract’s in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU simplifies the diluted net income per share calculation in certain areas. The ASU is effective for annual and interim periods beginning after December 31, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

 

In May 2021, the FASB issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as follows: i) for a modification or an exchange that is a part of or directly related to a modification or an exchange of an existing debt instrument or line-of-credit or revolving-debt arrangements (hereinafter, referred to as a “debt” or “debt instrument”), as the difference between the fair value of the modified or exchanged written call option and the fair value of that written call option immediately before it is modified or exchanged; ii) for all other modifications or exchanges, as the excess, if any, of the fair value of the modified or exchanged written call option over the fair value of that written call option immediately before it is modified or exchanged. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

 

The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

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Production Data

 

The following tables set forth our production data for the three months ended June 30, 2021 and 2020:

 

  Three Months Ended June 30, 
  2021  2020 
 Bbls  Bbls 
 Gross  Net  Gross  Net 
Production Data:            
By State/County            
Mississippi            
Holmes Cty  8   6   -   - 
Amite  3,512   2,795   1,325   1,055 
Wilkinson  3,619   2,808   860   679 
Pike  295   221   2   2 
   7,433   5,829   2,188   1,736 
                 
Louisiana                
Catahoula  1,835   899   299   251 
Concordia  1,059   619   -   - 
Tensas  1,026   770   72   54 
Lasalle  473   256   143   77 
Avoyelles  19,844   13,471   379   287 
   24,237   16,015   894   669 
                 
Total  31,670   21,845   3,082   2,405 

 

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Revenues

 

The following table shows revenues for the three months ended June 30, 2021 and 2020:

 

  Three Months Ended
June 30,
 
  2021  2020 
Oil and Gas Operations $1,568  $151 
Transportation Services and Other Revenue  5,163   2,072 
Financial Segment  148   90 
Technology Segment  -   - 
Total $6,879  $2,313 

 

Oil, Natural Gas and Natural Gas Liquids Revenues. Our revenues are a function of oil production volumes sold and average sales prices received for those volumes.

 

  Three Months Ended
June 30,
 
  2021  2020 
Revenues:      
Oil and natural gas sales, net of taxes $1,550  $151 
Other  18   - 
Total revenues $1,568  $151 

 

Our oil revenues for the three months ended June 30, 2021 increased by $1,399, or 926%, to $1,550 from $151 during the three months ended June 30, 2020. The increase in oil production during the three months ended June 30, 2021 as compared to the same period in 2020 resulted in $1,067 of the total increase due to more wells operational in 2021 versus 2020. The remaining revenue increase of $332 was due to an increase in oil prices during the three months ended June 30, 2021 as compared to the same period in 2020.

 

Average daily production sold increased by 89 barrels of oil per day (“BOPD”) to 243 BOPD during the three months ended June 30, 2021 from 154 BOPD during the three months ended June 30, 2020.

 

Cost of Revenues and Gross Profit

 

The following table shows costs of revenues for the three months ended June 30, 2021 and 2020:

 

   Three Months Ended
June 30,
 
   2021  2020 
Total  $3,942  $1,093 

 

The increase in cost of revenue was primarily due to increased owner operator and fuel expenses of $3,561 for three months ended June 30, 2021 compared to $1,316 for three months ended June 30, 2020.

 

Operating Expenses

 

The following table shows operating expenses by segment for the three months ended June 30, 2021 and 2020:

 

  Three Months Ended
June 30,
 
  2021  2020 
Segment   
Commodity segment $4,474  $2,304 
Technology segment  710   982 
Financial Segment  154   129 
Total $5,338  $3,415 

 

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The following table shows operating expenses for the three months ended June 30, 2021 and 2020:

 

  Three Months Ended
June 30,
 
  2021  2020 
Operating Expenses        
Salaries and salaries related costs $1,569  $2,012 
Professional and consulting fees  137   262 
Oilfield supplies and repairs  344   5 
Selling, general and administrative costs  2,272   605 
Depreciation, amortization, depletion, and accretion  1,016   301 
Research and development  -   230 
  $5,338  $3,415 

 

Selling, General and Administrative

 

The following table shows selling, general and administrative expenses for the three months ended June 30, 2021 and 2020:

 

  Three Months Ended
June 30,
 
  2021  2020 
Selling, general and administrative costs        
Insurance  672   (260)
Legal/Audit/Accounting expenses  274   309 
Factoring expenses  120   36 
Equipment Rental  117   13 
Other  1,089   507 
  $2,272  $605 

 

Insurance expense for three months ended June 30, 2020 included a one-time adjustment in commodity segment.

 

Depreciation, Amortization, Depletion and Accretion

 

The following table shows depreciation, amortization, depletion and accretion expenses for the three months ended June 30, 2021 and 2020:

 

  Three Months Ended
June 30,
 
  2021  2020 
Depletion of proved oil and natural gas properties $444  $54 
Depletion of drilled wells  274   - 
Depreciation of sand frac transportation equipment  109   105 
Depreciation of midstream assets  8   1 
Depreciation of technology segment assets  56   63 
Amortization of intangible assets  87   71 
Asset retirement obligation accretion  38   7 
Depreciation, depletion and amortization expense $1,016  $301 

 

The increase in depletion of proved oil and natural gas properties of $390 for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 is primarily due to full quarter of operations in 2021 compared to less than one month in 2020. Increase in depletion of drilled wells due to completion of Deshotel #24 well in March 2021.

 

Research and Development

 

Research and development expense decreased from $230 in the three months ended June 30, 2020 to zero in three months ended June 30, 2021. The $230 reduction in costs is due to the completion of the development of the Zest Labs freshness solutions.

 

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Other Income (Expense)

 

The following table shows other income (expense) for the three months ended June 30, 2021 and 2020:

 

  Three Months Ended
June 30,
 
  2021  2020 
Change in fair value of derivative liabilities $4,945  $(17,393)
Gain (loss) on exchange of warrants for common stock  -   1,630 
Loss on conversion of long-term debt and accrued expenses  -   (2,194)
Gain (loss) on disposal of fixed assets  -   (105)
Loss on abandonment of oil and gas property  -   (83)
Gain on disposal of ARO related to sale of oil and gas property  7   - 
Gain on sale of oil and gas property  592   - 
Interest expense, net of interest income  (584)  (841)
Other income (expense) $4,960  $(18,986)

 

Change in fair value of derivative liabilities for the three months ended June 30, 2021 was a non-cash gain as compared to a non-cash loss for the three months ended June 30, 2020. The $22,338 increase was a result of the fluctuation in the stock price at June 30, 2021 compared to June 30, 2020.

 

There was a gain in period ended June 30, 2020 from the extinguishment of the derivative liabilities that when converted to shares of common stock of $1,630. In addition, in the period ended June 30, 2020, there was a loss on the conversion of debt and other liabilities to shares of common stock of $2,194.

 

Interest expense, net of interest income, for the three months ended June 30, 2020 was the result of the interest incurred on the debt assumed in the Banner Midstream acquisition, the amortization of debt discount of $149 as well as the value related to the granting of warrants for interest of $524. For the three months ended June 30, 2021, value related to the granting of warrants for interest was $545.

 

Oil, Natural Gas and Natural Gas Liquids Costs and Expenses

 

  Three Months Ended
June 30,
 
  2021  2020 
Costs and expenses (income):      
Production $295  $(245)
Exploration, abandonment, and impairment  225   - 
Oilfield supplies and repairs  99   - 
Oil & Gas production taxes  44   10 
General and administrative  420   - 
Depreciation and amortization  8   1 
Depletion  718   53 
Accretion  38   7 
Gain on sale of oil and gas property  (600)  - 
Loss on abandonment of oil and gas property  -   82 

 

Net Income (loss)

 

The following table shows other income (expense) for the three months ended June 30, 2021 and 2020:

 

  Three Months Ended
June 30,
 
  2021  2020 
Commodities Segment $1,956  $(14,912)
Financial Segment  214   (914)
Technology Segment  389   (5,355)
Net Income (loss) $2,559  $(21,181)

 

Net income from continuing operations for the three months ended June 30, 2021 increased primarily due to the non-cash changes in the fair value of the derivative liability of $22,338 and the non-cash losses incurred on the conversion of debt and expense to equity in three months ended June 30, 2020, offset by the non-cash gain on the exchange of warrants for common stock in three months ended June 30, 2020.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

 

Net cash used in operating activities was ($290) for the three months ended June 30, 2021, as compared to net cash used in operating activities of ($2,837) for the three months ended June 30, 2020. Cash used in operating activities is related to the Company’s net income (loss) partially offset by non-cash expenses, including share-based compensation and the change in the fair value of the derivative liability and net losses incurred in the conversion of debt and liabilities to shares of common stock as well as losses on the sale of fixed assets and abandonment of oil and gas properties.

 

Net cash provided by (used in) investing activities was $2 for the three months ended June 30, 2021, as compared to ($209) net cash used in investing activities for the three months ended June 30, 2020. Net cash used in investing activities in 2021 related to the sale of fixed assets of $2. For the three months ended June 30, 2020, the cash used in investing activities related to advancement of a note receivable of $200, and the net purchases of fixed assets and oil and gas properties including drilling costs of $9.

 

Net cash used in financing activities for the three months ended June 30, 2021 was $186 that included $214 in repayments of debt offset by $28 in proceeds received from the exercise of stock options. This compared with the cash provided by financing activities in the three months ended June 30, 2020 of $4,433 that included $6,677 from the exercise of warrants, $349 form the exercise of stock options, $2,269 from proceeds received from debt form related and non-related parties offset by $4,596 from payments on debt to both related and non-related parties and $266 in payments to prior owners.

 

At June 30, 2021 we had cash (including restricted cash) of $842, and $17,100 as of August 9, 2021. We had a working capital deficit of $7,338 and $11,845 as of June 30, 2021 and March 31, 2021, respectively. The decrease in the working capital deficit is the result of the non-cash change in the fair value of the derivative liabilities and repayments of long-term debt offset by the net changes in accounts payable and accrued expenses.

 

On August 6, 2021, the Company closed a registered direct offering (the “Offering”) of 3,478 shares of the Company’s common stock and warrants to purchase 3,478 shares of common stock (the “Warrants”) to institutional investors at a purchase price per share and accompanying Warrant of $5.75 and received net proceeds of approximately $18,249 after deducting fees payable to the placement agent and offering expenses payable by the Company. We intend to use approximately $7,000 of the net proceeds from this offering to pay the expenses related to our new drilling projects for previously announced drilling program, approximately $3,000 to invest in the development of the prospective digital asset mining operation in Texas, approximately $1,000 to fund potential new intellectual property litigation legal fees and filings, and the remaining balance for additional to be determined growth capital projects, working capital, and general corporate purposes.

 

The Warrants have an exercise price equal to $5.75 per share, are exercisable on the effective date of an increase in the number of shares of the Company’s authorized common stock to 40,000 (the “Authorized Share Increase Date”) and will expire three and one-half years after the initial exercise date.

 

The Company has adequate capital resources to meet its cash requirements during the next 12 months. 

 

We expect that in the long term the revenue generating operations in our Commodities segment will continue to improve the liquidity of the Company moving forward. The Company’s capital program for production enhancement and development is expected to be significantly focused on exploiting legacy acreage positions that are economically viable at today’s oil prices. We anticipate that management’s focus on legacy acreage enhancement and development will positively benefit the balance sheet by producing hydrocarbons during a time of increasing demand after the negative impacts of COVID-19.

 

The amount and timing of our capital expenditures are largely discretionary and within our control. We could choose to defer a portion of these planned capital expenditures depending on a variety of factors, including but not limited to the success of our drilling activities, prevailing and anticipated prices for oil, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners. We currently continue to execute on our strategy to reinvest cash flow from operations to enhance, develop and increase oil production, strengthening our balance sheet. We intend to continue monitoring commodity prices and overall market conditions and can adjust capital deployment in response to changes in commodity prices and overall market conditions.

 

We monitor and adjust our projected capital expenditures in response to the results of our drilling activities, changes in prices, availability of financing, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs, contractual obligations, internally generated cash flow and other factors both within and outside our control. If we require additional capital, we may seek such capital through traditional reserve base borrowings, joint venture partnerships, production payment financing, asset sales, offerings of debt and/or equity securities or other means. There is no assurance that the needed capital will be available on acceptable terms or at all. If we are unable to obtain funds when needed or on acceptable terms, we may be required to curtail our drilling programs, which could result in a loss of acreage through lease expirations. In addition, we may not be able to complete acquisitions that may be favorable to us or finance the capital.

 

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Contractual Obligations

 

Our contractual obligations are included in our Notes to the Unaudited Condensed Consolidated Financial Statements. To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.

 

Off-Balance Sheet Arrangements 

 

As of June 30, 2021 and March 31, 2021, we had no off-balance sheet arrangements.

 

Cautionary Note Regarding Forward Looking Statements

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the expected increase in revenues from oil and gas operations, the proposed digital assets mining business, the expected use of proceeds from the Offering, including the new drilling projects, the digital asset mining business and prospective future litigation, our capital program for production enhancement and development, our anticipated capital expenditures, and future liquidity. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including: any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

 

The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ from those in the forward-looking statements include, among other things, volatility of oil prices, the risks arising from the new impact of the COVID-19 pandemic, including its future effect on the U.S. and global economies including the oil and gas market, competition, government regulation or action, the costs and results of drilling activities, risks inherent in drilling operations, availability of equipment, services, resources and personnel required to conduct operating activities, ability to replace reserves and uncertainties related to reserve estimates, uncertainties related to ongoing litigation, risks related to potential impact of natural disasters, risks and uncertainties related to the proposed digital asset mining business, and cybersecurity risks. Further information on our risk factors is contained in our filings with the SEC, including our Annual Report on Form 10-K for the year ended March 31, 2021 and our prospectus supplement dated August 4, 2021. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, our principal executive and financial officers have concluded that as of the end of the period covered by this report the Company’s disclosure controls and procedures were effective.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Principal Financial Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no material changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

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PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Other than discussed below, during the period covered by this report, there were no material developments in the legal proceedings disclosed in our Annual Report on Form 10-K for the year ended March 31, 2021.

 

 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. On April 9, 2021, a Little Rock, Arkansas jury awarded Ecoark and Zest a total of $115 million in damages which includes $65 million in compensatory damages and $50 million in punitive damages and found Walmart Inc. liable on three claims. The federal jury found that Walmart Inc. misappropriated Zest’s trade secrets, failed to comply with a written contract, and acted willfully and maliciously in misappropriating Zest’s trade secrets. We expect Walmart to continue to vigorously defend the litigation and to oppose the verdict in post-trial motions and an appeal. On April 27, 2021, we filed with the United States District Court for the Eastern District of Arkansas, Central Division a motion for attorneys’ fees in the amount of $46,000,000 or alternatively, $13,536,803, pre-judgment interest in the amount of $16,700,548 and 0.06% post-judgment interest, accruing from April 13, 2021. 

 

ITEM 1A. RISK FACTORS

 

Investors should review new risk factors contained in our prospectus supplement dated August 4, 2021 in addition to those disclosed in our Form 10-K for the year ended March 31, 2021.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On June 30, 2021, the Company issued to an employee (i) 10 shares of common stock upon exercise of stock options for cash and received proceeds in the amount of $28, and (ii) 10 shares of common stock upon cashless exercise of 20 stock options.

 

On June 30, 2021, the Company issued 200 warrants (the “Warrants”) pursuant to a Purchase Agreement, dated June 30, 2021, by and between the Company and an investor for a total consideration of $545. The Warrants are two-year warrants immediately exercisable at the strike price of $10.00 per share.

 

On July 1, 2021, the Company issued 30 shares to a consultant.

 

The issuance of the above shares was not registered under the Securities Act in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

    Incorporated by Reference 

Filed or

Furnished

Exhibit No. Exhibit Description Form Date Number Herewith
3.1 Articles of Incorporation, as amended 10-Q 2/12/21 3.1  
3.2 Amended and Restated Bylaws 8-K 4/28/17 3.1  
31.1 Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002       Filed
31.2 Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002       Filed
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002       Furnished*
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002       Furnished*
101.INS Inline XBRL Instance Document.      Filed 
101.SCH Inline XBRL Taxonomy Extension Schema Document.      Filed 
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.      Filed 
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.      Filed 
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.      Filed 
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.      Filed 
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).      Filed 

 

 

*This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

 

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to our Corporate Secretary at Ecoark Holdings, Inc., 303 Pearl Parkway Suite #200, San Antonio, Texas 78215.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 Ecoark Holdings, Inc.
   
Date: August 13, 2021By:/s/ RANDY MAY
  Randy May
  Chief Executive Officer
   
Date: August 13, 2021By:/s/ WILLIAM B. HOAGLAND
  William B. Hoagland
  Chief Financial Officer

 

 

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