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 _______
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(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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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
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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 ☐
As of February 11, 2022, there were
Ecoark Holdings, Inc.
INDEX
i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
Table of Contents
1
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2021 (UNAUDITED) AND MARCH 31, 2021
(in thousands, except per share data)
| DECEMBER 31, | 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 | ||||||||
| Intangible assets, digital currency | - | |||||||
| Power development costs | - | |||||||
| 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 | ||||||||
| 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 before non-controlling interest | ||||||||
| Non-controlling interest | ( | ) | - | |||||
| 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 NINE AND THREE MONTHS ENDED DECEMBER 31, 2021 AND 2020
(in thousands, except per share data)
| NINE MONTHS ENDED | THREE MONTHS ENDED | |||||||||||||||
| DECEMBER 31, | DECEMBER 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (unaudited) | (unaudited) | (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 | ||||||||||||||||
| Forgiveness of debt | ||||||||||||||||
| Interest expense, net of interest income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ||||||||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS AND (PROVISION) FOR INCOME TAXES | ( | ) | ||||||||||||||
| DISCONTINUED OPERATIONS: | ||||||||||||||||
| Loss from discontinued operations | ||||||||||||||||
| Gain on disposal of discontinued operations | ||||||||||||||||
| Total discontinued operations | ||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS BEFORE BENEFIT (PROVISION) FOR INCOME TAXES | ( | ) | ||||||||||||||
| BENEFIT (PROVISION) FOR INCOME TAXES | ||||||||||||||||
| NET INCOME (LOSS) | ( | ) | ||||||||||||||
| NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | ||||||||||||||||
| NET INCOME (LOSS) TO CONTROLLING INTEREST | $ | $ | ( | ) | $ | $ | ||||||||||
| NET INCOME (LOSS) PER SHARE - BASIC | $ | $ | ( | ) | $ | $ | ||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC | ||||||||||||||||
| NET INCOME (LOSS) PER SHARE – DILUTED (see NOTE 1) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING – DILUTED (see NOTE 1) | ||||||||||||||||
See notes to consolidated financial statements.
3
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2021 AND 2020
(Dollar amounts and number of shares in thousands)
| Additional | ||||||||||||||||||||||||||||||||||||
| Preferred | Common Stock | Paid-In | Accumulated | Treasury | Non-controlling | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Interest | 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 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Shares issued in the conversion of long-term debt and accrued interest | - | |||||||||||||||||||||||||||||||||||
| Shares issued services rendered | - | |||||||||||||||||||||||||||||||||||
| Shares issued in acquisition of oil and gas reserves and fixed assets | - | |||||||||||||||||||||||||||||||||||
| Shares issued in the exercise of warrants | - | |||||||||||||||||||||||||||||||||||
| Shares issued in the exercise of cashless stock options | - | |||||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Net income for the period | - | - | ||||||||||||||||||||||||||||||||||
| Balance - September 30, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Shares issued in the exercise of warrants | - | |||||||||||||||||||||||||||||||||||
| Shares issued in registered direct offering, net of amount allocated to derivative liability | |
- | ||||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Fractional adjustment | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
| Net income for the period | - | - | ||||||||||||||||||||||||||||||||||
| Balance - December 31, 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 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Shares issued for services rendered, net of amounts prepaid | - | |||||||||||||||||||||||||||||||||||
| Shares issued in registered direct offering, net of amount allocated to derivative liability | - | |||||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Fractional adjustment | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
| Net loss for the period | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance - September 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Shares issued by Agora Digital Holdings, Inc. for services rendered, net of amounts prepaid | - | - | ||||||||||||||||||||||||||||||||||
| Vesting of shares issued in prior quarter | - | - | ||||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Recognition of non-controlling interest | - | - | ( | ) | ||||||||||||||||||||||||||||||||
| Net income (loss) for the period | - | - | ( | ) | ||||||||||||||||||||||||||||||||
| Balance - December 31, 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 NINE MONTHS ENDED DECEMBER 31, 2021 AND 2020
(in thousands, except per share data)
| 2021 | 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities | ||||||||
| Change in non-controlling interest | ( | ) | ||||||
| Depreciation, amortization, depletion, and accretion | ||||||||
| Impairment of digital assets | ||||||||
| Share-based compensation | ||||||||
| Bad debt, net of recovery | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| (Gain) on disposal of oil and gas property | ( | ) | ||||||
| Forgiveness of debt | ( | ) | ||||||
| (Gain) loss on exchange of warrants | ( | ) | ||||||
| Common shares issued for services | ||||||||
| Common shares issued for services- Agora | ||||||||
| Loss on sale of fixed assets | ||||||||
| Loss on abandonment of oil and gas property | ||||||||
| Warrants granted for interest expense | ||||||||
| Warrants granted for commissions | ||||||||
| 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 | ( | ) | ( | ) | ||||
| Intangible assets - digital currencies | ( | ) | ||||||
| Amortization of right of use asset - financing leases | ||||||||
| Amortization of right of use asset - operating leases | ||||||||
| Other assets | ( | ) | ||||||
| Interest on lease liability - financing leases | ( | ) | ( | ) | ||||
| Operating lease expense | ( | ) | ( | ) | ||||
| 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 ACTIVITIES | ||||||||
| Advance of note receivable | ( | ) | ||||||
| Payment of power development costs | ( | ) | ||||||
| Purchases of oil and gas properties, net of asset retirement obligations | ( | ) | ( | ) | ||||
| Proceeds from the sale of fixed assets | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities of continuing operations | ( | ) | ( | ) | ||||
| Net cash used in discontinued operations | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from the issuance of common stock in a registered direct offering, net of fees | ||||||||
| Proceeds from exercise of warrants, net of fees | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Reduction of finance lease liability | ( | ) | ( | ) | ||||
| 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 provided by financing activities | ||||||||
| NET (DECREASE) INCREASE IN CASH AND RESTRICTED CASH | ( | ) | ||||||
| CASH AND RESTRICTED 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 | $ | $ | ||||||
| Bifurcation of derivative liability in registered direct offering | $ | $ | ||||||
| Recognition of non-controlling interest | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Shares issued for acquisition of oil and gas reserves and fixed assets, net of asset retirement obligations | $ | $ | ||||||
| Note receivable offset against oil and gas reserves in acquisition of Rabb | $ | $ | ||||||
| Lease liability recognized for ROU asset | $ | $ | ||||||
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)
DECEMBER 31, 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 and when separately disclosed, or where the context indicates otherwise.
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)
DECEMBER 31, 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 $
On
August 16, 2021 the Company and Shamrock Upstream Energy, LLC, a wholly-owned subsidiary of the Company entered into an agreement with
a privately-held limited liability company to acquire working interests in the Luling Prospect for $
7
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
On
September 1, 2021 the Company and White River Energy, LLC, a wholly-owned subsidiary of the Company entered into an agreement with several
individuals to acquire working interests in the various leases in Concordia, LA for $
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
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 Holdings formed four subsidiaries: Bitstream Mining, LLC, a Texas Limited Liability Corp. (“Bitstream”) on May 16, 2021, REStream Processing LLC, a Texas Limited Liability Corp (“REStream”) on May 16, 2021, Trend Discovery Exploration LLC, a Texas Limited Liability Corp. (“Trend Exploration”) on May 27, 2021, and OTZI, LLC, a Delaware Limited Liability Corp. (“OTZI”) on September 2, 2021, in addition to Barrier Crest, LLC (“Barrier Crest”) that was acquired along with Trend Capital Management, Inc. (“TCM”) that was acquired by Ecoark on May 31, 2019.
The Company assigned its membership interest in Trend Holdings and its related wholly owned subsidiaries to Agora on September 22, 2021, for the sale of the initial one hundred shares for ten dollars. On October 1, 2021, the Company purchased 41,671 shares of Agora common stock for $4,167 which Agora used to purchase equipment to commence the Bitstream operations.
Agora was organized by Ecoark to enter the digital asset mining business. Because of regulatory uncertainty over digital assets being deemed to be securities, Agora’s initial focus is on mining Bitcoin which the Securities and Exchange Commission (the “SEC”) administratively determined is not a security. Because of regulatory concerns and the changing regulatory environment, Agora intends to seek opportunities to engage with cryptocurrencies that do not involve the offer or sale of any securities.
On November 19, 2021 Agora filed a registration
statement on Form S-1 (File No. 333-261246) in connection with its initial public offering of
Subject to completion of the Agora public offering and Nasdaq uplisting described below, the Company intends to issue a stock dividend through a pro rata distribution of Agora’s common stock to Ecoark’s common stockholders and holders of common stock equivalents. Ecoark plans to distribute 80% of the Agora common stock it holds to its stockholders as of a future record date to be determined upon completion of regulatory compliance. Ecoark plans to retain the remaining 20% ownership in Agora on its balance sheet. As a result of the approval by the board of directors of the Company to divest Agora, the Company has accounted for this as a disposal other than by sale. Assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of. Upon disposal, the Company must assess whether the disposed of assets qualify for discontinued operations reporting. If so, the Company will apply the presentation and disclosure requirements of ASC 205-20, and if not, the Company will apply the presentation and disclosure requirements of ASC 360-10.
On August 4, 2021, the Company’s common stock commenced trading on the Nasdaq Capital Market.
8
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
On
October 6, 2021, the Company held a Special Meeting of Stockholders, at which the stockholders approved (a) an amendment to the Articles
of Incorporation to increase the number of shares of authorized common stock of the Company from
Overview of Agora Digital Holdings, Inc.
Bitstream
Bitstream
was organized to be our principal cryptocurrency subsidiary. Bitstream has entered into a series of agreements including arranging for
a reliable and economical electric power source needed to efficiently mine Bitcoin, ordering miners, housing infrastructure and other
infrastructure to mine Bitcoin and locating a third-party hosting service to operate the miners and the service’s more advanced
miners. Agora has spent (and agreed to spend) between $
Bitstream deploys and operates (or hires third parties to operate)
modularized data centers (facilities) with the sole purpose of mining digital assets, with Bitcoin initially as the focus. Agora is powering
these data centers by acquiring one or more long-term power contract to purchase electric power from the electric grid in Texas. As the
business’ operations grow, Bitstream intends to continuously add data center facilities by reinvesting their revenues. All data
centers will be remotely managed with onsite personnel for servicing and troubleshooting any operational issues. Bitstream plans to utilize
the energy to power its energy intensive operations of digital asset mining. Additionally, if Texas experiences another power shortage
during the winter or summer months from extreme weather conditions, Bitstream would be able to arbitrage power at favorable margins. Bitstream
will do this by temporarily shutting down their cryptocurrency mining operations and selling their purchased power back to the grid at
favorable margins. Last winter, during the blackout, the price per kWh exceeded $
Bitstream has
| ● | entered into a letter of intent to obtain a source of electric power in West Texas, including the initial 12 megawatts (“MW”) of power with agreement by the retail power provider to increase the available capacity at the substation to 48 MW. We have also entered into a second letter of intent for an additional 30 MW at a second location; |
| ● | paid the power management company $2,423 which includes $2,000 in power development fees and is negotiating definitive agreements (the “Power Agreement”) which if executed will allow for the increase of the facility’s electrical capacity to up to 78 MW; and |
| ● | ordered 5,000 used Canaan Avalon 841 13 tera hash per second (“TH/s”) miners for $1,350, plus shipping costs to be delivered on 1,000-unit increments, of which 4,000 miners have been delivered as of January 31, 2022; and | |
| ● | entered into a long-term lease for 20 acres of land effective December 10, 2021, and a land purchase agreement for a separate 20 acres of land effective January 3, 2022. |
9
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
Mining Equipment
Because Bitstream has secured a source for 48 MW of electrical power
with agreement by the power provider to increase the available capacity at the substations to 78 MW as more fully described below and
expects to increase the capacity through conditional and unconditional rights to a number of sites across West Texas to up to 372 MW assuming
this can be done on acceptable terms. In September 2021 Bitstream ordered 5,000 used Canaan Avalon 841 13 TH/s miners for $
In
August 2021, Bitstream entered into an agreement with a third party which will supply Bitstream with more advanced housing infrastructure
in exchange for approximately $
In
September 2021, Bitstream entered into a binding agreement referred to as a Memorandum of Understanding with Elite Mining Inc. (the “Hosting
Company”) that will supply high speed miners, host the Company’s data center and operate the miners it installs. In Phase
1 which is a beta test phase, Bitstream paid $
The Hosting Company uses immersion cooling, and other technological enhancements, for the miners it will install for Bitstream. Immersion cooling is a technique where Bitcoin mining units are submerged in a dielectric fluid to keep the integrated circuits operating at lower temperatures. When successful, this has the potential to: prolong equipment life, enhance hashing efficiencies, and provides the opportunity to “overclock” the processors, i.e., running at speeds beyond factory specified design. Overclocking, including when assisted by immersion cooling, is a technique that can be used to increase a miner’s overall hash rate.
Phase 2 is planned to begin in May 2022 which is subject to Bitstream agreeing to proceed. If Bitstream elects to enter Phase 2, it will be required to loan the Hosting Company the funds to develop a production facility in Texas on terms to be negotiated. Bitstream will have certain rights to the production facility capacity from Phase 2 and will pay the Hosting Company for its services.
10
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
In connection with the increase in electrical capacity, Bitstream entered into a second binding letter of intent with the power management company pursuant to which the Company has paid a total of $2,955, consisting of a $2,628 development fee and a $327 reimbursement for payments made by the power management company to the electric utility to secure the power. In addition, the Company agreed to pay a total of $450 upon the power management company signing a binding agreement to acquire or lease 20 or more acres of usable land for Bitstream’s facility and construct a transmission line to the mining site.
Once the business is operational, Bitstream intends to continuously add data center platforms by reinvesting cash and potentially utilizing leverage to scale operations. All data centers will be remotely managed with onsite personnel for servicing and troubleshooting any operational issues.
Barrier Crest provides fund administration and related services for small hedge funds. Trend Capital Management was founded in 2011. Trend Capital Management is the investment manager of and provides services and collects fees from Trend Discovery LP (“Trend LP”) and Trend Discovery SPV I, LLC (“Trend SPV”), both of which invest in securities. Trend Capital Management is not the beneficial owner of Ecoark securities held by Trend LP since it assigned to a third party not affiliated with Ecoark the power to vote and dispose of Ecoark securities. The investment capital in Trend LP and Trend SPV is from individual limited partners, and not from the Company.
Trend
Exploration was assigned an
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 for the Company to acquire
11
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
Subject to completion of the Agora public offering and Nasdaq uplisting described above, the Company intends to issue a stock dividend through a pro rata distribution of Agora’s common stock to Ecoark’s common stockholders and holders of common stock equivalents. Ecoark plans to distribute 80% of the Agora common stock it holds to its stockholders as of a future record date to be determined upon completion of regulatory compliance. Ecoark plans to retain the remaining 20% ownership in Agora on its balance sheet. As a result of the approval by the board of directors of the Company to divest Agora, the Company, has accounted for this as a disposal other than by sale. Assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of. Upon disposal, the Company must assess whether the disposed of assets qualify for discontinued operations reporting. If so, the Company will apply the presentation and disclosure requirements of ASC 205-20, and if not, the Company will apply the presentation and disclosure requirements of ASC 360-10.
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
The Company has utilized the guidance under ASC 810-10-55-4B, Case A for a Change that has resulted in the recognition of non-controlling interest. On October 1, 2021, Agora issued restricted common stock to non-employee directors, management, employees and advisors. As a result of the restricted common share issuances, the Company owns now owns less than 100% of Agora (approximately 90.1%), The Company expects it will continue to control Agora until it completes the distribution of Agora common stock to its security holders described above; after that event occurs, it may still have sufficient equity ownership to control Agora unless one or more third parties acquire a larger equity position.
Pursuant to 810-10-55-4M, the Company has provided below the effects of ASC 810-10-50-1A(d) to disclose the effects of the changes in the Company’s ownership interest in Agora on the Company’s equity for the three months ended December 31, 2021:
| Net income (loss) attributable to the Company’s stockholders | $ | |||
| Increase in the Company’s additional paid-in capital for the issuance of the | ||||
| Change from net income (loss) attributable to the Company’s stockholders and transfers to noncontrolling interest | $ |
Reclassifications
The Company has reclassified certain amounts in the December 31, 2020 unaudited condensed consolidated financial statements to be consistent with the December 31, 2021 presentation.
Noncontrolling Interests
In accordance with ASC 810-10-45 Noncontrolling Interests in Consolidated Financial Statements, the Company classifies noncontrolling interests as a component of equity within the consolidated balance sheet. In October 2021, with the issuance of restricted common stock to directors, management and advisors, the Company no longer owns 100% of Agora. As of December 31, 2021, approximately 9.1% is reflected as non-controlling interest of that entity.
12
ECOARK
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 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
13
ECOARK
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 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 nine and three months ended December 31, 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.
14
ECOARK
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 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 will recognize income from digital currency mining from the provision of transaction services within digital currency networks, commonly termed “cryptocurrency mining”. As consideration for those services, the Company will receive digital currency from each specific network in which it participates (“coins”). Income from digital currency mining is measured based on the fair value of the coins received. The fair value is determined using the spot price of the coin on the date of receipt. The coins are recorded on the consolidated balance sheet, as intangible asset – digital currency, at their fair value less costs to sell and re-measured each reporting date, if not sooner. Revaluation gains or losses on the sale of coins for traditional (fiat) currencies will be included in the consolidated statements of operations.
The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company’s entitled to a fractional share of the fixed cryptocurrency reward the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain. The terms of the agreement provides that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share of the cryptocurrency generated by the pool is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
Providing computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. The provision of providing such computing power is the only performance obligation on the Company in the Company’s contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the reward from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time the revenue is recognized. There is no significant financing component in these transactions.
Fair value of the digital asset reward received is determined using the quoted price of the related digital asset at the time of receipt. The block reward provides an incentive for Bitcoin miners to process transactions made with the cryptocurrency. Creating an immutable record of these transactions is vital for the digital assets to work as intended. The blockchain is like a decentralized bank ledger, one that cannot be altered after being created. The miners are needed to verify the transactions and keep this ledger up to date. Block rewards, and to a lesser extent, transaction fees, are their payment for doing so. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for digital assets recognized as revenue and held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.
15
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
The Company’s cost of revenue for digital assets consists primarily of direct costs of earning the digital asset related to mining operations, including mining pool fees, electric power costs, other utilities, labor, insurance whether incurred directly from self-mining operations or reimbursed, including any revenue sharing arrangements under the hosting agreements, but excluding depreciation and amortization, which are separately stated in the Company’s Consolidated Statement of Operations.
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
for both with and without recourse.
White
River has recognized an allowance for doubtful accounts of $
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.
Digital assets will consist of cryptocurrency denominated assets and will be included in non-current assets. Digital assets will be carried at their fair value determined by the spot rate less costs to sell. The digital asset market is still a new market and is highly volatile; historical prices are not necessarily indicative of future value; a significant change in the market prices for digital currencies would have a significant impact on the Company’s earnings and financial position. Fair value will be determined by taking the price of the coins from the exchanges which the Company will most frequently use.
16
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
Digital Assets
Digital currencies will be included in non-current assets in the consolidated balance sheets as intangible assets with indefinite useful lives. Digital assets are recorded at cost less impairment.
The Company accounts for its digital assets as indefinite-lived intangible assets in accordance with ASC 350. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital currency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
The Company determines the fair value of its Bitcoin on a nonrecurring basis in accordance with ASC 820, based on quoted (unadjusted) prices on the active exchange that the Company has determined is its principal market for Bitcoin (Level 1 inputs). The Company performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted (unadjusted) prices on the active exchange, indicate that it is more likely than not that any of the assets are impaired. In determining if an impairment has occurred, the Company considers the lowest price of one Bitcoin quoted on the active exchange at any time since acquiring the specific Bitcoin held by the Company. If the carrying value of a Bitcoin exceeds that lowest price, an impairment loss has occurred with respect to that Bitcoin in the amount equal to the difference between its carrying value and such lowest price.
Impairment losses are recognized as “Digital asset impairment losses” in the Company’s Consolidated Statements of Operations in the period in which the impairment is identified. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains (if any) are not recorded until realized upon sale, at which point they would be presented net of any impairment losses in the Company’s Consolidated Statement of Operations. In determining the gain to be recognized upon sale, the Company calculates the difference between the sales price and the carrying value of the specific Bitcoin sold immediately prior to sale.
Any impairment losses related to digital assets are included in the Digital Assets segment.
Impairment of Long-lived Assets
Segment Information
The Company follows the provisions of ASC 280-10 Segment Reporting. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. The Company and its chief operating decision makers determined that the Company’s operations effective with the May 31, 2019, acquisition of Trend Holdings and the March 27, 2020 acquisition of Banner Midstream consisted of three segments, Financial, Commodities and Technology. Effective July 1, 2021, the Company’s chief operating decision makers in discussion with the finance team determined that the Company would add a fourth reporting segment to account for their Digital Asset mining business. Additionally, on July 1, 2021 the Company will report its home office costs into the Commodity segment, charge its Technology segment a monthly overhead fee, and has recorded typical overhead expenses in their Finance and Digital Asset segments to account for this home office allocation.
17
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
Earnings (Loss) Per Share of Common Stock
Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (“EPS”) include additional dilution from common stock equivalents, such as convertible notes, preferred stock, stock issuable pursuant to the exercise of stock options and warrants.
Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented, so only the basic weighted average number of common shares are used in the computations.
The Company has adjusted the diluted EPS for warrants classified as derivative liabilities in accordance with ASC 260-10-45 as follows:
| Nine Months Ended December 31, | Three Months Ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Diluted EPS: | ||||||||||||||||
| Net income (loss) to controlling interest | $ | $ | ( | ) | $ | $ | ||||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ( | ) | ||||||||||
| Adjusted net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted Average Shares Outstanding | ||||||||||||||||
| Adjusted earnings (loss) per share | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
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 re-measured at the end of each reporting period. The Black-Scholes model is used to estimate the fair value of the derivative liabilities.
18
ECOARK
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 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 nine months ended December 31, 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 including the current supply chain shortages.
The Company believes that the current cash on hand and anticipated cash from operations is sufficient to conduct planned operations for one year from the issuance of the consolidated financial statements.
19
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
Impact of COVID-19
The COVID-19 pandemic has had a profound effect on the U.S. and global economy and may continue to affect the economy and the industries in which we operate, depending on the vaccine and booster rollouts and the emergence of virus mutations including Omicron.
COVID-19 did not have a material effect on the Consolidated Statements of Operations or the Consolidated Balance Sheets for the nine and three months ended December 31, 2021 in contrast to the material impact it had in the prior fiscal year.
COVID-19 has also contributed to the supply chain disruptions which have not yet had a material effect for the Company. The Company will continue to monitor the supply chain shortages affecting the world.
Because the federal government and some state and local authorities are reacting to the current Omicron 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 businesses 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,
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 nine and three months ended December 31, 2021 and 2020.
20
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 3: REVENUE
The following table disaggregates the Company’s revenue by major source for the nine and three months ended December 31:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue: | ||||||||||||||||
| Financial Services | $ | $ | $ | $ | ||||||||||||
| Digital asset mining | ||||||||||||||||
| 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.
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 December 31, 2021 and March 31, 2021 of $165 and $122, respectively, consisted of crude oil of approximately 5,187 and 6,198 barrels of unsold crude oil (these amounts are not rounded in thousands), respectively, using the lower of cost (LIFO) or net realizable value.
NOTE 5: NOTE RECEIVABLE
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 $
21
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 6: DIGITAL ASSETS
The Company commenced their digital asset mining operations in November
2021. During the period ended December 31, 2021,
NOTE 7: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2021 and March 31, 2021:
| December 31, 2021 | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Zest Labs freshness hardware | $ | $ | ||||||
| Computers and software costs | ||||||||
| Land | ||||||||
| Buildings | ||||||||
| Leasehold improvements – Pinnacle Frac | ||||||||
| Mining technology equipment – Digital Asset | ||||||||
| Machinery and equipment – Technology | ||||||||
| Machinery and equipment – Commodities | ||||||||
| Total property and equipment | ||||||||
| Accumulated depreciation and impairment | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
As of December 31, 2021 and 2020, the Company performed an evaluation of the recoverability of these long-lived assets. The analysis resulted in no impairment as of related to these assets.
On April 1, 2021, the Company placed back in service
equipment of $
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 nine and three months ended December 31,
2021 and 2020 was $
22
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 8: INTANGIBLE ASSETS AND GOODWILL
Intangible assets consisted of the following as of December 31, 2021 and March 31, 2021:
| December 31, 2021 | 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 nine and three months
ended December 31, 2021 and 2020 was $
The following is the future amortization of the intangibles as of December 31:
| 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 December 31, 2021:
| Acquisition – Trend Discovery | $ | |||
| Acquisition – Banner Midstream | ||||
| Goodwill – December 31, 2021 | $ |
The Company assessed the criteria for impairment, and there were no indicators of impairment present as of December 31, 2021, and therefore no impairment is necessary.
23
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 9: POWER DEVELOPMENT FEE
The Company has paid $
The Company also reimbursed the utility deposits paid by the non-related
third party in connection with these agreements in the amount of $
The Company has classified these payments as “Power Development Costs” as a noncurrent asset on the Consolidated Balance Sheets.
NOTE 10: ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| December 31, 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 $
24
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 11: WARRANT DERIVATIVE LIABILITIES
The Company issued common stock and warrants in several private placements and two public offerings (“Derivative Warrant Instruments”) and some of these warrants have been classified as liabilities. The Derivative Warrant Instruments have been accounted for utilizing ASC 815 “Derivatives and Hedging.” The Company has incurred a liability for the estimated fair value of Derivative Warrant Instruments. The estimated fair value of the Derivative Warrant Instruments has been calculated using the Black-Scholes fair value option-pricing model with key input variables provided by management, as of the date of issuance, with changes in fair value recorded as gains or losses on revaluation in other income (expense).
The Company identified embedded features in some of the warrant agreements which were classified as a liability. These embedded features included (a) the implicit right for the holders to request that the Company settle the warrants in registered shares. Since maintaining an effective registration of shares is potentially outside the control of the Company, these warrants were classified as liabilities as opposed to equity; (b) included the right for the holders to request that the Company cash settle the warrant instruments from the holder by paying to the holder an amount of cash equal to the Black-Scholes value of the remaining unexercised portion of the Derivative Warrant Instruments on the date of the consummation of a fundamental transaction; and (c) certain price protections in the agreements. The accounting treatment of derivative financial instruments requires that the Company treat the whole instrument as liability and record the fair value of the instrument as derivatives as of the inception date of the instrument and to adjust the fair value of the instrument as of each subsequent balance sheet date.
On November 14, 2020, the Company granted
On December 30, 2020, the Company granted
The fair value of the
25
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
On June 30, 2021, the Company granted
On August 6, 2021, the Company closed a $
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 December 31, 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 December 31, 2021 and March 31, 2021 and at inception:
| Nine Months Ended December 31, 2021 | Year Ended March 31, 2021 | Inception | ||||
| Expected term | ||||||
| Expected volatility | ||||||
| Expected dividend yield | ||||||
| Risk-free interest rate | ||||||
| Market price | $ | $ |
The Company’s remaining derivative liabilities as of December 31, 2021 and March 31, 2021 associated with warrant offerings are as follows. All fully extinguished warrants liabilities are not included in the chart below.
| December 31, 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 | ||||||||||||
| Fair value of 3,478 August 6, 2021 warrants | ||||||||||||
| Fair value of 243 August 6, 2021 warrants | ||||||||||||
| $ | $ | |||||||||||
During the nine and three months ended December
31, 2021 and 2020 the Company recognized changes in the fair value of the derivative liabilities of $
26
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
Activity related to the warrant derivative liabilities for the nine months ended December 31, 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 December 31, 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 12: 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 December 31, 2021 and March 31, 2021 are as follows:
Trend Exploration was assigned an
| December 31, 2021 | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Total OGML Properties Acquired | $ | $ | ||||||
27
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 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 18, the Company acquired
certain leases on June 11, 2020 and June 18, 2020 in Mississippi and Louisiana valued at $
As discussed in Note 18, 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 18, on September 4, 2020,
the Company entered into a Lease Assignment agreement. The purchase price for this acquisition was $
As discussed in Note 18, on September 30, 2020,
the Company entered into three Asset Purchase Agreements. The purchase prices for these acquisitions were $
As discussed in Note 18, on October 1, 2020, the
Company entered into three Asset Purchase Agreements. The purchase price for these acquisitions were $
As discussed in Note 18, 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 $
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 $
Effective on July 1, 2021, the Company’s
subsidiary White River SPV 2, LLC closed on the sale of the Weyerhauser OGML Lease. The Company did not record a value for the property
as it was acquired in a group of properties on June 11, 2021 as the entire group of properties were purchased for $
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.
28
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
The following table summarizes the Company’s oil and gas activities by classification for the nine months ended December 31, 2021 and year ended March 31, 2021.
| Activity Category | March 31, 2021 | Adjustments (1) | December 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 | $ | $ | ( | ) | $ | |||||||
| 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. For the nine months ended December 31, 2021, the Company acquired various leases in Concordia, LA and Caldwell, TX for $
In addition, on July 1, 2021, the Company assigned an |
29
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 13: LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 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.
| December 31, 2021 | 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, 2022 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 |
30
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
The following is a list of maturities as of December 31:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| $ |
During the nine months ended December 31, 2021,
the Company repaid $
During the year ended March 31, 2021,
Interest expense on long-term debt during the three and nine months
ended December 31, 2021 and 2020 are $
NOTE 14: NOTES PAYABLE - RELATED PARTIES
Notes payable to related parties consisted of the following as of December 31, 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.
| December 31, 2021 | 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) |
An officer of the Company advanced $
During the year ended March 31, 2021, the Company
received proceeds of $
31
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 15: 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
32
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
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
In the three months ended September 30, 2021,
the Company issued
In the three months ended December 31, 2021, the Company did not issue any shares of common stock.
In order to have sufficient authorized capital
to raise the $
As of December 31, 2021,
Agora Common Stock
Agora is authorized to issue 250,000 shares of common stock, par value $0.001. On September 22, 2021, the Company purchased one hundred shares of Agora for ten dollars.
On October 1, 2021, the Company purchased
In addition, between October 1 and December 7,
2021, Agora issued
33
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 16: COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are presently involved in the following legal proceedings. To the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties or businesses are subject, which would reasonably be likely to have a material adverse effect on the Company.
| ● | On
August 1, 2018, Ecoark Holdings, 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 $ |
| ● | On September 21, 2021, Ecoark Holdings, Inc. and Zest Labs, Inc. filed a complaint against Deloitte Consulting, LLP (“Deloitte”) in the Eight Judicial District Court in Clark County, Nevada. The complaint is for violation of the Nevada Uniform Trade Secret Act and will also be seeking a preliminary and permanent injunction, attorney’s fees, and punitive damages. The damages at issue are in the hundreds of millions of dollars. Zest Labs, Inc. began working with Deloitte in 2016, in a confidential matter in a pilot program that Zest Labs, Inc. had been engaged for by a large customer. Zest Labs, Inc. engaged in significant discussions, presentations, demonstrations, and information downloads with Deloitte who specifically acknowledged that this information was confidential. This complaint is in the very early stages, with motions filed on both sides and an initial hearing set for March 8, 2022. The Company cannot reasonably determine the outcome and potential reward at this time. |
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 $
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.
Bitstream Commitments on Purchase Obligations
As discussed in the overview of Bitstream in Note 1, Bitstream has
entered into a number of agreements for the procurement of land, electricity and equipment necessary to run its business. Bitstream has
estimated this commitment to be approximately $
34
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 17: 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 18: ACQUISITIONS
The following represent acquisitions for the nine months ended December 31, 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.
35
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 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,
36
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
The purchase prices of these leases were $
| Oil and Gas Properties | $ | |||
| Asset retirement obligation | ( | ) | ||
| $ |
Luling Prospect
On August 16, 2021 the Company and Shamrock Upstream
Energy, LLC, a wholly-owned subsidiary of the Company entered into an agreement with a privately-held limited liability company to acquire
working interests in the Luling Prospect for $
| Oil and gas properties | $ | |||
| $ |
Concordia Leases
On September 1, 2021 the Company and White River
Energy, LLC, a wholly-owned subsidiary of the Company entered into an agreement with several individuals to acquire working interests
in the various leases in Concordia, LA for $
| Working interest in oil and gas wells | $ | |||
| $ |
37
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 19: 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 nine months ended December 31, 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) | |||||||||||||
| December 31, 2021 | ||||||||||||||||
| Warrant derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Digital assets | ( | ) | ||||||||||||||
| March 31, 2021 | ||||||||||||||||
| Warrant derivative liabilities | $ | $ | $ | $ | ( | ) | ||||||||||
38
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 20: 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. Effective July 1, 2021, the Company’s chief operating decision makers in discussion with the finance team determined that the Company would add a fourth reporting segment to account for their Digital Asset mining business. Additionally, on July 1, 2021 the Company began reporting its home office costs into the Commodity segment, charge its Technology segment a monthly overhead fee, and has recorded typical overhead expenses in their Finance and Digital Asset segments to account for this home office allocation.
| Nine Months Ended December 31, 2021 | Digital Assets | Commodities | Financial | Technology | Total | |||||||||||||||
| Segmented operating revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenues | ||||||||||||||||||||
| Gross profit (loss) | ( | ) | ||||||||||||||||||
| Total operating expenses net of depreciation, amortization, depletion, accretion and impairment | ||||||||||||||||||||
| Depreciation, amortization, depletion, accretion and impairment | ||||||||||||||||||||
| Other (income) expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Income (loss) from continuing operations | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||
| Three Months Ended December 31, 2021 | Digital Assets | Commodities | Financial | Technology | Total | |||||||||||||||
| Segmented operating revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenues | ||||||||||||||||||||
| Gross profit (loss) | ( | ) | ||||||||||||||||||
| Total operating expenses net of depreciation, amortization, depletion, accretion and impairment | ||||||||||||||||||||
| Depreciation, amortization, depletion, accretion and impairment | ||||||||||||||||||||
| Other (income) expense | ( | ) | ( | ) | ||||||||||||||||
| Income (loss) from continuing operations | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||
| Segmented assets as of December 31, 2021 | ||||||||||||||||||||
| Property and equipment, net | $ | $ | $ | $ | $ | |||||||||||||||
| Oil and Gas Properties/Capitalized drilling costs | $ | $ | $ | $ | $ | |||||||||||||||
| Intangible assets, net | $ | $ | $ | $ | $ | |||||||||||||||
| Goodwill | $ | $ | $ | $ | $ | |||||||||||||||
| Capital expenditures | $ | $ | $ | $ | $ | |||||||||||||||
39
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
| Nine Months Ended December 31, 2020 | 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 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Three Months Ended December 31, 2020 | 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 December 31, 2020 | ||||||||||||||||
| Property and equipment, net | $ | $ | $ | $ | ||||||||||||
| Oil and Gas Properties | $ | $ | $ | $ | ||||||||||||
| Intangible assets, net | $ | $ | $ | $ | ||||||||||||
| Goodwill | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
40
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 21: 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 on March 27, 2020. The Company recorded these amounts at present value, in accordance
with the standard, using discount rates ranging between
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 and digital asset segments. As of December 31, 2021, the value
of the unamortized lease right of use asset is $
| Maturity of lease liability for the operating leases for the period ended December 31, | ||||
| 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| 2026 | $ | |||
| Imputed interest | $ | ( | ) | |
| Total lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-current portion | $ | |||
| Maturity of lease liability for the financing leases for the period ended December 31, | ||||
| 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 December 31, | ||||
| 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| 2026 | $ | |||
| Total | $ | |||
41
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
Total Lease Cost
Individual components of the total lease cost incurred by the Company is as follows:
| Three months ended December 31, 2021 | Nine months ended December 31, 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease expense | $ | $ | ||||||
| Finance lease expense | ||||||||
| Depreciation of capitalized finance lease assets | ||||||||
| Interest expense on finance lease liabilities | ||||||||
| Total lease cost | $ | $ | ||||||
| Three months ended December 31, 2020 | Nine months ended December 31, 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease expense | $ | $ | ||||||
| Finance lease expense | ||||||||
| Depreciation of capitalized finance lease assets | ||||||||
| Interest expense on finance lease liabilities | ||||||||
| Total lease cost | $ | $ | ||||||
NOTE 22: 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 nine months ended December 31, 2021 and year ended March 31, 2021:
| December 31, 2021 | 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 December 31, 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 December 31, 2021 and March 31, 2021, respectively.
These values are discounted to present value at
42
ECOARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 23: RELATED PARTY TRANSACTIONS
On May 31, 2019 the Company acquired Trend Holdings.
Pursuant to the merger, the one thousand issued and outstanding shares of common stock of Trend Holdings were converted into
Trend Capital Management is the general partner or manager of, and provides services and collects fees from entities including Trend LP and Trend SPV, respectively. However, Trend Capital Management is not the investment manager of these entities, nor the beneficial owner of Ecoark securities held by Trend LP nor Trend SPV since it assigned the sole power to vote and direct all investment activities which will impact the entities’ economic performance to an independent third party not affiliated with Ecoark. The investment capital in Trend LP and Trend SPV is from individual limited partners and members, and not from the Company. Trend Capital Management does not have the obligation to absorb losses or the right to receive benefits that could be significant as a result of the entities’ performance. Trend Capital Management does not have any ownership of or a controlling financial interest in Trend LP nor Trend SPV and therefore management has concluded consolidation of these entities with Trend Capital Management is not required.
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 $
On August 31, 2021,
Ecoark has made periodic loans to Agora to permit
it to begin its cryptocurrency mining business. On November 13, 2021, Agora issued Ecoark a $
43
ECOARK HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2021
NOTE 24: SUBSEQUENT EVENTS
Subsequent to December 31, 2021, the Company had the following transactions:
On January 3, 2022,
On February 2, 2022, Peter Mehring, a director and executive officer, gave notice of his intent to resign as an executive officer and director effective on February 11, 2022. Mr. Mehring resigned as a result of his entering into an Employment Agreement with a leading Internet service company. He also entered into a Consulting Agreement with the Company.
Under the Consulting Agreement, Mr. Mehring will advise the Company
(including Zest Labs) on its current intellectual property litigation and matters relating to ZEST’s intellectual property as well
as provide transition services. The Consulting Agreement is for a one-year term. The Company agreed to pay Mr. Mehring $
Trend Exploration completed the auction of two
lots of overriding royalty interests (ORRIs). Trend Exploration posted them to EnergyNet and the auction ended February 3, 2022. The sale
is for the Mississippi ORRIs and the Louisiana ORRIs for a total of $
44
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 and when separately disclosed, or where the context indicates otherwise.
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, (iii) financial services including investing in a select number of early stage startups, and (iv) a recently launched 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 Agora Digital Holdings, Inc., a Nevada corporation (“Agora”) who was assigned the membership interest in Trend Discovery Holdings LLC, a Delaware limited liability corporation (“Trend Holdings”) as well as all of Agora’s recently formed subsidiaries as discussed herein, (all references to “Trend Holdings” or “Trend” are now synonymous with Agora) from the Company on September 17, 2021 upon its formation.
On August 4, 2021, the Company’s common stock commenced trading on the Nasdaq Capital Market.
Pinnacle Frac
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.
White River and Shamrock
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
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.
Agora Digital Holdings, Inc.
Through Agora we provide financial services and collect fees from entities which invest in securities and operate a digital asset mining company as described in more detail below.
45
The Company assigned its membership interest in Trend Holdings and its related wholly owned subsidiaries to Agora on September 22, 2021, for the sale of the initial one hundred shares for ten dollars. On October 1, 2021, the Company purchased 41,671 shares of Agora common stock for $4,167 which Agora used to purchase equipment to commence the Bitstream operations.
Trend Holdings formed four subsidiaries, Bitstream Mining, LLC, a Texas Limited Liability Company (“Bitstream”) on May 16, 2021, REStream Processing LLC, a Texas Limited Liability Corp (“REStream”). on May 16, 2021, Trend Discovery Exploration LLC, a Texas Limited Liability Corp. (“Trend Exploration”) on May 27, 2021, and OTZI, LLC, a Delaware Limited Liability Corp. (“OTZI”) on September 2, 2021, in addition to Barrier Crest, LLC (“Barrier Crest”) that was acquired along with Trend Capital Management, Inc. (“TCM”) that was acquired by Ecoark on May 31, 2019. REStream and OTZI are currently inactive subsidiaries.
Agora was organized by Ecoark to enter the digital asset mining business. Because of regulatory uncertainty over digital assets being deemed to be securities, Agora’s initial focus is on mining Bitcoin which the SEC administratively determined is not a security. Because of regulatory concerns and the changing regulatory environment, Agora intends to seek opportunities to engage with cryptocurrencies that do not involve the offer or sale of any securities.
On November 19, 2021 Agora filed a registration statement on Form S-1 in connection with its initial public offering of 10,000,000 (ten million) units comprised of shares of common stock and warrants to purchase an equal number of shares of common stock. The Form S-1 has not yet been declared effective. See Note to the Consolidated Financial Statements.
Subject to completion of the Agora public offering and Nasdaq uplisting, the Company intends to issue a stock dividend through a pro rata distribution of Agora’s common stock to Ecoark’s common stockholders and holders of common stock equivalents. Ecoark plans to distribute 80% of the Agora common stock it holds to its stockholders as of a future record date to be determined upon completion of regulatory compliance. Ecoark plans to retain the remaining 20% ownership in Agora on its balance sheet. As a result of the approval by the board of directors of the Company to divest Agora, the Company, has accounted for this as a disposal other than by sale. Assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of. Upon disposal, the Company must assess whether the disposed of assets qualify for discontinued operations reporting. If so, the Company will apply the presentation and disclosure requirements of ASC 205-20, and if not, the Company will apply the presentation and disclosure requirements of ASC 360-10.
Overview of Agora Digital Holdings, Inc.
The following is a brief overview of each of the principal subsidiaries that the Company operates through Agora, the Company’s newly formed, majority-owned subsidiary.
Bitstream
Bitstream was organized to be our principal cryptocurrency subsidiary. Bitstream has entered into a series of agreements including procuring land to install mining equipment, arranging for a reliable and economical electric power source needed to efficiently mine Bitcoin, ordering miners, housing infrastructure and other infrastructure to mine Bitcoin and locating a third-party hosting service to operate the miners and the service’s more advanced miners. Agora has spent (and agreed to spend) between $12-$14 million in connection with these agreements, not including future revenue sharing. Agora brought online miners that began operating in early November 2021, the Bitmain S19 Pro miners supplied by the hosting service.
Bitstream anticipates that they will deploy and operate modularized data centers (facilities) with the sole purpose of mining digital assets, with Bitcoin initially as the focus. Agora is powering these data centers through acquiring a long-term power contract to purchase electric power from the electric grid in Texas. Once the business’ operations grow, Bitstream intends to continuously add data center facilities by reinvesting their revenues. All data centers will be remotely managed with onsite personnel for servicing and troubleshooting any operational issues. Bitstream plans to utilize the energy to power its energy intensive operations of digital asset mining. Additionally, if Texas experiences another power shortage during the winter or summer months from extreme weather conditions, Bitstream would be able to arbitrage power at favorable margins. Bitstream will do this by temporarily shutting down their cryptocurrency mining operations and sell their purchased power back to the grid at favorable margins. Last winter, during the blackout, the price per kWh exceeded $10 (ten dollars) at its peak imbalance, whereas Bitstream’s power cost is expected to be $0.023 (two and three one hundredths) per kWh.
46
Bitstream is expected to be the focal point of the Company’s Agora operations during the next 12 months. For this reason, set forth below is a more detailed overview of Bitstream’s developments, planned operations and the cryptocurrency assets and industry in which it operates.
Trend Exploration
On July 1, 2021, Trend Exploration acquired oil and gas leases with producing oil wells in Louisiana. Trend Exploration was formed to provide an environmental, social and governance (“ESG”) solution to Bitstream’s need for affordable electric power does not intend to be an oil and gas exploration company. Trend Exploration was assigned an 80% working interest in fourteen wells from White River SPV 2, LLC and White River E&P LLC (“Assignors”) on July 1, 2021. In accordance with ASC 205-20, there is a scope exception for oil and gas properties that use the full-cost method of accounting. Under the full-cost method of accounting, all costs associated with property acquisition, exploration, and development activities are capitalized to cost centers, which are established on a country-by-country basis. The definition of discontinued operations, however, applies to disposals of components of an entity, which is defined as the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. As a result, the definition of discontinued operations will not be operable under the full-cost method of accounting because of differences in the tracking and allocation of costs, which is at a much higher level. The Company as a result has not reflected the working interest on the fourteen wells in discontinued operations. The Trend Exploration business is identical to the business noted herein for Banner Midstream.
Trend Capital Management
Trend Capital Management is the general partner or manager of, and provides services and collects fees from entities including Trend Discovery LP (“Trend LP”) and Trend Discovery SPV I, LLC (“Trend SPV”), respectively. However, Trend Capital Management is not the investment manager of these entities, nor the beneficial owner of Ecoark securities held by Trend LP nor Trend SPV since it assigned the sole power to vote and direct all investment activities which will impact the entities’ economic performance to an independent third party not affiliated with Ecoark. The investment capital in Trend LP and Trend SPV is from individual limited partners and members, and not from the Company. Trend Capital Management does not have the obligation to absorb losses or the right to receive benefits that could be significant as a result of the entities’ performance. Trend Capital Management does not have any ownership of or a controlling financial interest in Trend LP nor Trend SPV and therefore management has concluded consolidation of these entities with Trend Capital Management is not required.
Barrier Crest
Barrier Crest provides fund administration and fund formation services to institutional investors. Barrier Crest provides fund administration services to Trend LP and Trend SPV. Barrier Crest provides fund administration and related services for small hedge funds. Trend Holdings owns an entity which is the general partner but not the investment manager of two investment funds. These investment funds own shares of Ecoark and one also owns warrants of Ecoark.
Part of the financial services strategy envisions the acquisition of a broker-dealer to engage in the digital assets markets. As of the date of this Report, we are not negotiating any potential acquisition. We plan to focus on a target as soon as we can.
Cryptocurrency Mining Overview
Distributed blockchain technology is a decentralized or distributed and encrypted ledger that is designed to offer a secure, efficient, verifiable, and permanent way of storing records and other information without the need for intermediaries. Cryptocurrencies serve multiple purposes. They can serve as a medium of exchange, store of value or unit of account. Examples of cryptocurrencies include Bitcoin, Bitcoin Cash, and Litecoin.
Bitcoin was first introduced in 2008 and was first introduced as a means of exchange in 2009. Bitcoin is a consensus network that enables a new payment system and a completely new form of digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitstream believes Bitcoin can be viewed as cash for the Internet. The Bitcoin network shares a public ledger called the “blockchain.” This ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending Bitcoins rewards from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in Bitcoins for this service. This process is often called “mining.”
In November 2021, Bitstream commenced the mining of Bitcoin by acquiring miners to solve complex cryptographic algorithms to support the Bitcoin blockchain (in a process known as “solving a block”). In return for solving a block, Bitstream receives a Bitcoin.
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Bitstream mines Bitcoin using specialized computer equipment referred to as “miners.” Miners measure their capability in terms of processing power, which is known in the industry as “hashing” power. Hashing power is measured in terms of the number of hashing algorithms solved (or “hashes”) per second, which is the miner’s “hash rate.” Generally speaking, miners with greater hashing power and in turn a higher hash rate relative to other miners attempting to solve a block have a higher chance of solving the block and receiving a cryptocurrency award. However, although newer generations of miners advertise improved energy efficiency, increasing hash rate generally requires greater electrical power, which increases the cost of solving a block and, therefore, the relative cost of mining a cryptocurrency. As additional miners competed for the limited supply of blocks, individuals found that they were working for months without finding a block and receiving any reward for their mining efforts. To address this variance, miners started organizing into pools to share mining rewards more evenly on a pro rata basis based on total hashing capacity contributed to the mining pool. Bitstream will be participating in a mining pool. As of the date of this Report, Bitstream is in the process of paying for and receiving delivery of the necessary infrastructure and equipment to commence mining operations using a total of 48 megawatts (“MW”) of electricity, which through conditional and unconditional rights to two sites in West Texas may be increased to up to 372 MW assuming this can be done so on acceptable terms.
Mining Equipment
In September 2021 Bitstream ordered 5,000 used Canaan Avalon 841 13 TH/s miners for $1,350. Delivery of 4,000 of these miners occurred as of January 31, 2022. Bitstream’s plan is to use trailer or shipping container-like units as housing infrastructure to house our miners. Bitstream will either build their own or partner with another third-party vendor to build entry level housing infrastructure to deploy the initial mining equipment in November. In August 2021, Bitstream entered into an agreement with a third party which will supply Bitstream with more advanced housing infrastructure in exchange for approximately $375. Delivery of these enhanced housing infrastructure is expected in the first calendar quarter of 2022.
Effective December 10, 2021, Bitstream entered into a lease agreement for 20 acres of land near the power substation upon which we will place the housing infrastructure. The lease is for an initial term of 10 years and a subsequent term of 10 years, pursuant to which Bitstream will pay the lessor a monthly payment equal to 3% of the electricity cost. If we do not use the leased land for 12 consecutive months, the lease will terminate. On January 3, 2022, the Company entered into a land purchase agreement for a separate parcel of twenty acres of land ($12.5 per acre) in West Texas for $250. The Company has an option to sell back this land to the sellers at $0.4 (four hundred) per acre upon cessation of the land being used as a data center.
In September 2021, Bitstream entered into a binding agreement referred to as a Memorandum of Understanding with Elite Mining Inc. (the “Hosting Company”) that will supply high speed miners, host the Company’s data center and operate the miners it installs. In Phase 1 which is a beta test phase, Bitstream paid $600 to the Hosting Company which will also supply 6 MW capacity’s worth of very high speed and efficient miners in the first calendar quarter of 2022. Bitstream has an option to purchase these high-speed miners at replacement cost (which may be higher than current cost). The Hosting Company may provide hosting for third parties during Phase 1 which reduces the cash flow for Bitstream. This agreement will also allow Bitstream to utilize a minimum of 25 MW of electricity under the initial power purchase agreement in Phase 2. Bitstream can terminate the hosting agreement as soon as Bitstream has secured sufficient capital to replace the hosted Bitmain S19 Pros with their own. Once Bitstream purchases the high-efficiency miners, the Hosting Company cannot host third parties.
Phase 2 is planned to begin in May 2022 which is subject to Bitstream agreeing to proceed. If Bitstream elects to enter Phase 2, it will be required to loan the Hosting Company the funds to develop a production facility in Texas on terms to be negotiated. Bitstream will have certain rights to the production facility capacity from Phase 2 and will pay the Hosting Company for its services.
In late 2021 Bitstream secured an additional 36 MWs of electrical capacity at a different West Texas location. This supplements Agora’s prior agreement to secure 12 MWs and as a result Agora will have a total of 48 MWs of electric power for immediate use and benefit to Agora at that location. Bitstream also entered into a second letter of intent for an additional 30 MW at a second location. Bitstream also plans to participate in the Electric Reliability Council of Texas’ (“ERCOT”) responsive reserve market by relinquishing its power back to the Texas grid as power stabilization events are needed.
Additionally, Bitstream has procured mining infrastructure to power the 48 MWs at one location and expects the equipment and infrastructure to be delivered over the next 135 days. This mining infrastructure includes twenty-one 2,600 kilo-volt amp (KVA) or similar transformers and Agora’s first shipment of Bitcoin mining application-specific integrated circuits (“ASIC”). Agora has agreed to pay a total $3,685 for the new equipment and infrastructure as follows: (i) $506 upon the order which has been paid, (ii) $506 by November 11, 2021, which has been paid and (iii) $816 paid on December 15, 2021; (iv) $1,856 by February 2022.
In connection with the increase in electrical capacity, Bitstream entered into a second binding letter of intent with the power management company pursuant to which the Company has paid a total of $2,955, consisting of a $2,628 development fee and a $327 reimbursement for payments made by the power management company to the electric utility to secure the power. Of this amount $1,326 has already been paid. In addition, the Company agreed to pay a total of $450 upon the power management company signing a binding agreement to acquire or lease 20 or more acres of usable land. Bitstream is currently negotiating an agreement for this but as of the date of this Report, no agreement has been executed.
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Once the business is operational, Bitstream intends to continuously add data center platforms by reinvesting cash and potentially utilizing leverage to scale operations. All data centers will be remotely managed with onsite personnel for servicing and troubleshooting any operational issues.
Commodities Segment
For the nine and three months ended December 31, 2021, the Company’s consolidated revenues from continuing operations 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.
Segment Reporting for the Nine and Three Months Ended December 31, 2021 and 2020:
Prior to August 26, 2021, the Company operated in three segments. The segments are Financial Services (Trend Holdings), Technology (Zest Labs), and Commodities (Banner Midstream). Effective July 1, 2021, the Company’s chief operating decision makers in discussion with the finance team determined that the Company would add a fourth reporting segment to account for their Digital Asset mining business. Additionally, beginning on July 1, 2021 the Company began reporting its home office costs into the Commodity segment, charging its Technology segment a monthly overhead fee, and has recorded typical overhead expenses in their Finance and Digital Asset segments to account for this home office allocation.
| Nine Months Ended December 31, 2021 | Digital Assets | Commodities | Financial | Technology | Total | |||||||||||||||
| Segmented operating revenues | $ | 18 | $ | 18,583 | $ | 524 | $ | - | $ | 19,125 | ||||||||||
| Cost of revenues | 93 | 10,600 | - | - | 10,693 | |||||||||||||||
| Gross profit (loss) | (75 | ) | 7,983 | 524 | - | 8,432 | ||||||||||||||
| Total operating expenses net of depreciation, amortization, depletion, accretion and impairment | 3,694 | 13,784 | 686 | 2,325 | 20,489 | |||||||||||||||
| Depreciation, amortization, depletion, accretion and impairment | 21 | 2,176 | - | 143 | 2,340 | |||||||||||||||
| Other (income) expense | 29 | (14,094 | ) | (216 | ) | (1,099 | ) | (15,380 | ) | |||||||||||
| Income (loss) from continuing operations | $ | (3,819 | ) | $ | 6,117 | $ | 54 | $ | (1,369 | ) | $ | 983 | ||||||||
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| Three Months Ended December 31, 2021 | Digital Assets | Commodities | Financial | Technology | Total | |||||||||||||||
| Segmented operating revenues | $ | 18 | $ | 5,941 | $ | 176 | $ | - | $ | 6,135 | ||||||||||
| Cost of revenues | 93 | 3,434 | - | - | 3,527 | |||||||||||||||
| Gross profit (loss) | (75 | ) | 2,507 | 176 | - | 2,608 | ||||||||||||||
| Total operating expenses net of depreciation, amortization, depletion, accretion and impairment | 3,286 | 4,254 | 415 | 732 | 8,687 | |||||||||||||||
| Depreciation, amortization, depletion, accretion and impairment | 21 | 549 | - | 32 | 602 | |||||||||||||||
| Other (income) expense | 29 | (10,993 | ) | 4 | - | (10,960 | ) | |||||||||||||
| Income (loss) from continuing operations | $ | (3,411 | ) | $ | 8,697 | $ | (243 | ) | $ | (764 | ) | $ | 4,279 | |||||||
| Segmented assets as of December 31, 2021 | ||||||||||||||||||||
| Property and equipment, net | $ | 7,045 | $ | 3,262 | $ | - | $ | 149 | $ | 10,456 | ||||||||||
| Oil and Gas Properties/Capitalized drilling costs | $ | - | $ | 13,783 | $ | - | $ | - | $ | 13,783 | ||||||||||
| Intangible assets, net | $ | - | $ | 1,804 | $ | - | $ | - | $ | 1,804 | ||||||||||
| Goodwill | $ | - | $ | 7,002 | $ | 3,223 | $ | - | $ | 10,225 | ||||||||||
| Capital expenditures | $ | 7,066 | $ | 19 | $ | - | $ | - | $ | 7,085 | ||||||||||
| Nine Months Ended December 31, 2020 | Commodities | Financial | Technology | Total | ||||||||||||
| Segmented operating revenues | $ | 9,697 | $ | 359 | $ | - | $ | 10,056 | ||||||||
| Cost of revenues | 6,644 | - | - | 6,644 | ||||||||||||
| Gross profit | 3,053 | 359 | - | 3,412 | ||||||||||||
| Total operating expenses net of depreciation, amortization, depletion and accretion | 9,916 | 331 | 2,353 | 12,600 | ||||||||||||
| Depreciation, amortization, depletion and accretion | 945 | - | 188 | 1,133 | ||||||||||||
| Other (income) expense | 1,501 | (26 | ) | (132 | ) | 1,343 | ||||||||||
| Income (loss) from continuing operations | $ | (9,309 | ) | $ | 54 | $ | (2,409 | ) | $ | (11,664 | ) | |||||
| Three Months Ended December 31, 2020 | Commodities | Financial | Technology | Total | ||||||||||||
| Segmented operating revenues | $ | 4,300 | $ | 165 | $ | - | $ | 4,465 | ||||||||
| Cost of revenues | 3,218 | - | - | 3,218 | ||||||||||||
| Gross profit | 1,082 | 165 | - | 1,247 | ||||||||||||
| Total operating expenses net of depreciation, amortization, depletion and accretion | 3,965 | 137 | 872 | 4,974 | ||||||||||||
| Depreciation, amortization, depletion and accretion | 447 | - | 62 | 509 | ||||||||||||
| Other (income) expense | (3,769 | ) | (166 | ) | (833 | ) | (4,768 | ) | ||||||||
| Income (loss) from continuing operations | $ | 439 | $ | 194 | $ | (101 | ) | $ | 532 | |||||||
| Segmented assets as of December 31, 2020 | ||||||||||||||||
| Property and equipment, net | $ | 3,567 | $ | - | $ | 354 | $ | 3,921 | ||||||||
| Oil and Gas Properties | $ | 11,795 | $ | - | $ | - | $ | 11,795 | ||||||||
| Intangible assets, net | $ | 2,136 | $ | - | $ | - | $ | 2,136 | ||||||||
| Goodwill | $ | 7,002 | $ | 3,223 | $ | - | $ | 10,225 | ||||||||
| Capital expenditures | $ | 617 | $ | - | $ | - | $ | 617 | ||||||||
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Third Quarter 2021 Operating Highlights
| ● | Revenue for three months ended December 31, 2021 were $6,135, an increase of $1,670 compared to same period in prior year. |
| ● | We recorded net income of $4,279 for the third quarter ended December 31, 2021, as a result of a $10,979 increase in the fair value of derivative liabilities. |
| ● | Our average production was 231 Gross (164 Net) barrels of oil per day during the three months ended December 31, 2021. |
| ● | During the three months ended December 31, 2021, we had no new successful drilling activity as the focus has been on well re-entries. |
| ● | We have entered into a number of agreements through Bitstream for the procurement of land, electricity and equipment necessary to run its business. Bitstream has estimated this commitment to be approximately $12-$14 million over the next three months inclusive of what has been spent to date. |
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 and global and United States reductions in drilling. However, in recent periods oil and natural gas prices have experienced increased volatility due to the uncertainty related to the Delta and Omicron variant of the virus.
During 2020 and 2021, the posted NYMEX WTI price for crude oil ranged from $(37.63) to $84.65 per Bbl. On December 31, 2021, the NYMEX WTI price for crude oil was $75.21 per Bbl. Commodity prices have historically been volatile and we cannot predict events which may lead to future fluctuations in these prices.
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Impact of COVID-19
The COVID-19 pandemic previously had a profound effect on the U.S. and global economy and may continue to affect the economy and the industries in which we operate, depending on the vaccine rollouts and the emergence of virus mutations as well as the impact of supply chain disruptions.
COVID-19 did not have a material effect on the Consolidated Statements of Operations or the Consolidated Balance Sheets for fiscal 2021 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 Omicron 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. For example, outbreaks in early calendar year 2022 arising from the more contagious Omicron variant resulted in labor shortages including with respect to truck drivers. Additionally, the pandemic has been a contributing factor in supply shortages which have been pervasive in many industries. The extent to which the COVID-19 outbreak and other adverse developments may impact the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.
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 businesses 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.
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.
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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.
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 will recognize income from digital currency mining from the provision of transaction services within digital currency networks, commonly termed “cryptocurrency mining”. As consideration for those services, the Company will receive digital currency from each specific network in which it participates (“coins”). Income from digital currency mining is measured based on the fair value of the coins received. The fair value is determined using the spot price of the coin on the date of receipt. The coins are recorded on the consolidated balance sheet, as intangible asset – digital currency, at their fair value less costs to sell and re-measured each reporting date, if not sooner. Revaluation gains or losses on the sale of coins for traditional (fiat) currencies will be included in the consolidated statements of operations.
The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company’s entitled to a fractional share of the fixed cryptocurrency reward the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain. The terms of the agreement provides that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share of the cryptocurrency generated by the pool is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
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Providing computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. The provision of such computing power is the only performance obligation on the Company in the Company’s contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the reward from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time the revenue is recognized. There is no significant financing component in these transactions.
Fair value of the digital asset reward received is determined using the quoted price of the related digital asset at the time of receipt. The block reward provides an incentive for Bitcoin miners to process transactions made with the cryptocurrency. Creating an immutable record of these transactions is vital for the digital assets to work as intended. The blockchain is like a decentralized bank ledger, one that cannot be altered after being created. The miners are needed to verify the transactions and keep this ledger up to date. Block rewards, and to a lesser extent, transaction fees, are their payment for doing so. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for digital assets recognized as revenue and held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.
The Company’s cost of revenue for digital assets consists primarily of direct costs of earning the digital asset related to mining operations, including mining pool fees, electric power costs, other utilities, labor, insurance whether incurred directly from self-mining operations or reimbursed, including any revenue sharing arrangements under the hosting agreements, but excluding depreciation and amortization, which are separately stated in the Company’s Consolidated Statement of Operations.
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.
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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.
Digital assets will consist of cryptocurrency denominated assets and will be included in noncurrent assets. Digital assets will be carried at their fair value determined by the spot rate less costs to sell. The digital asset market is still a new market and is highly volatile; historical prices are not necessarily indicative of future value; a significant change in the market prices for digital currencies would have a significant impact on the Company’s earnings and financial position. Fair value will be determined by taking the price of the coins from the exchanges which the Company most frequently uses.
Digital Assets
Digital currencies will be included in non-current assets in the consolidated balance sheets as intangible assets with indefinite useful lives. Digital assets are recorded at cost less impairment.
The Company accounts for its digital assets as indefinite-lived intangible assets in accordance with ASC 350. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital currency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether It is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
The Company determines the fair value of its Bitcoin on a nonrecurring basis in accordance with ASC 820, based on quoted (unadjusted) prices on the active exchange that the Company has determined is its principal market for Bitcoin (Level 1 inputs). The Company performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted (unadjusted) prices on the active exchange, indicate that it is more likely than not that any of the assets are impaired. In determining if an impairment has occurred, the Company considers the lowest price of one Bitcoin quoted on the active exchange at any time since acquiring the specific Bitcoin held by the Company. If the carrying value of a Bitcoin exceeds that lowest price, an impairment loss has occurred with respect to that Bitcoin in the amount equal to the difference between its carrying value and such lowest price.
Impairment losses are recognized as “Digital asset impairment losses” in the Company’s Consolidated Statements of Operations in the period in which the impairment is identified. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains (if any) are not recorded until realized upon sale, at which point they would be presented net of any impairment losses in the Company’s Consolidated Statement of Operations. In determining the gain to be recognized upon sale, the Company calculates the difference between the sales price and the carrying value of the specific Bitcoin sold immediately prior to sale.
Any impairment losses related to digital assets are included in the Digital Assets segment.
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Impairment of Long-lived Assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Segment Information
The Company follows the provisions of ASC 280-10 Segment Reporting. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. The Company and its chief operating decision makers determined that the Company’s operations effective with the May 31, 2019, acquisition of Trend Holdings and the March 27, 2020 acquisition of Banner Midstream now consist of three segments, Agora (Finance), Banner Midstream (Commodities) and Zest Labs (Technology). Effective July 1, 2021, the Company’s chief operating decision makers in discussion with the finance team determined that the Company would add a fourth reporting segment to account for their Digital Asset mining business. Additionally, effective on July 1, 2021 the Company will report its home office costs into the Commodity segment, charge its Technology segment a monthly overhead fee, and has recorded typical overhead expenses in their Finance and Digital Asset segments to account for this home office allocation.
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 re-measured 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.
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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.
Production Data – Nine and Three Months Ended December 31, 2021
The following tables set forth our production data for the nine months ended December 31, 2021 and 2020:
| Nine Months Ended December 31, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Bbls | Bbls | |||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||
| Production Data: | ||||||||||||||||
| By State/County | ||||||||||||||||
| Mississippi | ||||||||||||||||
| Holmes | 1,657 | 1,243 | - | - | ||||||||||||
| Amite | 9,540 | 7,621 | 9,963 | 7,956 | ||||||||||||
| Wilkinson | 10,576 | 8,197 | 7,565 | 6,046 | ||||||||||||
| Pike | 1,192 | 923 | 481 | 391 | ||||||||||||
| 22,965 | 17,984 | 18,009 | 14,393 | |||||||||||||
| Louisiana | ||||||||||||||||
| Catahoula | 4,871 | 3,649 | 2,711 | 2,159 | ||||||||||||
| Concordia | 6,463 | 3,039 | 4,592 | 2,105 | ||||||||||||
| Tensas | 2,627 | 1,970 | 1,737 | 1,291 | ||||||||||||
| Lasalle | 609 | 330 | 887 | 480 | ||||||||||||
| Avoyelles | 37,976 | 25,858 | 2,204 | 1,668 | ||||||||||||
| 52,546 | 34,847 | 12,132 | 7,703 | |||||||||||||
| Total | 75,511 | 52,830 | 30,141 | 22,096 | ||||||||||||
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The following tables set forth our production data for the three months ended December 31, 2021 and 2020:
| Three Months Ended December 31, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Bbls | Bbls | |||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||
| Production Data: | ||||||||||||||||
| By State/County | ||||||||||||||||
| Mississippi | ||||||||||||||||
| Holmes | 1,518 | 1,139 | - | - | ||||||||||||
| Amite | 3,357 | 2,694 | 4,011 | 3,207 | ||||||||||||
| Wilkinson | 3,086 | 2,392 | 2,710 | 2,169 | ||||||||||||
| Pike | 433 | 339 | 368 | 299 | ||||||||||||
| 8,395 | 6,563 | 7,089 | 5,674 | |||||||||||||
| Louisiana | ||||||||||||||||
| Catahoula | 1,626 | 1,439 | 1,224 | 955 | ||||||||||||
| Concordia | 3,044 | 1,379 | 2,070 | 987 | ||||||||||||
| Tensas | 941 | 705 | 578 | 429 | ||||||||||||
| Lasalle | - | - | 315 | 171 | ||||||||||||
| Avoyelles | 7,269 | 4,980 | 701 | 531 | ||||||||||||
| 12,880 | 8,504 | 4,888 | 3,073 | |||||||||||||
| Total | 21,275 | 15,067 | 11,977 | 8,747 | ||||||||||||
RESULTS OF OPERATIONS FOR CONTINUING OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2021 AND 2020
Revenues
The following table shows revenues for the nine months ended December 31, 2021 and 2020:
| Nine Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Oil and Gas Operations | $ | 4,585 | $ | 1,317 | ||||
| Transportation Services and Other Revenue | 14,000 | 8,380 | ||||||
| Financial Segment | 523 | 359 | ||||||
| Digital Asset Segment | 17 | - | ||||||
| Technology Segment | - | - | ||||||
| Total | $ | 19,125 | $ | 10,056 | ||||
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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.
| Nine Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Oil and natural gas sales, net of taxes | $ | 4,766 | $ | 1,316 | ||||
| Other | 35 | - | ||||||
| Total revenues | $ | 4,801 | $ | 1,316 | ||||
Our oil revenues for the nine months ended December 31, 2021 increased by $3,450, or 262%, to $4,766 from $1,316 as compared to the nine months ended December 31, 2020. There was an increase in revenue for the three months ended December 31, 2021 versus the three months ended September 30, 2021 due to higher average oil prices in the three months ended December 31, 2021, offset by slower production in our main producing well.
The increase in oil production during the nine months ended December 31, 2021 as compared to the same period in 2020 resulted in $1,959 of the total increase due to more wells operational in 2021 versus 2020. The remaining revenue increase of $1,491 was due to an increase in oil prices during the nine months ended December 31, 2021 as compared to the same period in 2020.
Average daily production sold increased by 92 barrels of oil per day (“BOPD”) to 199 BOPD during the nine months ended December 31, 2021 from 107 BOPD during the nine months ended December 31, 2020.
Cost of Revenues and Gross Profit
The following table shows costs of revenues for the nine months ended December 31, 2021 and 2020:
| Nine Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Total | $ | 10,693 | $ | 6,644 | ||||
The increase in cost of revenue was primarily due to increased owner operator and fuel expenses of $10,094 for the nine months ended December 31, 2021 compared to $5,865 for the nine months ended December 31, 2020.
Operating Expenses
The following table shows operating expenses by segment for the nine months ended December 31, 2021 and 2020:
| Nine Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Segment | ||||||||
| Commodity segment | $ | 15,960 | $ | 10,861 | ||||
| Technology segment | 2,468 | 2,541 | ||||||
| Digital Assets Segment | 3,715 | - | ||||||
| Financial Segment | 686 | 331 | ||||||
| Total | $ | 22,829 | $ | 13,733 | ||||
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The following table shows operating expenses for the nine months ended December 31, 2021 and 2020:
| Nine Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating Expenses | ||||||||
| Salaries and salaries related costs | $ | 8,316 | $ | 5,001 | ||||
| Professional and consulting fees | 906 | 652 | ||||||
| Oilfield supplies and repairs | 2,262 | 1,518 | ||||||
| Selling, general and administrative costs | 9,005 | 4,799 | ||||||
| Depreciation, amortization, depletion, and accretion | 2,340 | 1,133 | ||||||
| Research and development | - | 630 | ||||||
| $ | 22,829 | $ | 13,733 | |||||
Selling, General and Administrative
The following table shows selling, general and administrative expenses for the nine months ended December 31, 2021 and 2020:
| Nine Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Selling, general and administrative costs | ||||||||
| Capital Raising Costs | $ | 2,130 | $ | 773 | ||||
| Insurance | 2,346 | 839 | ||||||
| Legal/Audit/Accounting expenses | 1,071 | 1,116 | ||||||
| Factoring expenses | 319 | 214 | ||||||
| Equipment Rental | 283 | 38 | ||||||
| Development Costs | 105 | - | ||||||
| Other | 2,751 | 1,819 | ||||||
| $ | 9,005 | $ | 4,799 | |||||
Insurance expense for nine months ended December 31, 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 nine months ended December 31, 2021 and 2020:
| Nine Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Depletion of proved oil and natural gas properties | $ | 934 | $ | 380 | ||||
| Depletion of drilled wells | 510 | - | ||||||
| Depreciation of sand frac transportation equipment | 344 | 324 | ||||||
| Depreciation of midstream assets | 8 | 1 | ||||||
| Depreciation of technology segment assets | 143 | 188 | ||||||
| Depreciation of Bitstream mining assets | 21 | - | ||||||
| Amortization of intangible assets | 262 | 214 | ||||||
| Asset retirement obligation accretion | 118 | 26 | ||||||
| Depreciation, depletion and amortization expense | $ | 2,340 | $ | 1,133 | ||||
The increase in depletion of proved oil and natural gas properties of $554 for the nine months ended December 31, 2021 as compared to the nine months ended December 31, 2020 is primarily due to full nine months of operations in 2021 compared to less than seven months in 2020. Increase in depletion of drilled wells due to completion of Deshotel #24 well in March 2021.
Research and Development
Research and development expense decreased from $630 in the nine months ended December 31, 2020 to zero in the nine months ended December 31, 2021. The $630 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 nine months ended December 31, 2021 and 2020:
| Nine Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Change in fair value of derivative liabilities | $ | 15,295 | $ | (15,901 | ) | |||
| Gain (loss) on exchange of warrants for common stock | - | 19,338 | ||||||
| Loss on conversion of long-term debt and accrued expenses | - | (3,969 | ) | |||||
| Gain (loss) on disposal of fixed assets | - | (105 | ) | |||||
| Loss on abandonment of oil and gas property | - | (83 | ) | |||||
| Gain on disposal of ARO related to sale of oil and gas property | 8 | - | ||||||
| Gain on sale of oil and gas property | 713 | - | ||||||
| Forgiveness of debt | - | 1,850 | ||||||
| Interest expense, net of interest income | (636 | ) | (2,473 | ) | ||||
| Other income (expense) | $ | 15,380 | $ | (1,343 | ) | |||
Change in fair value of derivative liabilities for the nine months ended December 31, 2021 was a non-cash gain as compared to a non-cash loss for the nine months ended December 31, 2020. The $31,196 increase was a result of the fluctuation in the stock price at December 31, 2021 compared to December 31, 2020.
There was a gain in the period ended December 31, 2020 from the extinguishment of the derivative liabilities that when converted to shares of common stock of $19,338. In addition, in the period ended December 31, 2020, there was a loss on the conversion of debt and other liabilities to shares of common stock of $3,969.
Interest expense, net of interest income, for the nine months ended December 31, 2020 was the result of the interest incurred on the debt assumed in the Banner Midstream acquisition, the amortization of debt discount of $149 as well as the value related to the granting of warrants for interest of $1,265. For the nine months ended December 31, 2021, value related to the granting of warrants for interest was $545.
Oil, Natural Gas and Natural Gas Liquids Costs and Expenses
| Nine Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Costs and expenses (income): | ||||||||
| Production | $ | 407 | $ | 516 | ||||
| Exploration, abandonment, and impairment | 397 | 8 | ||||||
| Oilfield supplies and repairs | 1,517 | 1,423 | ||||||
| Oil & Gas production taxes | 162 | 106 | ||||||
| General and administrative | 1,552 | 3,245 | ||||||
| Depreciation and amortization | 25 | 115 | ||||||
| Depletion | 1,445 | 380 | ||||||
| Accretion | 118 | 26 | ||||||
| Gain on sale of oil and gas property | (721 | ) | - | |||||
| Loss on abandonment of oil and gas property | - | 82 | ||||||
Net Income (loss)
The following table shows net income (loss) for the nine months ended December 31, 2021 and 2020:
| Nine Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Commodities Segment | $ | 6,117 | $ | (9,309 | ) | |||
| Financial Segment | 54 | 54 | ||||||
| Digital Assets Segment | (3,819 | ) | - | |||||
| Technology Segment | (1,369 | ) | (2,409 | ) | ||||
| Net Income (loss) | $ | 983 | $ | (11,664 | ) | |||
Net income from continuing operations for the nine months ended December 31, 2021 increased primarily due to the non-cash changes in the fair value of the derivative liability of $15,295 and the non-cash losses incurred on the conversion of debt and expense to equity in the nine months ended December 31, 2020 of $3,969, offset by the non-cash gain on the exchange of warrants for common stock in the nine months ended December 31, 2020 of $19,338.
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RESULTS OF OPERATIONS FOR CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2021 AND 2020
Revenues
The following table shows revenues for the three months ended December 31, 2021 and 2020:
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Oil and Gas Operations | $ | 1,748 | $ | 641 | ||||
| Transportation Services and Other Revenue | 4,195 | 3,659 | ||||||
| Financial Segment | 175 | 165 | ||||||
| BTC Mining | 17 | - | ||||||
| Technology Segment | - | - | ||||||
| Total | $ | 6,135 | $ | 4,465 | ||||
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 December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Oil and natural gas sales, net of taxes | $ | 1,957 | $ | 640 | ||||
| Other | - | - | ||||||
| Total revenues | $ | 1,957 | $ | 640 | ||||
Our oil revenues for the three months ended December 31, 2021 increased by $1,317, or 206%, to $1,957 from $640 during the three months ended December 31, 2020. The increase in oil production during the three months ended December 31, 2021 as compared to the same period in 2020 resulted in $782 of the total increase due to more wells operational in 2021 versus 2020. The remaining revenue increase of $535 was due to an increase in oil prices during the three months ended December 31, 2021 as compared to the same period in 2020.
Average daily production sold increased by 71 barrels of oil per day (“BOPD”) to 163 BOPD during the three months ended December 31, 2021 from 92 BOPD during the three months ended December 31, 2020.
Cost of Revenues and Gross Profit
The following table shows costs of revenues for the three months ended December 31, 2021 and 2020:
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Total | $ | 3,527 | $ | 3,218 | ||||
The increase in cost of revenue was primarily due to increased owner operator and fuel expenses of $3,367 for the three months ended December 31, 2021 compared to $2,733 for the three months ended December 31, 2020.
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Operating Expenses
The following table shows operating expenses by segment for the three months ended December 31, 2021 and 2020:
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Segment | ||||||||
| Commodity segment | $ | 4,803 | $ | 4,412 | ||||
| Technology segment | 764 | 934 | ||||||
| Digital Assets segment | 3,307 | - | ||||||
| Financial segment | 415 | 137 | ||||||
| Total | $ | 9,289 | $ | 5,483 | ||||
The following table shows operating expenses for the three months ended December 31, 2021 and 2020:
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating Expenses | ||||||||
| Salaries and salaries related costs | $ | 4,478 | $ | 1,384 | ||||
| Professional and consulting fees | 524 | 154 | ||||||
| Oilfield supplies and repairs | 1,062 | 644 | ||||||
| Selling, general and administrative costs | 2,623 | 2,528 | ||||||
| Depreciation, amortization, depletion, and accretion | 602 | 509 | ||||||
| Research and development | - | 264 | ||||||
| $ | 9,289 | $ | 5,483 | |||||
Selling, General and Administrative
The following table shows selling, general and administrative expenses for the three months ended December 31, 2021 and 2020:
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Selling, general and administrative costs | ||||||||
| Capital Raising Costs | $ | 4 | $ | 773 | ||||
| Insurance | 820 | 552 | ||||||
| Legal/Audit/Accounting expenses | 424 | 407 | ||||||
| Factoring expenses | 98 | 135 | ||||||
| Equipment Rental | 124 | 4 | ||||||
| Development Costs | 105 | - | ||||||
| Other | 1,048 | 657 | ||||||
| $ | 2,623 | $ | 2,528 | |||||
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Depreciation, Amortization, Depletion and Accretion
The following table shows depreciation, amortization, depletion and accretion expenses for the three months ended December 31, 2021 and 2020:
| Three Months Ended December 31, | ||||||||||
| 2021 | 2020 | |||||||||
| Depletion of proved oil and natural gas properties | $ | 212 | $ | 255 | ||||||
| Depletion of drilled wells | 92 | - | ||||||||
| Depreciation of sand frac transportation equipment | 117 | 110 | ||||||||
| Depreciation of technology segment assets | 32 | 62 | ||||||||
| Depreciation of Bitstream mining assets | 21 | - | ||||||||
| Amortization of intangible assets | 88 | 72 | ||||||||
| Asset retirement obligation accretion | 40 | 10 | ||||||||
| Depreciation, depletion and amortization expense | $ | 602 | $ | 509 | ||||||
The decrease in depletion of proved oil and natural gas properties of $43 for the three months ended December 31, 2021 as compared to the three months ended December 31, 2020 is primarily due to an adjustment of projected lifetime production at wells purchased in August 2020, offset by additional wells being depleted. Increase in depletion of drilled wells was due to completion of Deshotel #24 well in March 2021.
Research and Development
Research and development expense decreased from $264 in the three months ended December 31, 2020 to zero in the three months ended December 31, 2021. The $264 reduction in costs is due to the completion of the development of the Zest Labs freshness solutions.
Other Income (Expense)
The following table shows other income (expense) for the three months ended December 31, 2021 and 2020:
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Change in fair value of derivative liabilities | $ | 10,979 | $ | 481 | ||||
| Gain (loss) on exchange of warrants for common stock | - | 2,755 | ||||||
| Loss on conversion of long-term debt and accrued expenses | - | - | ||||||
| Gain on disposal of ARO related to sale of oil and gas property | - | - | ||||||
| Gain on sale of oil and gas property | - | - | ||||||
| Forgiveness of debt | - | 1,850 | ||||||
| Interest expense, net of interest income | (19 | ) | (318 | ) | ||||
| Other income (expense) | $ | 10,960 | $ | 4,768 | ||||
Change in fair value of derivative liabilities for the three months ended December 31, 2021 was a non-cash gain, same as for the three months ended December 31, 2020. The $10,498 increase was a result of the fluctuation in the stock price at December 31, 2021 compared to December 31, 2020 as well as issuance of warrants August 2021
There was a gain in the period ended December 31, 2020 from the extinguishment of the derivative liabilities that when converted to shares of common stock of $2,755. In addition, in the period ended December 31, 2020, there was a loss on the conversion of debt and other liabilities to shares of common stock of $1,775.
Interest expense, net of interest income, for the three months ended December 31, 2020 was the result of the interest incurred on the debt assumed in the Banner Midstream acquisition, the amortization of debt discount of $149 as well as the value related to the granting of warrants for interest of $1,265. For the three months ended December 31, 2021, value related to the granting of warrants for interest was $0.
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Oil, Natural Gas and Natural Gas Liquids Costs and Expenses
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Costs and expenses (income): | ||||||||
| Production | $ | 128 | $ | 352 | ||||
| Exploration, abandonment, and impairment | - | 8 | ||||||
| Oilfield supplies and repairs | 750 | 630 | ||||||
| Oil & Gas production taxes | 83 | 47 | ||||||
| General and administrative | 624 | 1,099 | ||||||
| Depreciation and amortization | 9 | 110 | ||||||
| Depletion | 305 | 254 | ||||||
| Accretion | 40 | 10 | ||||||
| Gain on sale of oil and gas property | - | - | ||||||
| Loss on abandonment of oil and gas property | - | - | ||||||
Net Income (loss)
The following table shows net income (loss) for the three months ended December 31, 2021 and 2020:
| Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Commodities Segment | $ | 8,697 | $ | 439 | ||||
| Financial Segment | (243 | ) | 194 | |||||
| Digital Assets Segment | (3,411 | ) | - | |||||
| Technology Segment | (764 | ) | (101 | ) | ||||
| Net Income (loss) | $ | 4,279 | $ | 532 | ||||
Net income from continuing operations for the three months ended December 31, 2021 increased primarily due to the non-cash changes in the fair value of the derivative liability and the non-cash gain on the exchange of warrants for common stock in the three months ended December 31, 2021 and 2020, offset by the non-cash losses incurred on the conversion of debt and expense to equity in the three months ended December 31, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
Net cash used in operating activities was ($8,420) for the nine months ended December 31, 2021, as compared to net cash used in operating activities of ($7,737) for the nine months ended December 31, 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.
66
Net cash provided by (used in) investing activities was $(9,387) for the nine months ended December 31, 2021, as compared to ($3,808) net cash used in investing activities for the nine months ended December 31, 2020. Net cash used in investing activities in 2021 related to the purchase of fixed assets of ($7,085), payment for power development costs of ($2,000) and oil and gas properties of $(304), offset by sale of fixed assets of $2. For the nine months ended December 31, 2020, the cash used in investing activities related to advancement of a note receivable of ($275), and the net purchases of fixed assets and oil and gas properties including drilling costs of $(3,533).
Net cash provided (used) in financing activities for the nine months ended December 31, 2021 was $17,355 that included $19,230 of proceeds from issuance of common stock and warrants, net of fees, and $28 in proceeds received from the exercise of stock options, offset by $1,805 in repayments of debt. This compared with the cash provided by financing activities in the nine months ended December 31, 2020 of $19,120 that included $14,359 from the exercise of warrants, $349 from the exercise of stock options, $2,473 from proceeds received from debt form related and non-related parties, $7,666 from issuance of common stock, net of fees offset by ($5,320) from payments on debt to both related and non-related parties and ($316) in payments to prior owners.
On August 6, 2021, the Company closed a registered direct offering (the “Offering”) of 3,478 shares of the Company’s common stock and warrants to purchase 3,478 shares of common stock (the “Warrants”) to institutional investors at a purchase price per share and accompanying Warrant of $5.75 and received net proceeds of approximately $18,249 after deducting fees payable to the placement agent and offering expenses payable by the Company. We have spent and will continue to spend a majority of the net proceeds from this offering to pay the expenses and equipment related to our digital asset mining operation and a portion of the proceeds will continue to be spent on new drilling projects as previously announced. Additionally, approximately $1,000 will be used to fund new intellectual property litigation legal fees and filings.
The Warrants have an exercise price equal to $5.75 per share and will expire April 8, 2025.
At December 31, 2021 we had cash (including restricted cash) of $864 and $205 as of February 10, 2022 from continuing operations. We had a working capital deficit of $6,020 and $11,845 as of December 31, 2021 and March 31, 2021, respectively. The decrease in the working capital deficit is the result of the non-cash change in the fair value of the derivative liabilities and repayments of long-term debt offset by the net changes in accounts payable and accrued expenses.
The Company has adequate capital resources to meet its cash requirements during the next 12 months.
We expect that in the long term the revenue generating operations in our Commodities segment will continue to improve the liquidity of the Company moving forward. The Company’s capital program for production enhancement and development is expected to be significantly focused on exploiting legacy acreage positions that are economically viable at today’s oil prices. We anticipate that management’s focus on legacy acreage enhancement and development will positively benefit the balance sheet by producing hydrocarbons during a time of increasing demand after the negative impacts of COVID-19.
The amount and timing of our capital expenditures are largely discretionary and within our control. We could choose to defer a portion of these planned capital expenditures depending on a variety of factors, including but not limited to the success of our drilling activities, prevailing and anticipated prices for oil, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners. We currently continue to execute on our strategy to reinvest cash flow from operations to enhance, develop and increase oil production, strengthening our balance sheet. We intend to continue monitoring commodity prices and overall market conditions and can adjust capital deployment in response to changes in commodity prices and overall market conditions.
We monitor and adjust our projected capital expenditures for our operations in response to the results of our drilling activities, changes in prices, availability of financing, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs, contractual obligations, internally generated cash flow and other factors both within and outside our control. If we require additional capital, we may seek such capital through traditional reserve base borrowings, joint venture partnerships, production payment financing, asset sales, offerings of debt and/or equity securities or other means. There is no assurance that the needed capital will be available on acceptable terms or at all. If we are unable to obtain funds when needed or on acceptable terms, we may be required to curtail our drilling programs, which could result in a loss of acreage through lease expirations. In addition, we may not be able to complete acquisitions that may be favorable to us or finance the capital.
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Bitstream Expenditures
As of February 10, 2022, the Company has paid unaffiliated third parties a total of $4,755 and is obligated to pay certain of these third parties an additional $8,686 in connection with Bitstream and the establishment of its cryptocurrency mining facilities and operations. Depending upon the availability of capital, Bitstream may spend material additional sums.
Contractual Obligations
Our contractual obligations are included in our Notes to the Unaudited Condensed Consolidated Financial Statements. To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.
Off-Balance Sheet Arrangements
As of December 31, 2021 and March 31, 2021, we had no off-balance sheet arrangements.
Cautionary Note Regarding Forward Looking Statements
This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the expected revenues from existing and new drilling projects in our oil and gas operations, plans and prospects for our new digital assets mining business including developing mining facilities and delivery of related infrastructure, power and equipment, increasing the electric power supply for our cryptocurrency mining operations, our planned participation in ERCOT and ability to sell power at favorable margins during shortages, the use and benefits of immersion cooling technology for our cryptocurrency mining operations, prospective future litigation, the initial public offering and uplisting of Agora’s securities and our anticipated stock dividend involving Agora common stock thereafter, regulatory changes in the oil and gas industry, our capital program for production enhancement and development, the potential acquisition of a broker-dealer, our anticipated capital expenditures, and future liquidity. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including: any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ from those in the forward-looking statements include, among other things, volatility of oil and Bitcoin prices, the risks arising from the new impact of the COVID-19 pandemic, including its future effect on the U.S. and global economies including the oil and gas and cryptocurrency markets, competition, government regulation or action, the costs and results of drilling and cryptocurrency mining activities, risks inherent in drilling operations, availability of equipment, services, resources and personnel required to conduct operating activities, ability to replace reserves and uncertainties related to reserve estimates, contingencies in our development of cryptocurrency mining facilities in West Texas including the need for sufficient land and energy and regulatory approvals and uncertainties related to ongoing litigation, risks related to potential impact of natural disasters, any delays or difficulties in the completion of the initial public offering and uplisting of Agora securities or our planned distribution of Agora common stock thereafter, including delays or challenges in obtaining the requisite approvals, risks and uncertainties related to the new digital asset mining business, and cybersecurity risks. Further information on our risk factors is contained in our filings with the SEC, including our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2021 filed on November 10, 2021, our Annual Report on Form 10-K for the year ended March 31, 2021 filed on June 30, 2021 and our prospectus supplement dated August 4, 2021. Further, with respect to Agora and its subsidiaries, Agora’s registration statement on Form S-1 (File No. 333-261246) sets forth additional risks and uncertainties specific to its business after giving effect to its initial public offering and related transactions and events more particularly described therein. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, our principal executive and financial officers have concluded that as of the end of the period covered by this report the Company’s disclosure controls and procedures were effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Principal Financial Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no material changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 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.
| ● | As previously disclosed, on August 1, 2018, Ecoark Holdings, Inc. and Zest Labs, Inc. filed a complaint against Walmart Inc. in the United States District Court for the Eastern District of Arkansas, Western Division. The complaint includes claims for violation of the Arkansas Trade Secrets Act, violation of the Federal Defend Trade Secrets Act, breach of contract, unfair competition, unjust enrichment, breach of the covenant of good faith and fair dealing, conversion and fraud. On April 9, 2021, a Little Rock, Arkansas jury awarded Ecoark and Zest a total of $115 million in damages which includes $65 million in compensatory damages and $50 million in punitive damages and found Walmart Inc. liable on three claims. The federal jury found that Walmart Inc. misappropriated Zest’s trade secrets, failed to comply with a written contract, and acted willfully and maliciously in misappropriating Zest’s trade secrets. We expect Walmart to continue to vigorously defend the litigation and to oppose the verdict in post-trial motions and an appeal. The Company has filed post-trial motions to add an award for their attorneys’ fees as the prevailing party in the litigation. In addition to other post-trial motions, Walmart, Inc. has filed a renewed motion for judgment as a matter of law or, in the alternative, for remittitur or a new trial. As of the date of this Report, the court has not ruled on any of the post-trial motions. |
| ● | On September 21, 2021, Ecoark Holdings, Inc. and Zest Labs, Inc. filed a complaint against Deloitte Consulting, LLP (“Deloitte”) in the Eight Judicial District Court in Clark County, Nevada. The complaint alleges violation of the Nevada Uniform Trade Secret Act and in addition to compensatory damages will also be seeking a preliminary and permanent injunction, attorney’s fees, and punitive damages. The damages at issue are in the hundreds of millions of dollars. Zest Labs, Inc. began working with Deloitte in 2016, in a confidential matter in a pilot program that Zest Labs, Inc. had been engaged for by a large customer. Zest Labs, Inc. engaged in significant discussions, presentations, demonstrations, and information downloads with Deloitte who specifically acknowledged that this information was confidential. This complaint is in the very early stages, with motions filed on both sides and an initial hearing set for March 8, 2022. The Company cannot reasonably determine the outcome and potential reward at this time. |
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. Investors should review the risk factors described in our Quarterly Report on Form 10-Q for the six months ended September 30, 2021 filed on November 10, 2021, in addition to those disclosed in our Annual Report on Form 10-K for the year ended March 31, 2021 filed on June 30, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| Incorporated by Reference |
Filed or Furnished |
||||||||||
| Exhibit No. | Exhibit Description | Form | Date | Number | Herewith | ||||||
| 3.1(a) | Articles of Incorporation, as amended | 10-Q | 2/12/21 | 3.1 | |||||||
| 3.1(b) | Certificate of Amendment to Articles of Incorporation | 8-K | 10/12/21 | 3.1 | |||||||
| 3.2(a) | Amended and Restated Bylaws | 8-K | 4/28/17 | 3.1 | |||||||
| 3.2(b) | Amendment to Bylaws | 8-K | 8/30/21 | 3.1 | |||||||
| 4.1 | Form of Warrant | 8-K | 8/5/21 | 4.1 | |||||||
| 4.2 | Form of Placement Agent Warrant | 8-K | 8/5/21 | 4.2 | |||||||
| 10.1 | Restricted Stock Unit Agreement, dated October 6, 2021, between the Company and Peter Mehring** | 8-K | 10/12/21 | 10.1 | |||||||
| 10.2 | Peter Mehring Consulting Agreement | 8-K |
2/4/22 |
10.1 |
|||||||
| 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. |
| ** | Exhibits and/or Schedules have been omitted. The Company hereby agrees to furnish to the SEC upon request any omitted information. |
| + | Portions of this exhibit have been omitted as permitted by the rules of the SEC. The information excluded is both (i) not material and (ii) would be competitively harmful if publicly disclosed. The Company undertakes to submit a marked copy of this exhibit for review by the SEC Staff, to the extent it has not been previously provided, and provide supplemental materials to the SEC Staff promptly upon request. |
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our stockholders 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: February 11, 2022 | By: | /s/ Randy May |
| Randy May | ||
| Chief Executive Officer | ||
| Date: February 11, 2022 | By: | /s/ William B. Hoagland |
| William B. Hoagland | ||
| Chief Financial Officer | ||
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