UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
For
the quarterly period ended
OR
For the transition period from _______ to _______
Commission
File Number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(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 |
(The Nasdaq Capital Market) |
Securities
registered pursuant to Section 12(g) of the Act:
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.
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).
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 filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
As of August 13, 2021, there were
Ecoark Holdings, Inc.
INDEX
i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
Table of Contents
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 ($ | $ | $ | ||||||
| Accounts receivable, net of allowance of $ | ||||||||
| Inventories - Crude Oil | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Oil and gas properties, full cost-method | ||||||||
| Capitalized drilling costs, net of depletion | ||||||||
| Goodwill | ||||||||
| Right of use assets - financing leases | ||||||||
| Right of use assets - operating leases | ||||||||
| Non-current assets of discontinued operations | - | |||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| LIABILITIES | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Warrant derivative liabilities | ||||||||
| Current portion of long-term debt | ||||||||
| Note payable - related parties | ||||||||
| Current portion of lease liability - financing leases | ||||||||
| Current portion of lease liability - operating leases | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| NON-CURRENT LIABILITIES | ||||||||
| Lease liability - financing leases, net of current portion | ||||||||
| Lease liability - operating leases, net of current portion | ||||||||
| Long-term debt, net of current portion | ||||||||
| Asset retirement obligations | ||||||||
| Total non-current liabilities | ||||||||
| Total Liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) (Numbers of shares rounded to thousands) | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
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 | $ | $ | ||||||
| COST OF REVENUES | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES | ||||||||
| Salaries and salaries related costs | ||||||||
| Professional and consulting fees | ||||||||
| Oilfield supplies and repairs | ||||||||
| Selling, general and administrative costs | ||||||||
| Depreciation, amortization, depletion, and accretion | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) | ( | ) | ( | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Gain (loss) on exchange of warrants for common stock | ||||||||
| Loss on conversion of long-term debt and accrued expenses | ( | ) | ||||||
| Gain (loss) on disposal of fixed assets | ( | ) | ||||||
| Loss on abandonment of oil and gas property | ( | ) | ||||||
| Gain on disposal of ARO related to sale of oil and gas property | ||||||||
| Gain on sale of oil and gas property | ||||||||
| Interest expense, net of interest income | ( | ) | ( | ) | ||||
| Total other income (expense) | ( | ) | ||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE BENEFIT (PROVISION) FOR INCOME TAXES | ( | ) | ||||||
| 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 | ( | ) | ||||||
| BENEFIT (PROVISION) FOR INCOME TAXES | ||||||||
| NET INCOME (LOSS) | $ | $ | ( | ) | ||||
| NET INCOME (LOSS) PER SHARE - BASIC | $ | $ | ( | ) | ||||
| WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC | ||||||||
| NET INCOME (LOSS) PER SHARE - DILUTED | $ | $ | ( | ) | ||||
| WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED | ||||||||
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 | | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Shares issued in the exercise of warrants, net of expenses | - | - | - | - | ||||||||||||||||||||||||||||
| Shares issued in the exercise of stock options | - | - | - | - | - | |||||||||||||||||||||||||||
| Shares issued in conversion of debt and accrued interest | - | - | - | - | ||||||||||||||||||||||||||||
| Shares issued in conversion of accounts payable and accrued expenses | - | - | - | - | - | |||||||||||||||||||||||||||
| Conversion of preferred shares (Series C) to common shares | ( | ) | - | - | - | - | - | - | ||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Balance - June 30, 2020 | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Balance - March 31, 2021 | - | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Shares issued in the exercise of stock options, including cashless exercises | - | - | - | - | - | |||||||||||||||||||||||||||
| Shares issued for services rendered | - | - | - | - | - | |||||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net income for the period | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Balance - June 30, 2021 | - | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
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) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation, amortization, depletion, and accretion | ||||||||
| Share-based compensation | ||||||||
| Bad debt, net of recovery | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| (Gain) on disposal of ARO related to sale of oil and gas property | ( | ) | - | |||||
| (Gain) loss on exchange of warrants | ( | ) | ||||||
| Common shares issued for services | ||||||||
| (Gain) loss on sale of fixed assets | - | |||||||
| Loss on abandonment of oil and gas property | ||||||||
| Warrants granted for interest expense | ||||||||
| (Gain) loss on conversion of debt and liabilities to common stock | ||||||||
| Amortization of debt discount | ||||||||
| Changes in assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Amortization of right of use asset - financing leases | ||||||||
| Amortization of right of use asset - operating leases | ||||||||
| Interest on lease liability - financing leases | ( | ) | ( | ) | ||||
| Interest on lease liability - operating leases | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued liabilities | ( | ) | ||||||
| Total adjustments | ( | ) | ||||||
| Net cash used in operating activities of continuing operations | ( | ) | ( | ) | ||||
| Net cash used in discontinued operations | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITES | ||||||||
| Advance of note receivable | ( | ) | ||||||
| Purchases of oil and gas properties, net of asset retirement obligations | ( | ) | ||||||
| Proceeds from the sale of fixed assets | ||||||||
| Purchase of fixed assets | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITES | ||||||||
| Proceeds from exercise of warrants, net of fees | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from notes payable - related parties | ||||||||
| Repayments of notes payable - related parties | ( | ) | ||||||
| Proceeds from long-term debt | ||||||||
| Repayment of long-term debt | ( | ) | ( | ) | ||||
| Repayment to prior owners | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| NET (DECREASE) INCREASE IN CASH AND RESTRICTED CASH | ( | ) | ||||||
| CASH AND RESTRCITED CASH - BEGINNING OF PERIOD | ||||||||
| CASH AND RESTRICTED CASH - END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES | ||||||||
| Cash paid for interest expense | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| SUMMARY OF NON-CASH ACTIVITIES: | ||||||||
| Reclassification of assets of discontinued operations to current operations in fixed assets | $ | $ | ||||||
| Preferred stock converted into common stock | $ | $ | ||||||
| Conversion of long-term debt and notes payable and accrued interest into common stock | $ | $ | ||||||
| Conversion of accounts payable and accrued liabilities into common stock | $ | $ | ||||||
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
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
On
June 11, 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.
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
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 $
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
In
February and March 2021, the Company acquired additional leases for $
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
Effective
December 29, 2020, the Company amended its Articles of Incorporation to reduce the authorized common stock from
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
On
April 9, 2021, a Little Rock, Arkansas jury awarded Ecoark and Zest a total of $
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
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
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 $
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
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.
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 $
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 $
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 | $ | $ | ||||||
| Oil and Gas Production | ||||||||
| Transportation Services | ||||||||
| Fuel Rebate | ||||||||
| Equipment Rental | ||||||||
| $ | $ | |||||||
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 $
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 $
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 $
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, | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Zest Labs freshness hardware | $ | $ | ||||||
| Computers and software costs | ||||||||
| Land | ||||||||
| Buildings | ||||||||
| Leasehold improvements – Pinnacle Frac | ||||||||
| Machinery and equipment – Technology | ||||||||
| Machinery and equipment – Commodities | ||||||||
| Total property and equipment | ||||||||
| Accumulated depreciation and impairment | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
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.
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 $
NOTE 7: INTANGIBLE ASSETS AND GOODWILL
Intangible assets consisted of the following as of June 30, 2021 and March 31, 2021:
June 30, | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Patents | $ | $ | ||||||
| Customer relationships | ||||||||
| Non-compete agreements – Banner Midstream | ||||||||
| Outsourced vendor relationships | ||||||||
| Non-compete agreements – Zest Labs | ||||||||
| Total intangible assets | ||||||||
| Accumulated amortization and impairment | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
In
the acquisition of Banner Midstream, the Company acquired the customer relationships and non-compete agreements valued at $
Amortization
expense for the three months ended June 30, 2021 and 2020 was $
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 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| $ |
In
addition to the statutory based intangible assets noted above, the Company recorded a total of $
Accordingly, goodwill was as follows as of June 30, 2021:
| Acquisition – Trend Discovery | $ | |||
| Acquisition – Banner Midstream | ||||
| Goodwill – March 31, 2021 | $ |
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 | $ | $ | ||||||
| Vacation and paid time off | ||||||||
| Legal fees | ||||||||
| Compensation | ||||||||
| Interest | ||||||||
| Insurance | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
During the year ended March 31, 2021, the Company
converted $
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
On
December 30, 2020, the Company granted
The
fair value of the
On June 30, 2021, the Company granted
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 | – |
||||||||
| Expected volatility | |||||||||
| Expected dividend yield | |||||||||
| Risk-free interest rate | |||||||||
| Market price | $ |
$ |
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 | $ | $ | $ | |||||||||
| Fair value of 60 November 14, 2020 warrants | ||||||||||||
| Fair value of 889 December 31, 2020 warrants | ||||||||||||
| Fair value of 62 December 31, 2020 warrants | ||||||||||||
| Fair value of 200 June 30, 2021 warrants | - | |||||||||||
| $ | $ | |||||||||||
During
the three months ended June 30, 2021 and 2020 the Company recognized changes in the fair value of the derivative liabilities of $
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 | $ | |||
| Issuances of warrants – derivative liabilities | ||||
| Warrants exchanged for common stock | (- | ) | ||
| Change in fair value of warrant derivative liabilities | ( | ) | ||
| Ending balance as of June 30, 2021 | $ |
Activity related to the warrant derivative liabilities for the year ended March 31, 2021 is as follows:
| Beginning balance as of March 31, 2020 | $ | |||
| Issuances of warrants – derivative liabilities | ||||
| Warrants exchanged for common stock | ( | ) | ||
| Change in fair value of warrant derivative liabilities | ||||
| Ending balance as of March 31, 2021 | $ |
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
$
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, | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Total OGML Properties Acquired | $ | $ | ||||||
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 $
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
As
discussed in Note 16, the Company acquired certain leases on June 11, 2020 and June 18, 2020 in Mississippi and Louisiana valued at $
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 $
As
discussed in Note 16, on September 4, 2020, the Company entered into a Lease Assignment agreement. The purchase price for this acquisition
was $
As
discussed in Note 16, on September 30, 2020, the Company entered into three Asset Purchase Agreements. The purchase prices for these
acquisitions were $
As
discussed in Note 16, on October 1, 2020, the Company entered into three Asset Purchase Agreements. The purchase price for these acquisitions
were $
As
discussed in Note 16, on October 9, 2020, the Company entered into three Asset Purchase Agreements. The purchase price for these acquisitions
were $
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 $
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 | $ | $ | $ | |||||||||
| Accumulated depreciation, depletion and amortization | ( | ) | ( | ) | ( | ) | ||||||
| Changes in estimates | ||||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
| Undeveloped and Non-Producing Oil and Gas Properties | ||||||||||||
| Cost | $ | $ | $ | |||||||||
| Changes in estimates | (- | ) | (- | ) | (- | ) | ||||||
| Total | $ | $ | ) | $ | ||||||||
| Grand Total | $ | $ | ( | ) | $ | |||||||
| Activity Category | March 31, 2020 | Adjustments (1) | March 31, 2021 | |||||||||
| Proved Developed Producing Oil and Gas Properties | ||||||||||||
| Cost | $ | $ | $ | |||||||||
| Accumulated depreciation, depletion and amortization | ( | ) | ( | ) | ||||||||
| Changes in estimates | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Undeveloped and Non-Producing Oil and Gas Properties | ||||||||||||
| Cost | $ | $ | $ | |||||||||
| Changes in estimates | ( | ) | ( | ) | ||||||||
| Total | $ | $ | ( | ) | $ | |||||||
| Grand Total | $ | $ | $ | |||||||||
| (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, | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Note payable – Alliance Bank (a) | $ | $ | ||||||
| Commercial loan – Firstar Bank (b) | ||||||||
| Auto loan 1 – Firstar Bank (c) | ||||||||
| Auto loan 2 – Firstar Bank (d) | ||||||||
| Auto loan 3 – Ally Bank (e) | ||||||||
| Auto loan 4 – Ally Bank (f) | ||||||||
| Auto loan 7 – Ally Bank (g) | ||||||||
| Tractor loan 6 – Tab Bank (h) | ||||||||
| Ecoark – PPP Loan (i) | ||||||||
| Total long-term debt | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Long-term debt, net of current portion | $ | $ | ||||||
| (a) | Original loan date of June 14, 2019 with an original maturity date of April 14, 2020. The Company extended this loan for $ |
| (b) | Original loan date of February 28, 2018, due December 31, 2021 at |
| (c) | On July 20, 2018, entered into a long-term secured note payable for $ |
| (d) | On August 3, 2018, entered into a long-term secured note payable for $ |
| (e) | On July 18, 2018, entered into a long-term secured note payable for $ |
| (f) | On July 26, 2018, entered into a long-term secured note payable for $ |
| (g) | On November 5, 2018, entered into four long-term secured notes payable for $ |
| (h) | On November 7, 2018, entered into a long-term secured note payable for $ |
| (i) | PPP loan received by Ecoark Holdings Inc. in April 2020. Loan bears interest at |
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 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| $ |
During the three months ended June 30, 2021,
the Company repaid $
During
the year ended March 31, 2021,
Interest
expense on long-term debt during the three months ended June 30, 2021 and 2020 are $
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, | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Ecoark Holdings Board Member (a) | $ | $ | ||||||
| Total Notes Payable – Related Parties | ||||||||
| Less: Current Portion of Notes Payable – Related Parties | ( | ) | ( | ) | ||||
| Long-term debt, net of current portion | $ | $ | ||||||
| (a) | A board member advanced $ |
During
the year ended March 31, 2021, the Company received proceeds of $
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
The
Company has entered into agreements to issue preferred stock over the past several years.
Ecoark Holdings Common Stock
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
On
December 31, 2020,
In
the three months ended March 31, 2021, the Company issued
In
the three months ended June 30, 2021, the Company issued
Share-based
compensation expense
As
of June 30, 2021,
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 $ |
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
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.
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,
On
June 18, 2020,
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.
| Building | $ | |||
| Land | ||||
| Oil and Gas Properties | ||||
| Asset retirement obligation | ( | ) | ||
| $ |
Unrelated Third Party
O’Neal Family
On
September 30, 2020,
The
purchase prices of these leases were $
| Oil and Gas Properties | $ | |||
| Asset retirement obligation | ( | ) | ||
| $ |
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 | $ | $ | ||||||||||||||
| March 31, 2021 | ||||||||||||||||
| Warrant derivative liabilities | $ | $ | ( | ) | ||||||||||||
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
| Three Months Ended June 30, 2021 | Commodities | Financial | Technology | Total | ||||||||||||
| Segmented operating revenues | $ | $ | $ | - | $ | |||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | - | |||||||||||||||
| Total operating expenses net of depreciation, amortization, depletion and accretion | ||||||||||||||||
| Depreciation, amortization, depletion and accretion | - | |||||||||||||||
| Other (income) expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from continuing operations | $ | $ | $ | $ | ||||||||||||
| Segmented assets as of June 30, 2021 | ||||||||||||||||
| Property and equipment, net | $ | $ | - | $ | $ | |||||||||||
| Oil and Gas Properties/Capitalized drilling costs | $ | $ | - | $ | - | $ | ||||||||||
| Intangible assets, net | $ | $ | - | $ | - | $ | ||||||||||
| Goodwill | $ | $ | $ | - | $ | |||||||||||
| Capital expenditures | $ | - | $ | $ | $ | - | ||||||||||
| Three Months Ended June 30, 2020 | Commodities | Financial | Technology | Total | ||||||||||||
| Segmented operating revenues | $ | $ | $ | - | $ | |||||||||||
| Cost of revenues | - | - | ||||||||||||||
| Gross profit | - | |||||||||||||||
| Total operating expenses net of depreciation, amortization, and impairment | ||||||||||||||||
| Depreciation and amortization | - | |||||||||||||||
| Other expense | ||||||||||||||||
| Loss from continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Segmented assets as of June 30, 2020 | ||||||||||||||||
| Property and equipment, net | $ | $ | - | $ | $ | |||||||||||
| Oil and Gas Properties/Capitalized drilling costs | $ | $ | - | $ | - | $ | ||||||||||
| Intangible assets, net | $ | $ | - | $ | - | $ | ||||||||||
| Goodwill | $ | $ | $ | - | $ | |||||||||||
| Capital expenditures | $ | $ | - | $ | - | $ | ||||||||||
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 $
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 $
| Maturity of lease liability for the operating leases for the period ended June 30, | ||||
| 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| Imputed interest | $ | ( | ) | |
| Total lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-current portion | $ | |||
| Maturity of lease liability for the financing leases for the period ended June 30, | ||||
| 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| Imputed interest | $ | ( | ) | |
| Total lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-current portion | $ | |||
| Amortization of the right of use asset for the period ended June 30, | ||||
| 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| Total | $ | |||
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 | Three
months ended | |||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease expense | $ | $ | ||||||
| Finance lease expense | ||||||||
| Depreciation of capitalized finance lease assets | ||||||||
| Interest expense on finance lease liabilities | ||||||||
| Total lease cost | $ | $ | ||||||
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, | March 31,
2021 | |||||||
| (unaudited) | ||||||||
| Balance, beginning of period | $ | $ | ||||||
| Accretion expense | ||||||||
| Reclamation obligations settled | ||||||||
| Disposition due to sale of property | ( | ) | ||||||
| Additions | ||||||||
| Changes in estimates | ||||||||
| Balance, end of period | $ | $ | ||||||
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
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
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
Gary
Metzger, a director, advanced $
On
March 27, 2020, the Company issued
In
the Banner Midstream acquisition, Randy S. May, Chief Executive Officer and Chairman, was the holder of approximately $
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
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 $
On August 6, 2021, the Company closed a $
In order to have sufficient authorized capital
to raise the $
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, 2021 | By: | /s/ RANDY MAY |
| Randy May | ||
| Chief Executive Officer | ||
| Date: August 13, 2021 | By: | /s/ WILLIAM B. HOAGLAND |
| William B. Hoagland | ||
| Chief Financial Officer | ||
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