UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended:
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from:
Commission
file number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Issuer’s
telephone number: (
Securities registered pursuant to Section 12(b) of the Act: None
Indicate
by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “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 standard 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 10, 2023, the issuer had shares of common stock, $0.0001 par value per share, outstanding.
TABLE OF CONTENTS
| 2 |
WHITE RIVER ENERGY CORP
(FORMERLY FORTIUM HOLDINGS CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2022 (UNAUDITED) AND MARCH 31, 2022
| DECEMBER 31, | MARCH 31, | |||||||
| 2022 | 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash (including $ | $ | $ | ||||||
| Accounts receivable, net of $ | ||||||||
| Receivable - Participation Agreement | ||||||||
| Inventories - Crude Oil | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset - operating lease | ||||||||
| Right of use asset - financing lease | ||||||||
| Oil and gas properties, full cost-method | ||||||||
| Capitalized drilling costs, net of depletion | ||||||||
| Other assets | ||||||||
| Goodwill | ||||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| LIABILITIES | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Due to Ecoark Holdings, Inc. (*) | ||||||||
| Cash overdraft | ||||||||
| Derivative liabilities (including the Series C Preferred Shares) | ||||||||
| Deferred liabilities | ||||||||
| Convertible note payable, net of discount | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion of lease liability - operating lease | ||||||||
| Current portion of lease liability - financing lease | ||||||||
| Total current liabilities | ||||||||
| NON-CURRENT LIABILITIES | ||||||||
| Lease liability - operating lease, net of current portion | ||||||||
| Lease liability - financing lease, 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) | ||||||||
| Preferred stock, $ par value, shares authorized | ||||||||
| Series A - and (*) | ||||||||
| Series B - shares issued and outstanding | ||||||||
| Series C - and shares issued and outstanding (included in derivative liabilities) | ||||||||
| Common stock, $ par value, shares authorized and and shares issued and outstanding (*) | ||||||||
| Additional paid in capital (*) | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | $ | ||||||
| (*) |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| F-1 |
WHITE RIVER ENERGY CORP
(FORMERLY FORTIUM HOLDINGS CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE AND THREE MONTHS ENDED DECEMBER 31, 2022 AND 2021
| NINE MONTHS ENDED | THREE MONTHS ENDED | |||||||||||||||
| DECEMBER 31, | DECEMBER 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUES | $ | $ | $ | $ | ||||||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| Cost of revenues (excludes items below) | ||||||||||||||||
| Salaries and salaries related costs | ||||||||||||||||
| Professional and consulting fees | ||||||||||||||||
| Oilfield costs, supplies and repairs | ||||||||||||||||
| Selling, general and administrative costs | ||||||||||||||||
| Depreciation, amortization, impairment, depletion, and accretion | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSE) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Change in fair value of derivative liabilities | ||||||||||||||||
| Derivative expense | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on sale of oil and gas property and ARO | ||||||||||||||||
| Gain on sale of working interests on oil and gas properties | ||||||||||||||||
| Amortization of original issue discount | ( | ) | ( | ) | ||||||||||||
| Interest expense, net of interest income | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||||||||||
| (LOSS) INCOME FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES | ( | ) | ( | ) | ||||||||||||
| DISCONTINUED OPERATIONS: | ||||||||||||||||
| Loss from discontinued operations | ( | ) | ||||||||||||||
| Loss on disposal of discontinued operations | ( | ) | ||||||||||||||
| Total discontinued operations | ( | ) | ||||||||||||||
| (LOSS) INCOME FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES | ( | ) | ( | ) | ||||||||||||
| PROVISION FOR INCOME TAXES | ( | ) | ( | ) | ||||||||||||
| NET (LOSS) INCOME | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| NET (LOSS) EARNINGS PER SHARE - BASIC | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Discontinued operations | ( | ) | ||||||||||||||
| NET (LOSS) EARNINGS PER SHARE | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC (*) | ||||||||||||||||
| NET (LOSS) EARNINGS PER SHARE - DILUTED | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING – DILUTED (*) | ||||||||||||||||
| (*) |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| F-2 |
WHITE RIVER ENERGY CORP
(FORMERLY FORTIUM HOLDINGS CORP.)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2022 AND 2021
| Series A Preferred Stock (*) | Series C Preferred Stock | Common Stock (*) | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital (*) | Deficit | Total | ||||||||||||||||||||||||||||
| Balance - March 31, 2021(*) | $ | | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Advances from Ecoark Holdings Inc. to White River Holdings Corp, net | - | - | - | |||||||||||||||||||||||||||||||||
| Cost allocations from Ecoark Holdings, Inc. | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net income for the period | - | - | - | |||||||||||||||||||||||||||||||||
| Balance - June 30, 2021 | ( | ) | ||||||||||||||||||||||||||||||||||
| Advances from Ecoark Holdings, Inc. to White River Holdings Corp, net | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Cost allocations from Ecoark Holdings, Inc. | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance - September 30, 2021 | ( | ) | ||||||||||||||||||||||||||||||||||
| Advances from Ecoark Holdings, Inc. to White River Holdings Corp, net | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Cost allocations from Ecoark Holdings, Inc. | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net income for the period | - | - | - | |||||||||||||||||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Advances from Ecoark Holdings, Inc. to White River Holdings Corp, net | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance - June 30, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||
| Advances from Ecoark Holdings, Inc. to White River Holdings Corp, net | - | - | - | |||||||||||||||||||||||||||||||||
| To reflect the reverse merger of White River Holdings Corp | ||||||||||||||||||||||||||||||||||||
| To record contribution of capital by Ecoark Holdings, Inc. | - | - | - | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance - September 30, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||
| Preferred shares issued in PIPE, net of classification as liability** | - | - | - | |||||||||||||||||||||||||||||||||
| Shares issued in consulting agreement | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance - December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| * |
| ** |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| F-3 |
WHITE RIVER ENERGY CORP
(FORMERLY FORTIUM HOLDINGS CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2022 AND 2021
| DECEMBER 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES FROM OPERATIONS | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities | ||||||||
| Home office allocation | ( | ) | ||||||
| Depreciation, amortization, depletion, accretion and impairment | ||||||||
| Share-based compensation | ||||||||
| Fees paid in termination of note payable | ||||||||
| Bad debt reserve | ||||||||
| Loss on disposal of Norr and Elysian | ||||||||
| Gain on disposal of oil and gas property, ARO and fixed assets | ( | ) | ( | ) | ||||
| Change in fair value of derivative liability | ( | ) | ||||||
| Common stock issued for services | ||||||||
| Derivative expense | ||||||||
| Amortization of discount | ||||||||
| Expenses recorded on notes payable and preferred stock transactions | ||||||||
| Changes in assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ||||||
| Receivable - Participation Agreement | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Amortization of right of use asset - operating leases | ||||||||
| Amortization of right of use asset - financing leases | ||||||||
| Deferred revenues | ||||||||
| Contribution from Ecoark Holdings, Inc. | ||||||||
| Operating lease expense | ( | ) | ( | ) | ||||
| Interest expense on financing leases | ||||||||
| Accrued payable and accrued liabilities | ( | ) | ||||||
| Total adjustments | ( | ) | ||||||
| Net cash used in operating activities of continuing operations | ( | ) | ||||||
| Net cash used in discontinued operations | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of oil and gas properties, net of asset retirement obligations | ( | ) | ||||||
| Advances on note receivable | ( | ) | ||||||
| Payments received from note receivable | ||||||||
| Proceeds from the sale of fixed assets | ||||||||
| Capitalized drilling costs | ( | ) | ||||||
| Proceeds from the sale of oil and gas properties | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| (Decrease) in cash overdraft | ( | ) | ( | ) | ||||
| Proceeds from Series C Preferred Stock, net | ||||||||
| Proceeds from long-term debt | ||||||||
| Proceeds from note payable | ||||||||
| Repayment of long-term debt and note payable | ( | ) | ||||||
| Payment of lease liability | ( | ) | ||||||
| Proceeds from Ecoark Holdings, Inc. in acquisition of White River | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| NET INCREASE IN CASH AND RESTRICTED CASH | ||||||||
| CASH AND RESTRCITED CASH - BEGINNING OF PERIOD | ||||||||
| CASH AND RESTRICTED CASH - END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES | ||||||||
| Cash paid for interest expense | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| SUMMARY OF NON-CASH ACTIVITIES: | ||||||||
| Net assets acquired from Fortium Holdings Corp. | $ | $ | ||||||
| Bifurcation of derivative liability from convertible note | $ | $ | ||||||
| ROU asset acquired for lease liability - financing leases | $ | $ | ||||||
| Fixed assets acquired for notes payable and long-term debt | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| F-4 |
WHITE RIVER ENERGY CORP
(FORMERLY FORTIUM HOLDINGS CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2022
NOTE 1: DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The terms “we,” “us,” “our,” “registrant,” and the “Company” refer to White River Energy Corp.
On September 19, 2022, the Company changed its name from Fortium Holdings Corp. to White River Energy Corp. On September 28, 2022, the Board of Directors and holders of the majority outstanding voting power approved the changing of the fiscal year of the Company from December 31 to March 31, and approved increasing the authorized capital to shares consisting of shares of common stock (from ) and shares of preferred stock. The Company filed a Certificate of Amendment to the Articles of Incorporation with the Nevada Secretary of State on September 29, 2022, and the changes became effective upon filing.
The
Company executed a Share Exchange Agreement (the “Exchange Agreement”) on July 25, 2022 and pursuant to the Exchange
Agreement that day acquired %
of the outstanding shares of capital stock of White River Holdings Corp, a Delaware corporation (“Holdings”) from Ecoark
Holdings, Inc. (“Ecoark”), Holding’s sole stockholder. In exchange the Company issued Ecoark shares
of the newly designated non-voting Series A Convertible Preferred Stock (the “Series A”). The Series A will become
convertible into approximately
shares of the Company’s common stock upon such time as (A) the Company has filed a Form S-1, with the Securities and Exchange
Commission (the “SEC”) and such Form S-1 has been declared effective or is no longer subject to comments from the Staff
of the SEC, and (B) Ecoark elects to distribute shares of the Company’s common stock to Ecoark’s stockholders. The
Company filed the Form S-1 in December 2022 (File No. 333-268707), and is currently in the process of addressing the comments from
the SEC Staff. The Series A has a stated value of $
Holdings has operations in oil and gas, including exploration, production and drilling operations on over 30,000 cumulative acres of active mineral leases Louisiana, and Mississippi.
Pursuant to the Exchange Agreement Mr. Randy May, Ecoark’s Chief Executive Officer, was appointed as Executive Chairman and as a director of the Company, and Mr. Jay Puchir, Ecoark’s Chief Financial Officer, was appointed as Chief Executive Officer and Principal Financial Officer of the Company. Effective July 28, 2022, the number of directors of the Company was fixed at five, and Danny Hames, James Cahill, Greg Landis, and Alisa Horgan were appointed as directors. Alisa Horgan is the daughter of Randy May, and wife of Richard Horgan, who was the Company’s Chief Executive Officer and sole director until after the closing of the Holdings acquisition.
Ecoark has advised us that it plans to spin-off the common stock issuable upon conversion of the Series A issued in the share exchange with Holdings, subject to the effectiveness of the Form S-1.
On
July 29, 2022, the Company filed a Certificate of Designation with the Nevada Secretary of State designating a new series of preferred
stock as Series B Preferred Stock (the “Series B”).
On
October 25, 2022, the Company filed a Certificate of Designation of the Rights, Preferences and Limitations (the “Series C Certificate
of Designation”) of Series C Convertible Preferred Stock (the “Series C”) with the Nevada Secretary of State. The Series
C Certificate of Designation provides for the issuance of up to shares of Series C. From October 25, 2022 through
November 8, 2022, the Company sold Units, with each Unit comprised of
share of Series C and Warrant to purchase
of the shares
of common stock underlying such share of Series C (the “Units”) at a purchase price of $
| F-5 |
On March 18, 2021, the Company formed Norr LLC (“Norr”), a Nevada limited liability company and wholly-owned subsidiary of the Company, and commenced operations as a sports equipment and apparel manufacturer and retailer.
On September 9, 2021, the Company formed Elysian, a Colorado corporation and wholly-owned subsidiary, for the purpose of engaging in cannabis operations.
In
September 2022, the Company sold both Norr and Elysian pursuant to a Membership Interest Purchase Agreement (“MIPA”)
for Norr, and a Stock Purchase Agreement for Elysian. These entities were sold to non-related third parties
for $
On September 16, 2022, the Board of Directors and stockholders approved the name change of the Company from Fortium Holdings Corp. to White River Energy Corp. All paperwork were submitted to both the State of Nevada and to the Financial Industry Regulatory Authority (“FINRA”) on September 20, 2022 and subsequently approved.
The Company has reflected the operations of both Norr and Elysian post-combination in discontinued operations and have reflected the loss on disposal of these companies in the Statements of Operations. All information related to the prior operations and corporate formation of these entities is included in the Company’s Annual Report on Form 10-K, filed March 15, 2022 and the Form 10-Q for the period ended June 30, 2022 filed August 12, 2022.
Basis of Presentation
The Company’s unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB).
All adjustments considered necessary for a fair presentation have been included. These adjustments consist of normal and recurring accruals, as well as non-recurring charges.
As
the acquisition of Holdings resulted in the owner of Holdings gaining control over the combined entity after
the transaction, and the stockholders of the Company continuing only as passive investors, the transaction was not considered
a business combination under the ASC. Instead, this transaction was considered to be a capital transaction of the legal acquiree (Holdings) and was equivalent to the issuance of shares by Holdings for the net monetary assets of the Company, except for the purchase of the shares of issued and outstanding common shares of Fortium
Holdings Corp., which were considered as purchase consideration resulting in $
The condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as well as the Holdings audited financial statements that are reflected in Form 8-K/A filed by the Company on October 28, 2022. Therefore, the interim condensed consolidated financial statements should be read in conjunction with those reports. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year due to various factors.
| F-6 |
Principles of Consolidation
The Company prepares its consolidated financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts, balances and transactions have been eliminated in the consolidation.
Reclassifications
The Company has reclassified certain amounts in the December 31, 2021 condensed consolidated financial statements to be consistent with the December 31, 2022 presentation. These changes had no impact on the Company’s financial position or result of operations for the periods presented. In addition, we had reclassifications related to the retroactive treatment of certain liabilities and equity items which are reflected by asterisks in the condensed consolidated financial statements that had no impact on our net loss.
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.
| F-7 |
The
Ceiling is defined as the sum of: (a) the present value, discounted at
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 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.
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.
Impairment of Long-lived Assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
| F-8 |
Property and Equipment and Long-Lived Assets
Property and equipment is stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets.
ASC 360 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company reviews recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets.
ASC 360-10 addresses criteria to be considered for long-lived assets expected to be disposed of by sale. Six criteria are listed in ASC 360-10-45-9 that must be met in order for assets to be classified as held for sale. Once the criteria are met, long-lived assets classified as held for sale are to be measured at the lower of carrying amount or fair value less costs to sell.
The Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers to be important which could trigger an impairment review include the following:
1. Significant underperformance relative to expected historical or projected future operating results;
2. Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and
3. Significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.
Fair Value Measurements
The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets.
Level 2: Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The carrying values of the Company’s financial instruments such as cash, investments, accounts payable, and accrued expenses approximate their respective fair values because of the short-term nature of those financial instruments.
| F-9 |
Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.
The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
● Step 1: Identify the contract with the customer
● Step 2: Identify the performance obligations in the contract
● Step 3: Determine the transaction price
● Step 4: Allocate the transaction price to the performance obligations in the contract
● Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
● Variable consideration
● Constraining estimates of variable consideration
● The existence of a significant financing component in the contract
● Noncash consideration
● Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
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.
The Company recognizes revenue 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 may, from time to time, do contract drilling of oil wells for other energy companies and that services revenue would be categorized as Other Revenue within continuing operations. The Company may, from time to time, sell off working interests in drilling projects on its own oil and gas mineral leases, and that revenue would be categorized within “Other Income (Expense)”.
| F-10 |
The Company has accounted for stock-based compensation arrangements in accordance with Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718”). This guidance addresses all forms of share-based payment awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights, as well as share grants and other awards issued to employees and non-employees under free-standing arrangements. These awards are recorded at costs that are measured at fair value on the awards’ grant dates, based on the estimated number of awards that are expected to vest and will result in charges to operations.
Segment Reporting
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 only continuing operation is that of Holdings, and the Company only operates in one segment – oil and gas production.
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.
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 stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented, so only basic weighted average number of common shares are used in the computations.
Correction of Immaterial Misstatement
During
the quarter ended September 30, 2022, the Company in their previously issued condensed consolidated financial statements classified $
During
the quarter ended December 31, 2022, the Company became aware of the reclassification and has adjusted both goodwill and additional paid
in capital by $
Based on an analysis of ASC 250 “Accounting Changes and Error Corrections”, Staff Accounting Bulletin 99 “Materiality” and Staff Accounting Bulletin 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, we have determined that this error was immaterial to the previously issued consolidated financial statements for the six months ended September 30, 2022.
Recently Issued Accounting Pronouncements
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 does not believe this new guidance will have a material impact 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.
| F-11 |
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 does not believe this new guidance will have a material impact 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
With
the acquisition of Holdings, their former parent, Ecoark contributed $
The accompanying financial statements for the period ended December 31, 2022 have been prepared assuming the Company will continue as a going concern, but the ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it establishes a revenue stream and becomes profitable. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. If the Company is not able to obtain the necessary additional financing on a timely basis, the Company will be required to delay, and reduce the scope of the Company’s development and operations. Continuing as a going concern is dependent upon its ability to successfully secure other sources of financing and attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Impact of COVID-19
COVID-19 has 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 and booster rollouts and the emergence of virus mutations.
COVID-19 did not have a material effect on the Consolidated Statements of Operations or the Consolidated Balance Sheets for the nine months ended December 31, 2022.
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 its business.
The extent to which COVID-19 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.
NOTE 2: MERGER
The acquisition of Holdings was considered a reverse merger. In accordance with ASC 805-40-45-1, the consolidated financial statements prepared following a reverse acquisition are issued under the name of the legal parent (White River Energy Corp) but described in the notes to the financial statements as a continuation of the financial statements of the legal subsidiary (Holdings), with one adjustment, which is to retroactively adjust the accounting acquirer’s legal capital to reflect the legal capital of the accounting acquiree (White River Energy Corp). That adjustment is required to reflect the capital of the legal parent. Comparative information presented in the consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legal parent.
| F-12 |
Under ASC 805-40-45-2, the consolidated financial statements represent the continuation of the legal subsidiary except for the capital structure, as follows:
| (a) | The assets and liabilities of the legal subsidiary recognized and measured at their pre-combination carrying amounts; | |
| (b) | The assets and liabilities of the legal parent recognized and measured in accordance with the guidance in this topic applicable to business combinations (ASC 805); | |
| (c) | The retained earnings and other equity balances of the legal subsidiary before the business combination; | |
| (d) | The amount recognized as issued equity interests in the consolidated financial statements determined by adding the issued equity interest of the legal subsidiary outstanding immediately before the business combination to the fair value of the legal parent determined in accordance with the guidance in ASC 805 applicable to business combinations. However, the equity structure reflects the equity structure of the legal parent, including the equity interests the legal parent issued to effect the combination. Accordingly, the equity structure of the legal subsidiary is restated using the exchange ratio established in the acquisition agreement to reflect the number of shares of the legal parent issued in the reverse acquisition. |
Fortium
Holdings Corp. issued Ecoark shares of Series A valued at $
On July 25, 2022, the Company completed the share exchange transaction with Holdings. As a result of this transaction, which is accounted for as a share exchange, Holdings is a wholly owned subsidiary of the Company (the “Merger”). In accordance with the terms of the Merger, at the effective time of the Merger, the outstanding shares of the common stock of Holdings were exchanged for the shares of Series A of the Company. This exchange of shares and the resulting controlling ownership of the Company constitutes a reverse acquisition resulting in a recapitalization of Holdings and purchase accounting being applied to the non-controlling interest acquired from Fortium Holdings Corp. under ASC 805 due to Holdings being the accounting acquirer and Fortium Holdings Corp., being deemed an acquired business as they were not a shell corporation. This requires financial reporting from the Merger close date forward to reflect only the historic consolidated results of Holdings and to include the consolidated results for the Company and subsidiaries from July 25, 2022 forward.
The previously existing businesses of the Company at the time of the Merger, consisting of Norr and Elysian, were sold within 60 days of the Merger taking place.
The estimated allocation of the purchase price of the assets acquired and liabilities assumed for the acquisition by Holdings of Fortium Holdings Corp. via the reverse acquisition are set forth below in accordance with the guidance under ASC 805:
| Purchase Price Allocation of Fortium Holdings Corp. | ||||
| Current assets – inventory and deposits | $ | |||
| Accounts payable and accrued expenses | ( | ) | ||
| Goodwill | ||||
| Purchase price | $ |
This
allocation is based on management’s estimated fair value of the Fortium Holdings Corp assets and liabilities as of July 25, 2022 utilizing
the guidance in ASC 820-10-35 which included the measurement based on a known level one input regarding the applicable share price as
well as the level of activity in the Company and the fact that the value was driven off of a business no longer included in the Company’s
current operations. Fortium Holdings Corp. assets were derived from a total value of $
| F-13 |
The following pro forma balance sheet reflects the details of the March 31, 2022 consolidated balance sheet as presented in the Company’s financial statements as a result of the share exchange.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2022
Historical Fortium | White River | Other | Other | |||||||||||||||||
| Holdings | Holdings | Transaction | Transaction | |||||||||||||||||
| Corp | Corp | Adjustments | Adjustments | Pro Forma | ||||||||||||||||
| (1) | (2) | |||||||||||||||||||
| ASSETS | ||||||||||||||||||||
| CURRENT ASSETS | ||||||||||||||||||||
| Cash | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Accounts receivable | ||||||||||||||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||||||||||||||
| Inventory | ||||||||||||||||||||
| Current assets held for sale | ||||||||||||||||||||
| Total current assets | ( | ) | ||||||||||||||||||
| NON-CURRENT ASSETS | ||||||||||||||||||||
| Property and equipment, net | ( | ) | ||||||||||||||||||
| Capitalized drilling costs | ||||||||||||||||||||
| Oil and gas reserves | ||||||||||||||||||||
| Right of use asset - operating leases | ||||||||||||||||||||
| Other assets | ||||||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Total non-current assets | ( | ) | ||||||||||||||||||
| TOTAL ASSETS | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||||||||
| Accounts payable and accrued expenses | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Current portion of lease liability - operating leases | ||||||||||||||||||||
| Cash overdraft | ||||||||||||||||||||
| Due to Ecoark Holdings, Inc. | ||||||||||||||||||||
| Total current liabilities | ( | ) | ||||||||||||||||||
| NON-CURRENT LIABILITIES | ||||||||||||||||||||
| Asset retirement obligation | ||||||||||||||||||||
| Lease liability - operating leases, net of current portion | ||||||||||||||||||||
| Total liabilities | ( | ) | ||||||||||||||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||||||
| Preferred stock, $0.0001 par value | ||||||||||||||||||||
| Common stock, $0.0001 par value | ( | ) | ||||||||||||||||||
| Additional paid-in capital | ( | ) | ( | ) | ||||||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Total stockholders’ equity (deficit) before non-controlling interest | ( | ) | ( | ) | ||||||||||||||||
| Non-controlling interest | ( | ) | ||||||||||||||||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Adjustments: | (1) | |
| (2) |
| F-14 |
The consolidated statements of operations and cash flows represent the operations of Holdings for the nine months ended December 31, 2022 and 2021 include cost allocations from Holding’s former parent Ecoark as discussed below.
Cost Allocations
The consolidated financial statements of Holdings have been prepared in connection with the expected separation and have been derived from the consolidated financial statements and accounting records of Ecoark operated on a standalone basis during the periods presented and were prepared in accordance with accounting principles generally accepted in the United States of America.
The consolidated financial statements reflect allocations of certain Ecoark corporate, infrastructure and shared services expenses, including centralized research, legal, human resources, payroll, finance and accounting, employee benefits, real estate, insurance, information technology, telecommunications, treasury, and other income and expenses for interest expense on debt that portions were used for Holdings, changes in derivative liabilities on the books of Ecoark for Warrants granted in offerings of which proceeds went towards the operations of Holdings, and conversions of debt. As noted, the derivative liabilities are included in Ecoark’s books however, the advances made by Ecoark related to the proceeds received that were recognized as a derivative liability are included in the March 31, 2022 balance sheet as “Due to Ecoark Holdings, Inc.” which was reclassified to additional paid in capital. Where possible, these charges were allocated based on direct usage, with the remainder allocated on a pro rata basis of headcount, asset, or other allocation methodologies that are considered to be a reasonable reflection of the utilization of services provided or the benefit received by the Company during the periods presented pursuant to SAB Topic 1.B.1. The allocations may not, however, reflect the expense the Company would have incurred as a standalone company for the periods presented. These costs also may not be indicative of the expenses that the Company will incur in the future or would have incurred if the Company had obtained these services from a third party.
Management believes the assumptions underlying our financial statements, including the assumptions regarding the allocation of general corporate expenses from the former parent company are reasonable. Nevertheless, our financial statements may not include all of the actual expenses and income that would have been incurred had we operated as a standalone company during the periods presented and may not reflect our results of operations, financial position and cash flows had we operated as a standalone company during the periods presented.
Actual costs that would have been incurred if we had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.
NOTE 3: REVENUE
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company adopted effective January 1, 2019. No cumulative adjustment to members equity was required, and the adoption did not have a material impact on our financial statements, as no material arrangements prior to the adoption were impacted by the new pronouncement.
In
continuing operations, the Company only recognizes revenue from one source, oil and gas production and services, with the exception of
$
The Company may, from time to time, do contract drilling of oil wells for other energy companies and that services revenue would be categorized as Other Revenue within continuing operations. The Company may, from time to time, sell off working interests in drilling projects on its own oil and gas mineral leases, and that revenue would be categorized within “Other Income (Expense)”. Included in deferred revenue as of December 31, 2022 are proceeds received from White River E&P I, LP (the “Fund”) for working interests on two wells. As noted in Note 16 “Commitments”, the Company has made the commitment to purchase all outstanding working interests from the Fund at the end of the five-year term on June 30, 2028, to close out the Fund and offer a mechanism to return capital to investors in the Fund. The Company has formally committed to purchasing these working interests at a PV20 valuation by an independent firm. Since drilling on these two wells has not been completed as of December 31, 2022, no estimate can be provided for the valuation. The Company has reflected these amounts as deferred liabilities pending this valuation.
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.
| F-15 |
NOTE 4: INVENTORIES
Holding’s inventory as of December 31, 2022 and March 31, 2022 of $
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2022 and March 31, 2022:
| December 31, 2022 | March 31, 2022 | |||||||
| (unaudited) | ||||||||
| Land | $ | $ | ||||||
| Buildings ( | ||||||||
| Machinery and equipment ( | ||||||||
| Total property and equipment | ||||||||
| Accumulated depreciation and impairment | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
As of December 31, 2022, the Company performed an evaluation of the recoverability of these long-lived assets.
Depreciation
expense for the nine months ended December 31, 2022 and 2021 was $
NOTE 6: CAPITALIZED DRILLING COSTS AND OIL AND GAS PROPERTIES
As noted, under Rule 4-10 (c)(2) of Regulation S-X, 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. Under Rule 6(i) of Regulation S-X, 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.
Capitalized Drilling Costs
In
January 2021, the Company commenced a drilling program on their Deshotel 24H well included in their proved reserves. Depletion expense
for the nine months ended December 31, 2022 and 2021 for the capitalized drilling costs was $
Oil and Gas Properties
Activity in the current year consist of the following:
For
the nine months ended December 31, 2022, the Company received proceeds of $
On
October 6, 2022, the Company assigned
On
October 10, 2022, the Company entered into a settlement agreement with a Harry O’Neal working interest owner whereby they granted
them a
The following table summarizes the Company’s oil and gas activities by classification for the periods ended December 31, 2022 and 2021.
| Activity Category | March 31, 2022 | Adjustments (1) | December 31, 2022 | |||||||||
| 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 | $ | $ | ( | ) | $ | |||||||
| F-16 |
| 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 | $ | $ | ( | ) | $ | |||||||
| (1) |
NOTE 7: 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 Company disposed of $
The following table summarizes activity in the Company’s ARO for the nine months ended December 31, 2022 and the nine months ended December 31, 2021:
| December 31, 2022 | December 31, 2021 | |||||||
| (unaudited) | (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, 2022 and December 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,
2022 and December 31, 2021, respectively. These values are discounted to present value at
| F-17 |
NOTE 8: NOTES PAYABLE - RELATED PARTIES
The
Company borrowed $
NOTE 9: LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 2022 and March 31, 2022.
| December 31, 2022 | March 31, 2022 | |||||||
| (unaudited) | ||||||||
| Truck loan – Amur Capital (a) | $ | $ | ||||||
| Truck loan – Mitsubishi (b) | ||||||||
| Tractor loan – Simmon Bank(d) | ||||||||
| Loan – Amur Capital(e) | ||||||||
| Total long-term debt | ||||||||
| Less: current portion | ( | ) | ||||||
| Long-term debt, net of current portion | $ | $ | ||||||
| (a) | |
| (b) | |
| (c) |
|
| (d) | |
| (e) | On
October 18, 2022, entered into long-term secured note payable for $ |
The following is a list of maturities as of December 31:
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| $ |
Interest
expense on long-term debt during the nine months ended December 31, 2022 and 2021 are $
| F-18 |
NOTE 10: SENIOR SECURED CONVERTIBLE PROMISSORY NOTE
Convertible Note Transaction
On
December 20, 2022, the Company entered into a Securities Purchase Agreement (“SPA”) with an accredited investor (the “Purchaser”)
whereby the Purchaser lent the Company an aggregate of $
Pursuant to the SPA, the Company, its direct and indirect subsidiaries, and Jay Puchir and Randy May, executive officers of the Company, entered into Guarantee Agreements (the “Guarantee”) with the Purchaser pursuant to which each subsidiary and Messrs. Puchir and May personally guaranteed to the Purchaser the payment of the Note. In addition, Messrs. Puchir and May pledged the shares of the Company’s common stock they hold or have the right to acquire in the anticipated distribution of the Company’s common stock by Ecoark as collateral to secure the Company’s obligations under the Note, and each individual also executed affidavits of confession to that effect. The affidavits of confession signed by Messrs. Puchir and May in connection with their Guarantees will permit the Purchaser to obtain a judgment against them personally upon the occurrence of an event of default without having to file a lawsuit.
The
Note is due September 16, 2023. The Note bears interest at a rate of
The
Note is convertible into shares of the Company’s common stock at any time following the issuance date at the Purchaser’s
option at a conversion price equal to the lesser of (i) $
per share and (ii) the average of the five-closing prices of the common stock immediately prior to the date of conversion, subject
to certain adjustments (including based on the issuance of lower priced securities) and beneficial ownership limitations. Upon an
event of default, the Purchaser may convert the Note at a reduced conversion price equal to
Under
the Note, beginning on April 16, 2023 the Company is required to pay monthly installments equal to one-fourth of the original principal
amount at
The
Note is secured by the assets of the Company and its subsidiaries. The Note provides for certain events of default, including failure
to pay amounts owing on the Note when due, failure to observe other covenants or obligations under the Note, default under any other
indebtedness or material contract, a bankruptcy event with respect to the Company or a significant subsidiary, failure to maintain listing
or quotation of the common stock on a trading market, failure to maintain the current public information requirement under Rule 144,
and a judgment or similar process against the Company or any of its subsidiaries or assets in excess of $
Further, pursuant to the Note the Company is subject to certain restrictive covenants, including covenants against incurring new indebtedness or liens on its assets, paying cash dividends or distributions on any equity securities, or entering into transactions with affiliates, subject to certain exceptions. In addition, under the Note the Company agreed to at all times reserve three times the number of shares of common stock into which the Note is convertible.
| F-19 |
In addition, pursuant to the SPA, the Company entered into a Registration Rights Agreement with each Purchaser in which the Purchasers are entitled to “piggyback” registration rights, pursuant to which the Company has agreed to include the underlying shares of common stock from the conversion of the Note in a registration statement, if the Company files a registration statement for another purpose, subject to certain terms and conditions.
The
conversion terms of the Note required the Company to bifurcate the conversion option from the host, and classify the conversion option
as a derivative liability under ASC 815. The value of the derivative liability at inception was $
Consulting Agreement
On
December 20, 2022, the Company entered into a Consulting Agreement with an affiliate of the Purchaser described above (the
“Consultant”), pursuant to which the Company agreed to issue shares
shares of common stock, subject to upward adjustment to the extent the closing price per share of the Company’s common stock
is below $
as of (i) the date a registration statement registering the resale by the Consultant of its shares of common stock is declared
effective by the SEC (the “Effective Date”), and/or (ii)
NOTE 11: DERIVATIVE LIABILITIES
The Company issued Units consisting of Series C preferred stock and Warrants in a PIPE financing (see Note 12) and a Note payable (see Note 10) in two transactions (“Derivative Instruments”). The Series C as well as the conversion option on the Note payable contained characteristics that required the Company to classify them as derivative liabilities. The Derivative Instruments have been accounted for utilizing ASC 815 “Derivatives and Hedging.” The Company has incurred a liability for the estimated fair value of Derivative Instruments. The estimated fair value of the Derivative 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 agreements which were classified as liabilities. These embedded features included a variable conversion price that would convert those instruments into a variable number of common shares. The accounting treatment of derivative financial instruments requires that the Company treat the 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.
As discussed in Note 10, the Company entered into a Note payable that the conversion option was classified as a derivative liability. In addition, as discussed in Note 12, the Company entered into a PIPE transaction whereby they issued Series C and Warrants, whereby the Series C may be converted into common stock at a variable conversion price that required the Company to classify the Series C as a derivative liability.
The Company determined the 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, 2022. 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.
| F-20 |
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, 2022, March 31, 2022 and at inception:
Nine Months Ended | Year Ended March 31, 2022 | Inception | ||||||||||
| Expected term | – years | - | years | |||||||||
| Expected volatility | - | % | - | % – | % | |||||||
| Expected dividend yield | - | |||||||||||
| Risk-free interest rate | – | % | - | % | ||||||||
| Market price | $ – $ | - | ||||||||||
The Company’s remaining derivative liabilities as of December 31, 2022, March 31, 2022 and inception associated with the offerings are as follows.
| December 31, 2022 (unaudited) | March 31, 2022 | Inception | ||||||||||
| Fair value of shares of Series C Preferred Stock (see Note 12) | $ | $ | - | $ | ||||||||
| Fair value of Warrants issued in connection with Series C Preferred Stock (see Note 12) | - | |||||||||||
| Fair value of conversion option on convertible note payable (see Note 10) | - | |||||||||||
| $ | $ | - | ||||||||||
Activity related to the derivative liabilities for the nine months ended December 31, 2022 is as follows:
| Beginning balance as of March 31, 2022 | $ | |||
| Issuances of Series C Preferred Stock and Warrants – derivative liabilities | ||||
| Bifurcation of conversion option on convertible note payable | ||||
| Change in fair value of derivative liabilities | ( | ) | ||
| Ending balance as of December 31, 2022 | $ |
The
change in fair value of the derivative liability of $(
There
were
NOTE 12: STOCKHOLDERS’ EQUITY (DEFICIT)
On September 28, 2022, increased its authorized capital to shares consisting of shares of common stock (from ) and shares of preferred stock. See Note 1.
| F-21 |
The
Company executed the Exchange Agreement on July 25, 2022 and pursuant to the Exchange Agreement that day acquired
The
Series A has a stated value of $
Pursuant to the Exchange Agreement Mr. Randy May, Ecoark’s Chief Executive Officer, was appointed as Executive Chairman and as a director of the Company, and Mr. Jay Puchir, Ecoark’s Chief Financial Officer, was appointed as Chief Executive Officer and Principal Financial Officer of the Company. Effective July 28, 2022, the number of directors of the Company was fixed at five, and Danny Hames, James Cahill, Greg Landis, and Alisa Horgan were appointed as directors. Alisa Horgan is the daughter of Randy May, and wife of Richard Horgan, who was the Company’s Chief Executive Officer and sole director until after the closing of the Holding acquisition.
Ecoark has advised us that it plans to spin-off the common stock issuable upon conversion of the Series A, subject to the effectiveness of the Form S-1.
On July 29, 2022, the Company filed a Certificate of Designation with the Nevada Secretary of State designating a new series of preferred stock, the Series B. See Note 1 under “Description of Business” for more details on the Series B.
On October 25, 2022, the Company filed a Certificate of Designation of the Rights, Preferences and Limitations of Series C Convertible Preferred Stock (the “Series C Certificate of Designation”) with the Nevada Secretary of State. The Series C Certificate of Designation provides for the issuance of up to shares of Series C. See Note 1 under “Description of Business” and Note 11 “Derivative Liabilities” for more details on the Series C.
From
July 25, 2022 through August 15, 2022, the Company entered into advisor agreements with directors, management and consultants pursuant
to which the Company agreed to issue a total of restricted shares of common stock at prices ranging from $ to $ per
share (combined value of $
Stock Options
The Company’s Board of Directors approved the adoption of the 2016 Stock-Based Compensation Plan (the “2016 Plan”) on May 12, 2016.
There have been no stock options granted since 2018.
| F-22 |
Date of Grant | ||||
| Expected term (years) | ||||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | |||||||||||
| Balance outstanding at March 31, 2021 | $ | ||||||||||||
| Granted | - | ||||||||||||
| Exercised | - | ||||||||||||
| Forfeited | - | ||||||||||||
| Expired | - | ||||||||||||
| Cancelled | - | ||||||||||||
| Balance outstanding at March 31, 2022 | $ | ||||||||||||
| Exercisable at March 31, 2022 | $ | ||||||||||||
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | |||||||||||
| Balance outstanding at March 31, 2022 | $ | ||||||||||||
| Granted | - | ||||||||||||
| Exercised | - | ||||||||||||
| Forfeited | - | ||||||||||||
| Expired | - | ||||||||||||
| Cancelled | - | ||||||||||||
| Balance outstanding at December 31, 2022 | $ | ||||||||||||
| Exercisable at December 31, 2022 | $ | ||||||||||||
| F-23 |
Warrants
On
August 10, 2017, the Company entered into a Securities Purchase Agreement with two investors to purchase from the Company
On
July 21, 2021, the Company entered into a Consulting Agreement with a company controlled by its current Chief Executive Officer for
a period of one year, expiring July 20, 2022 and issued it
warrants that have a term of and an exercise price of $
As
discussed herein, the Company issued
The following table reflects Warrant activity:
| Warrants | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at March 31, 2021 | $ | $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited or expired | - | |||||||||||||||
| Outstanding at March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2022 | $ | $ | ||||||||||||||
| Warrants | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at March 31, 2022 | $ | $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited or expired | ( | ) | ( | ) | ( | ) | - | |||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Exercisable at December 31, 2022 | $ | $ | ||||||||||||||
| F-24 |
The following assumptions were used for the nine months ended December 31, 2022 and year ended March 31, 2022:
Nine
Months December 31, 2022 |
Year Ended March
31, |
|||||||
| Expected term | ||||||||
| Expected volatility | % | % | ||||||
| Expected dividend yield | ||||||||
| Risk-free interest rate | % | % | ||||||
NOTE 13: LEASES
The
Company has adopted ASU No. 2016-02, Leases (Topic 842) and as such 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 this
acquisition. 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 operating and financing leases. As of December 31, 2022, the value of the unamortized lease
right of use asset was $
| Maturity of lease liability for the operating leases for the period ended December 31, | ||||
| 2023 | $ | |||
| 2024 | $ | |||
| 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, | ||||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| 2026 | $ | |||
| 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, | ||||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| 2026 | $ | |||
| Total | $ | |||
| F-25 |
Total Lease Cost
Individual components of the total lease cost incurred by the Company is as follows:
| Nine months ended December 31, 2022 | Nine months ended December 31, 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease expense | $ | $ | ||||||
| Financing lease expense | ||||||||
| Depreciation of capitalized finance lease assets | ||||||||
| Interest expense on finance lease liabilities | ||||||||
| $ | $ | |||||||
NOTE 14: RELATED PARTY TRANSACTIONS
On
September 1, 2022, the Company assigned 10% working interests in a well to two related parties that are controlled by officers of
the Company (Sky3D, LLC and Atikin Investments LLC) pursuant to the vesting of various performance conditions in the employment contracts of Randy
May and Jay Puchir. In addition, two entities related to directors are working interest owners in wells the Company operates. As of
December 31, 2022 and March 31, 2022, the Company is owed $
The May Family Foundation controls % of the outstanding common stock of the Company as of December 31, 2022. Additionally, Atikin, an entity which is controlled by Jay Puchir, our Chief Executive Officer, controls % of the outstanding common stock. Alisa Horgan, the daughter of Randy May, our new Executive Chairman, became a director and officer of the Company following the Holdings acquisition. Her husband Richard Horgan was the Company’s former Chief Executive Officer and director. Mr. May is the Chief Executive Officer of Ecoark. Each of Messrs. May, Horgan and Puchir disclaim beneficial ownership of the securities held by The May Family Foundation except to the extent of any pecuniary interest therein.
All
amounts due to Ecoark were exchanged for the shares of Series A and classified as a capital transaction
with the adjustment to additional paid in capital as they were from a related party. The total reclassified to additional paid in capital
was $
| F-26 |
NOTE 15: 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, investments, 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, 2022, and the year ended March 31, 2022. 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.
| Level 1 | Level 2 | Level 3 | Total Gains and (Losses) | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| March 31, 2022 | ||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
The table below shows a reconciliation of the beginning and ending liabilities measured at fair value using significant unobservable inputs (Level 3):
| December 31, 2022 | ||||
| (unaudited) | ||||
| Beginning balance | $ | |||
| Net change in unrealized (depreciation) appreciation included in earnings | ||||
| Classification of Series C Preferred stock and warrants | ( | ) | ||
| Bifurcation of convertible note payable | ( | ) | ||
| Sales | ||||
| Transfers in and out | ||||
| Ending balance | $ | ( | ) | |
NOTE 16: COMMITMENTS
Participation Agreements
On October 9, 2020, White River SPV 3 LLC, entered into a Participation Agreement (the “Participation Agreement”) by and among White River SPV 3 LLC, 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, White River SPV 3 LLC funded 100% of the cost, $
| F-27 |
The Parties to the Participation Agreement, 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 3 LLC 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
July 27, 2022, the Company entered into a Participation Agreement with Ault Energy, LLC to sell a
On
November 22, 2022, the Company entered into two Participation Agreements with White River E&P I, LP (the “Fund”), a related
party, whereby the parties agreed to the following: (i) under the first Agreement , the Fund agreed to pay the Company an initial amount
of $
On
December 6, 2022, the Company entered into a Participation Agreement with Ault Energy, LLC for $
On
December 30, 2022, the Company entered into a Participation Agreements with the Fund, a related party, whereby the parties agreed to
the following: (i) under the first Agreement, the Fund agreed to pay the Company an initial amount of $
White River Fund
The Fund is a five-year closed-end private fund where general partners and limited partners invest into the fund and the fund then purchases direct working interests in various Company oil and gas drilling projects. The Company has made the commitment to purchase all outstanding working interests from the Fund at the end of the five-year term on June 30, 2028, to close out the Fund and offer a mechanism to return capital to investors in the Fund. The Company has formally committed to purchasing these working interests at a PV20 valuation by an independent firm. The PV20 valuation would be the present value of the remaining net cash flows from the Fund’s pro rata share of each oil well it has invested in during the five-year term, discounted by 20%. The Fund invested in two drilling projects in the Company during the three months ended December 31, 2022. The first drilling project, the Peabody AMI 12 No 18, hit oil and was determined by the Company’s geologist to be an economically viable oil production well in January 2023. This oil well is expected to be completed and begin producing oil in February 2023. The second oil project, the Denmiss No 1 well is expected to be spudded in February 2023. Since the Fund did not own working interests in any oil production wells as of December 31, 2022, there would not be a value which could be easily estimated for the PV20 valuation of the first oil well.
Employment Agreements and RSUs
The Company’s Board of Directors approved five-year executive employment agreements pursuant to which our officers are entitled to the following compensation and other rights:
Randy
May, our Executive Chairman, is receiving an annual base salary of $
(A)
an overriding royalty interest or carried working interest to be held in perpetuity from either the Company or its subsidiaries
equal to
(B)
a
| F-28 |
Jay
Puchir, our Chief Executive Officer, is receiving an annual base salary of $
(A)
a
(B)
a
Alisa
Horgan, our Chief Administrative Officer and a member of our Board of Directors and Mr. May’s daughter, is receiving an annual
base salary of $
Mrs. Horgan’s husband, Richard Horgan, Senior Vice President of M&A and our former Chief Executive Officer, is receiving an annual base salary of $
Each of the above employment agreements are also subject to the following severance provisions:
In the event of termination by the Company without “cause” or resignation by the officer for “good reason,” each officer is entitled to receive 2.99 years’ base salary, immediate vesting of unvested equity awards and continued benefits for six months.
In case of termination or adverse change in title upon a change of control, each officer is entitled to receive 2.99 years’ base salary, immediate vesting of unvested equity awards, continued benefits for 18 months and 100% of the existing target bonus, if any, for that fiscal year when the change of control occurs.
Further,
upon the officer’s death or disability, as defined, during the officer’s term of employment, the officer’s estate or
the officer, as applicable, becomes entitled to, among other things, a $
In the event an officer’s employment is terminated at the end of the term upon the notice of non-renewal and the officer remains employed until the end of the term, the officer will be entitled to receive six months’ base salary and continued benefits for six months.
| F-29 |
In addition, the Company agreed to the following compensation for each non-employee director:
(A) an
(B)
an
The
director compensation set forth above is subject to upward adjustment upon the successful uplisting of the Company to a national securities
exchange, whereupon the Restricted Stock Grant will be increased to $
In addition, the Company agreed to enter into indemnification agreements with each of its officers and directors.
NOTE 17: CONCENTRATIONS
Customer
Concentration. Three customers accounted for more than 10% of the accounts receivable balance at December 31, 2022 and
March 31, 2022 for a total of
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: SECURED PROMISSORY NOTE
On
September 2, 2022, the Company issued a $
NOTE 19: DISCONTINUED OPERATIONS
In September 2022, the Company sold both Norr and Elysian . See Note 1 under “Description of Business” for more details on the sale of Norr and Elysian.
| F-30 |
The
Company accounted for these sales as a disposal of the business under ASC 205-20-50-1(a) on September 20, 2022 and September 21, 2022
respectively at which time a loss was recognized. As a result of the Merger with Holdings, the current assets of
$
The Company reclassified the following operations to discontinued operations for the nine months ended December 31, 2022 and 2021, respectively.
| 2022 | 2021 | |||||||
| Revenue | $ | $ | ||||||
| Operating expenses | ||||||||
| Other (income) loss | ||||||||
| Net loss from discontinued operations | $ | ( | ) | $ | ||||
The Company had no discontinued operations in the three months ended December 31, 2022 and 2021, respectively.
The following represents the calculation of the loss on disposal of Norr at September 20, 2022:
| 2022 | 2021 | |||||||
| Proceeds from sale | $ | $ | ||||||
| Cash | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Loss on disposal of discontinued operations | $ | ( | ) | $ | ||||
The following represents the calculation of the loss on disposal of Elysian at September 21, 2022:
| 2022 | 2021 | |||||||
| Proceeds from sale | $ | $ | ||||||
| Cash | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Loss on disposal of discontinued operations | $ | ( | ) | $ | ||||
NOTE 20: SUBSEQUENT EVENTS
The following events occurred from January 1, 2023 up through the date of filing:
On
January 10, 2023, the Company entered into three separate Participation Agreements
with three investors via the White River Drilling Club, pursuant to which the parties agreed to the following: (i) each of the investors agreed
to pay $
On January 17, 2023 and January 18, 2023, the
Company entered into two separate Participation Agreements with two investors via the White River Drilling Club, pursuant to which the parties agreed to the
following: (i) the investors agreed to pay the Company a total of $
Under each of the above-described Participation Agreements, the investors also agreed to participate in the drilling of the initial test well, and each party may also drill a substitute well if the test well is abandoned prior to reaching the agreed upon depth. Further, for any well drilled after the initial test well and substitute well referenced herein, the Investors agreed to the same cost sharing arrangements as provided for in the initial test well.
On
January 23, 2023 the Company entered into a Membership Interest Purchase Agreement (the “MIPA”) with an entity (the “Seller”),
which Seller is the sole member of another entity (the “Broker”), pursuant to which the Company agreed to purchase from the
Seller all membership interests in the Broker in exchange for (i) payment of $
The Broker is a broker-dealer licensed with the SEC, FINRA and certain states. Subject to satisfaction of the closing conditions set forth in the Agreement, which include among other things obtaining FINRA approval for the change of control of the Broker within six months of execution of the MIPA, or by July 23, 2023, as well as approval from applicable states, the Broker will become a wholly-owned subsidiary of the Company. Under the MIPA, the Seller will continue and operate the Broker until the closing, and will be entitled to any accounts receivable generated by the Broker during that time. The MIPA also imposes certain restrictive covenants on the Seller related to the Broker’s operations and activities during the period between signing and closing under the MIPA.
The Company entered into the MIPA to acquire the Broker for the purpose of enabling the Company to create and sell interests in oil and gas funds to assist the Company in continuing its oil and gas exploration and drilling activities.
| F-31 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto presented in this Report as well as the audited consolidated financial statements and notes thereto of Ecoark Holdings, Inc.’s (“Ecoark”) (whose subsidiary, White River Holdings Corp (“Holdings”), is the accounting acquirer) included in Ecoark’s Annual Report on Form 10-K for the year ended March 31, 2022 filed July 7, 2022.
Cautionary Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the planned spin-off by Ecoark of our common stock issuable upon conversion of its preferred stock, our operations following our recent entrance into the oil and gas drilling industry through our acquisition of Holdings, the expected results from and trends and developments in our oil drilling and related activities, future plans for and anticipated transactions and relationships with respect to our oil and gas portfolio and operations, our working capital needs, potential financings through the sale of our common stock or other securities, the subsequent use and sufficiency of the proceeds from any capital raising methods we may undertake to fund our operations, our planned acquisition of a broker-dealer to assist us in our fund raising efforts, our further development and implementation of our business plan and our ability to locate sources of capital necessary to meet our business needs and objectives. All statements other than statements of historical facts contained in this Report, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements. 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, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include oil and gas price volatility and the continuation of high oil prices, the impact of (i) the Securities and Exchange Commission’s (“SEC”) propose climate change rules on us including enhanced regulatory compliance costs, (ii) future strains of COVID-19, (iii) the Russian invasion of the Ukraine, (iv) inflation and Federal Reserve interest rate increases in response thereto on the economy including any resulting recession, (v) supply chain shortages, (vi) continued inflation, (vii) the future prices of, and demand for, oil and gas, our ability to efficiently develop our current oil reserves and economically find or acquire additional recoverable reserves, and (viii) general risks related to drilling operations, together with those described or referenced in this Report under Item 1A of Part II – Risk Factors. We may also encounter regulatory delays in causing the registration statement to go effective with the SEC in connection with Ecoark’s planned spin-off of shares of our common stock and the PIPE offering described elsewhere in this Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.
Overview
Company Overview
The Company (formerly known as Fortium Holdings Corp.) is a holding company which, beginning in late July 2022, operates in oil and gas drilling through Holdings. The Company previously was in the early stages of operations in the online sporting goods space through Norr LLC, and was planning to operate as a retail distributor of cannabis products in California through Elysian Premium Corp. The Norr and Elysian businesses were both sold during September 2022 to allow the Company to focus on its core business in the energy sector, and the divested businesses are therefore not discussed in this section. All operations of the divested entities are reflected as discontinued operations in our condensed consolidated financial statements. For more details on these businesses, see our Annual Report on Form 10-K for the year ended December 31, 2021.
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Fiscal Year End Change
On September 28, 2022, the fiscal year end of the Company was changed from December 31 to March 31 to coincide with Holding’s fiscal year end. On October 28, 2022, the Company filed an Amendment to their Current Report on Form 8-K/A disclosing the Holdings share exchange transaction which filed as exhibits the historical financial statements for Holdings for the years ended March 31, 2022 and 2021 and the three months ended June 30, 2022 and 2021.
Holdings Acquisition
On July 25, 2022, the Company entered into a Share Exchange Agreement with Ecoark and Holdings pursuant to which the Company acquired Holdings from Ecoark and in exchange issued Ecoark 1,200 shares of a new series of Series A Convertible Preferred Stock of the Company (the “Series A”). Ecoark funded Holdings with $3 million in cash which was held by Holdings at the time of the business combination to ensure there was no lapse in Holding’s ongoing business operations.
The Series A is non-voting, has a stated value of $30 million, and is convertible into 42,253,521 shares of the Company’s common stock, provided that the Series A will only become convertible if and when a Registration Statement on Form S-1 filed by the Company for the purpose of effecting a spin-off of the Company’s common stock to Ecoark’s stockholders has been filed and declared effective by the SEC, and Ecoark elects to effect said spin-off. The initial Form S-1 was filed on December 22, 2022. Ecoark’s two senior management members were appointed as the Company’s senior executives following the Holdings acquisition. Our Executive Chairman, Randy May, is one of five directors, his daughter Alisa Horgan is a new director and he recommended the other three new directors. Our previous sole officer and director, Richard Horgan, is Mr. May’s son-in-law.
Following the transaction, our principal operations consist of generating revenue through oil and gas exploration, production and drilling. Through Holdings the Company is now engaged in oil and gas exploration, production, and drilling operations on over 30,000 cumulative acres of active mineral leases in Louisiana, and Mississippi. These subsidiaries are each engaged in oil and natural gas development, production, acquisition, and exploration activities principally in the above-referenced states. We may also expand our energy asset portfolio or engage in other energy-related strategic transactions as they arise, provided we have sufficient capital and market and regulatory conditions otherwise enable us and/or are favorable to such transactions. Such transactions may serve a number of business objectives, including by seeking to expand our product and service offerings and/or to increase our geographic footprint.
Recent Developments
During the period covered by this Report, the Company has continued its efforts to grow its oil and gas exploration and drilling business and achieved or experienced the following key developments:
| ● | In December 2022, the Company borrowed $1,500,000 in gross proceeds and issued the lender a 10% Original Issue Discount Senior Secured Convertible Promissory Note in the principal amount of $1,666,666.67. | |
| ● | In November and December 2022, the Company entered into Participation Agreements pursuant to which the Company received $4,214,762 in gross proceeds which were or are being used to drill the wells and have a receivable due in the amount of $1,597,632. | |
| ● | In October 2022, the Company and Ault Energy, LLC (“Ault Energy”), a wholly-owned subsidiary of Ault Alliance, Inc., successfully completed drilling a 9,531 foot well, the Harry O’Neal 20-9 No. 1 (the “O’Neal No. 1 Well”), on the Company’s oil and gas mineral lease in Holmes County, Mississippi. Through an exercise of its participation right, Ault Energy acquired a 37.5% working interest and a 27% net revenue interest in the O’Neal No. 1 Well. | |
| ● | In October 2022, the Operator borrowed $1,500,000 from and issued a Secured Promissory Note to Align Business Finance, LLC in the principal amount of $1,500,000 and used the proceeds to acquire two oil and gas drilling rigs and related equipment. In December 2022, this note was repaid in full. | |
| ● | During the three months ended December 31, 2022, the Company sold a total of 190.2726308 Units, with each Unit consisting of one share of Series C Convertible Preferred Stock (the “Series C”) and one Warrant to purchase 200% of the shares of common stock underlying the Series C, for a purchase price of $25,000 per Unit and resulting in total gross proceeds to the Company of $4,756,816. The proceeds are being used for working capital and general corporate purposes including oil and gas drilling on the Company’s working interests in Louisiana and Mississippi. |
The following table sets forth the number of wells in our inventory, in which White River Holdings maintained a working interest as of January 27, 2023. All of the wells with the exception of the plugged and abandoned wells and the inactive dryhole well are mechanically capable of producing.
| Well Category: | Oil | Gas | ||||||
| Active Producer | 10 | - | ||||||
| Inactive Producer | 2 | - | ||||||
| Inactive - dryhole | 1 | - | ||||||
| Shut-In | 44 | - | ||||||
| Plugged & Abandoned | 3 | - | ||||||
| Active Salt Water Disposal (SWD) | 9 | - | ||||||
| Inactive SWD | - | - | ||||||
| 69 | 0 | |||||||
The Company Subsidiaries
Through Holdings and its subsidiaries, we are engaged in oil and gas exploration, production, and drilling operations on over 30,000 cumulative acres of active mineral leases in Louisiana, and Mississippi. Holdings’.
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Funding Through Limited Partnership
The Company has formed an affiliated entity called White River E&P 1 LP (“WR Fund #1”) which consists of private external general and limited partners consisting of retail accredited and institutional investors. A separate subsidiary (the “Manager”) is the managing General Partner of WR Fund #1. WR Fund #1 is currently offering up to 4,000 units of partnership interest at a price per unit of $50,000 with a minimum investment of 1 unit or $50,000 through a five-year closed-end fund structure. The $200,000,000 offering will continue until the earlier of June 30, 2023 or the sale of all 4,000 units.
Mr. May, our Executive Chairman and Mr. Puchir, our Chief Executive Officer are also serving in the roles as Co-Fund Managers of WR Fund #1 Manager. Proceeds of the fund are being or will be used in drilling the Company drilling projects whereby the Company will receive a 25% promoted working interest and the Manager will receive a 10% carried working interest at the successful closure of the fund and 1% annual management fee. The Company has agreed to acquire the partnership interest of all partners in WR Fund #1 at the end of the fund’s 5-year term at the PV20 valuation generated by an independent valuation firm subject to the cash availability of the Company.
While the Company anticipates collaborating with WR Fund #1 in pursuing oil and gas ventures that are mutually beneficial to both entities, conflicts of interest may arise. See “Risk Factors” in our Form 10-Q for the quarterly period ended September 30, 2022 filed November 14, 2022 for more detailed information. The Company has no equity ownership of WR Fund #1 but expects to provide drilling services for a fee and receive management fees. Through February 10, 2023, WR Fund #1 has received approximately $3,250,000 in investments.
Broker-Dealer Acquisition Update
The Company has undertaken to search for and acquire a licensed broker-dealer for the purpose of enabling the Company to create and sell interests in future oil and gas funds to assist the Company in continuing its oil and gas exploration and drilling activities. In the furtherance of this goal, on January 23, 2023 the Company entered into a Membership Interest Purchase Agreement (“MIPA”) to purchase from the membership interests in a broker-dealer licensed with the Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority (“FINRA”) and certain states. Under the MIPA, the consideration payable by the Company for such purchase will be (i) payment of $70,000 in cash (of which $10,000 was paid upon signing of the MIPA), (ii) prepaid expenses incurred or to be incurred by the broker not to exceed $30,000, and (iii) up to $20,000 in transaction expenses incurred by the seller in connection with the MIPA. The acquisition is subject to satisfaction of the closing conditions set forth in the MIPA, which include among other things obtaining FINRA approval for the change of control of the broker within six months of execution of the Agreement, or by July 23, 2023, and no assurances can be given that the transaction will close. If the transaction closes, the broker will become a wholly-owned subsidiary of the Company.
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Key Terms and Metrics
In connection with the management of our businesses, we identify, measure and assess a variety of operating metrics. 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.
Production Data – Nine and Three Months Ended December 31, 2022 and 2021
The following tables set forth our production data for the nine months ended December 31, 2022 and 2021:
| Nine Months Ended December 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Bbls | Bbls | |||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||
| Production Data: | ||||||||||||||||
| By State/County | ||||||||||||||||
| Mississippi | ||||||||||||||||
| Holmes | 1,129 | 1 | 1,657 | 1,243 | ||||||||||||
| Amite | 9,267 | - | 9,540 | 7,621 | ||||||||||||
| Wilkinson | 8,126 | - | 10,576 | 8,197 | ||||||||||||
| Pike | 288 | - | 1,192 | 923 | ||||||||||||
| 18,810 | 1 | 22,965 | 17,984 | |||||||||||||
| Louisiana | ||||||||||||||||
| Catahoula | 4,579 | - | 4,871 | 3,649 | ||||||||||||
| Concordia | 5,174 | 737 | 6,463 | 3,039 | ||||||||||||
| Tensas | 1,701 | 1,215 | 2,627 | 1,970 | ||||||||||||
| Lasalle | - | - | 609 | 330 | ||||||||||||
| Avoyelles | 15,770 | 6,808 | 37,976 | 25,858 | ||||||||||||
| 27,224 | 8,760 | 52,546 | 34,846 | |||||||||||||
| Total | 46,034 | 8,761 | 75,511 | 52,830 | ||||||||||||
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The following tables set forth our production data for the three months ended December 31, 2022 and 2021:
| Three Months Ended December 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Bbls | Bbls | |||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||
| Production Data: | ||||||||||||||||
| By State/County | ||||||||||||||||
| Mississippi | ||||||||||||||||
| Holmes | 1,122 | 1 | 1,518 | 1,139 | ||||||||||||
| Amite | 2,414 | - | 3,357 | 2,694 | ||||||||||||
| Wilkinson | 2,533 | - | 3,086 | 2,392 | ||||||||||||
| Pike | - | - | 433 | 339 | ||||||||||||
| 6,069 | 1 | 8,394 | 6,564 | |||||||||||||
| Louisiana | ||||||||||||||||
| Catahoula | 1,509 | - | 1,626 | 1,439 | ||||||||||||
| Concordia | 990 | 175 | 3,044 | 1,379 | ||||||||||||
| Tensas | 808 | 581 | 941 | 705 | ||||||||||||
| Lasalle | - | - | - | - | ||||||||||||
| Avoyelles | 5,491 | 2,288 | 7,269 | 4,980 | ||||||||||||
| 8,798 | 3,044 | 12,880 | 8,503 | |||||||||||||
| Total | 14,867 | 3,045 | 21,274 | 15,067 | ||||||||||||
Results of Operations For Continuing Operations For the Nine Months Ended December 31, 2022 and 2021
Revenues
Revenues for the nine months ended December 31, 2022 of $3,015,203 compared to the nine months ended December 31, 2021 of $3,573,186, reflected a decrease of $557,983. The decrease is primarily related to a decline in the average barrel price of oil period over period, and less production out of some of our wells as we completed some repairs intended to enable greater production.
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Costs and Expenses
The following table shows costs and expenses for the nine months ended December 31, 2022 and 2021:
| Nine Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Costs and Expenses | ||||||||
| Cost of revenues (excludes items below) | $ | 1,109,372 | $ | 705,707 | ||||
| Salaries and salaries related costs | 4,861,432 | 1,946,302 | ||||||
| Professional and consulting fees | 2,821,430 | 284,900 | ||||||
| Oilfield costs, supplies and repairs | 8,552,596 | 651,421 | ||||||
| Selling, general and administrative costs | 3,192,647 | 3,095,913 | ||||||
| Depreciation, amortization, depletion, accretion and impairment | 6,398,704 | 1,587,702 | ||||||
| $ | 26,936,181 | $ | 8,271,945 | |||||
Costs and expenses in the nine months ended December 31, 2022 increased by $18,664,236 when compared to the nine months ended December 31, 2021, primarily from the increase of $7,901,175 in oilfield costs as we repaired some wells in an effort to increase production, as well as increased non-cash charges in the 2022 period compared to the 2021 period. In addition, we increased labor in the fields contributing to the $2,915,130 increase in salaries and salaries related costs and consulting expenses of $2,536,530 primarily from the issuance of common shares valued at $1,666,667. Our general and administrative costs were relatively consistent period over period, and in the periods ended 2022 and 2021 we recognized impairment, thus the non-cash depreciation, amortization, depletion, accretion and impairment costs increased $4,811,002 in the 2022 period from the same period in 2021 primarily from the impairment of $5,917,843. To-date the added expenditures have not resulted in increased revenue as needed to offset the higher costs, which resulted in a significant increase in net loss, and no assurances can be given that this trend will change in the future, particularly if and to the extent the decline in oil prices continues or the lower prices are sustained in future periods.
Other Income (Expense)
The following table shows other income (expense) (almost all non-cash) for the nine months ended December 31, 2022 and 2021:
| Nine Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Change in fair value of derivative liabilities | $ | 3,451,752 | $ | 7,647,407 | ||||
| Derivative expense | (10,124,521 | ) | - | |||||
| Gain (loss) on disposal of fixed assets/oil and gas | 405,052 | 721,365 | ||||||
| Gain on sale of working interests from Participation Agreements | 2,569,241 | - | ||||||
| Amortization of original issue discount | (6,525 | ) | - | |||||
| Interest expense, net of interest income | (9,108 | ) | (262,528 | ) | ||||
| Other income (expense) | $ | (3,714,109 | ) | $ | 8,106,244 | |||
Total other income decreased $11,820,353 in the nine months ended December 31, 2022 from the same period in 2021. The 2021 change in the derivative liability and the interest expense was the result of a cost allocation from Ecoark to the Company in accordance with SAB Topic 1.B.1. In both the 2022 and 2021 periods we recognized gains on sales of oil and gas reserves. In the 2022 period, we entered into Participation Agreements to sell working interests in wells that we are currently drilling and have recorded $2,569,241 from these agreements. In the 2022 period, we recognized derivative liabilities related to preferred stock and convertible note issuances and recognized a large gain when marked to market at the reporting date. As noted, the changes in the derivative liability in 2021 was for a derivative liability recognized on Ecoark’s books as it was indexed to their common stock. Holdings recorded a liability of “Due to Ecoark Holdings, Inc.” for the proceeds received by Ecoark related to the financing transactions that Ecoark completed that resulted in the recognition of the derivative liabilities.
Net Loss
Net loss from continuing operations before taxes for 2022 was $(27,635,087) as compared to net income from continuing operations before taxes of $3,407,485 for 2021. The increase in net loss was primarily due to non-cash charges of $16,269,168 as noted above, together with increased operational costs and expenses primarily related to the addition of labor and consulting, drilling expenses for various projects being drilled and the oilfield repair work completed in 2022. While the work performed is intended and expected to increase production on the applicable wells, no assurances can be given that the increased production will offset the expenses incurred in the short-term or at all, including due to fluctuations in oil prices over time and other factors beyond our control. Further, to-date the added expenditures have not resulted in increased revenue as needed to offset the higher costs, which resulted in a significant net loss, and no assurances can be given that this trend will change in the future, particularly if and to the extent the decline in oil prices continues or the lower prices are sustained in future periods.
Results of Operations For Continuing Operations For the Three Months Ended December 31, 2022 and 2021
Revenues
Revenues for the three months ended December 31, 2022 of $806,443 compared to the three months ended December 31, 2021 of $1,270,115, reflected a decrease of $463,672. The decrease is primarily related to a decrease in the average barrel price of oil period over period, and less production out of some of our wells as we completed some repairs intended to enable greater production.
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Costs and Expenses
The following table shows costs and expenses for the three months ended December 31, 2022 and 2021:
Three Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Costs and Expenses | ||||||||
| Cost of revenues (excludes items below) | $ | 297,395 | $ | 11,449 | ||||
| Salaries and salaries related costs | 2,540,366 | 700,424 | ||||||
| Professional and consulting fees | 2,502,156 | 143,680 | ||||||
| Oilfield costs, supplies and repairs | 4,328,988 | 55,793 | ||||||
| Selling, general and administrative costs | 598,275 | 488,352 | ||||||
| Depreciation, amortization, depletion, accretion and impairment | 196,308 | 353,440 | ||||||
| $ | 10,463,488 | $ | 1,753,138 | |||||
Costs and expenses in the three months ended December 31, 2022 increased $8,710,350, primarily from the increase of $4,273,195 in oilfield costs as we commenced drilling in certain well sites and repaired some wells to increase production. In addition, we increased labor in the fields contributing to the $1,839,942 increase in salaries and salaries related costs. We incurred a charge of $1,666,667 in consulting related to common stock issued during the three month period ended December 31, 2022. Our general and administrative costs were relatively consistent period over period showing a slight increase in these expenses of $109,923 in the 2022 period compared to the 2021 period, and in the 2022 period we reflected less depletion which lead to a decrease in these expenses of $157,132 period over period.
Other Income (Expense)
The following table shows other income (expense) (almost all non-cash) for the three months ended December 31, 2022 and 2021:
| Three Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Change in fair value of derivative liabilities | $ | 3,451,752 | $ | 5,489,569 | ||||
| Derivative expense | (10,124,521 | ) | - | |||||
| Gain (loss) on disposal of fixed assets/oil and gas | 13,519 | - | ||||||
| Gain on sale of working interests from Participation Agreements | 1,597,632 | - | ||||||
| Amortization of original issue discount | (6,525 | ) | - | |||||
| Interest expense, net of interest income | (4,985 | ) | 15,642 | |||||
| Other income (expense) | $ | (5,073,128 | ) | $ | 5,505,211 | |||
Total other income decreased $10,578,339 in the three months ended December 31, 2022 from the same period in 2021. The 2021 period change in the derivative liability and the interest expense was the result of a cost allocation from Ecoark to the Company in accordance with SAB Topic 1.B.1. In the 2022 period, we incurred a non-cash derivative charge from financing agreements for our preferred stock and convertible note payable of $11,048,477 at inception, and a non-cash fair value change in the derivative liability of $3,451,752 due to market conditions. In addition, we recognized a gain on the sale of our working interests of $1,597,632 due to new Participation Agreements entered into during the 2022 period. As noted, the changes in the derivative liability in the 2021 period was for a derivative liability recognized on Ecoark’s books as it was indexed to their common stock. Holdings recorded a liability of “Due to Ecoark Holdings, Inc.” for the proceeds received by Ecoark related to the financing transactions that Ecoark completed that resulted in the recognition of the derivative liabilities.
Net Loss
Net loss from continuing operations before taxes for the three months ended December 31, 2022 was $(14,730,173) as compared to net income from continuing operations of $5,022,188 for the three months ended December 31, 2021. The increase was primarily due to the oilfield drilling and repair work in the 2022 period, the increase in our labor force, the non-cash charge related to consulting fees incurred for a common stock issuance, and the non-cash derivative liability related charges, offset by the gain from the sale of our working interests.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are revenue generated from operations, levels of accounts receivable and accounts payable and capital expenditures.
Net cash (used in) provided by operating activities for continuing operations was $(6,422,633) for the nine months ended December 31, 2022, as compared to $330,706 for the same period in 2021. Cash used in operating activities for the nine months ended December 31, 2022 was primarily caused by the $27,868,528 net loss, the non-cash charges related to the derivative liability and the stock-based compensation of $3,394,071 (including value of common shares issued) and impairment of $5,917,843. In the 2021 period, the changes in operating activities related to the net income from continuing operations of $3,407,485 offset by the changes in accounts payable and the amounts that were due to Ecoark including the home office allocation.
Net cash used in investing activities was $310,640 for the nine months ended December 31, 2022, compared to $320,500 for the nine months ended December 31, 2021. Net cash used in investing activities in the nine months ended December 31, 2022 were comprised of proceeds received from the sale of equipment, net of purchases and the capitalization of certain drilling costs on the Peabody AMI 12A #18 well. In the 2021 period, the cash used in investing activities related to purchases of oil and gas properties and fixed assets, offset slightly by sales of fixed assets.
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Net cash provided by (used in) financing activities for the nine months ended December 31, 2022 was $7,697,662 which comprised of $4,721,816 in our private investment in public equity, or “PIPE,” financing transaction in which we sold our Series C and accompanying warrants, $3,000,000 in cash transferred to the Company from Ecoark which was a condition of such acquisition, $145,266 in proceeds from long-term debt, $1,485,000 in notes payable offset by repayments of long-term debt and notes payable of $1,588,561 and a decrease in a cash overdraft. In the 2021 period, we used $9,798 in cash flows from financing activities related to the decrease in the cash overdraft.
As of February 10, 2023, the Company has approximately $1,058,747 in cash and cash equivalents. The Company believes this cash is insufficient to meet our cash needs for the 12 months following the filing of this Report. Unless we receive the $1,597,632 we are owed from the sale of a participation interest and begin increasing our oil production at current prices, we will need to raise additional capital, which may be pursued through equity or debt financing, in order to fund our planned operations during that period, which may dilutive to our existing shareholders. See the Risk Factors referenced in Item 1A – Risk Factors.
Well Opening Requirements
The Company has continuous drilling requirements to drill or re-complete a well on its 9,615 Peabody Blackhawk lease every 270 days to keep the lease active. The Company drilled and completed a well in February 2022 on this oil and gas mineral lease and extended the lease to at least November 2022. Depending on the formation drilled, the costs could be as high as approximately $2,000,000. In this event, we would likely seek significant partners to share the cost. We have already orally agreed to afford Ault Energy a 25% participation right in future wells we drill. Ault Energy is a subsidiary of Ault Alliance, Inc. which invested $12 million in Ecoark in June 2022. We completed a joint oil and gas well drilling project with Ault Energy in October 2022 in which Ault Energy was given a 37.5% working interest and a 27% net revenue interest.
Recent Financing Transactions
The Company has undertaken the following financing transactions to raise capital needed to continue its operations and execute its business plan.
PIPE Offering
From October 19, 2022 through November 8, 2022, the Company entered into a Securities Purchase Agreement (“SPA”) with accredited investors (the “Purchasers”) whereby the Purchasers agreed to purchase a total of 190.2726308 Units from the Company, with each Unit consisting of one share of Series C and five-year Warrants to purchase up to 200% of the shares of common stock issuable upon conversion of the Series C (the “Warrants”), at a purchase price of $25,000 per Unit for a total net purchase price of $4,721,816 (the “PIPE Offering”). The net proceeds from the PIPE Offering, after offering expenses and related costs, will be used for working capital and general corporate purposes including oil and gas drilling on the Company’s working interests in Louisiana and Mississippi. The terms of the securities sold in the PIPE Offering are outlined under “Note 12 – Stockholders Equity (Deficit).”
Convertible Note Transaction
On December 20, 2022, the Company entered into a Securities Purchase Agreement with an accredited investor (the “Purchaser”) whereby the Purchaser lent the Company an aggregate of $1,500,000 in gross proceeds and the Company issued the Purchaser a 10% Original Issue Discount Senior Secured Convertible Promissory Note in the principal amount of $1,666,666.67 (the “Note”). The terms of the Note sold in this are outlined under “Note 10 – Senior Secured Convertible Promissory Note.”
Participation Agreements
From July 2022 through January 2023 the Company entered into a series of Participation Agreements with third parties including WR Fund #1 wherein it granted the counter parties working interests and net revenue interests in oil and gas wells, in exchange for total proceeds of approximately $5,800,000 which are being used to drill the wells.
Go-Forward Business Strategy
In conjunction with the proceeds received in the PIPE offering described above as well as the proceeds received from our oil and gas production and sales of working interests, the Company plans to initiate a long-term business strategy to focus on sourcing capital for its current and future drilling projects through WR Fund #1 in a non-dilutive manner to stockholders as opposed to equity financing through common or preferred stock issuances from the Company.
As consideration for managing WR Fund #1, the Manager will receive a 1% annual management fee and a 10% carried working interest on successfully completed drilling projects while the Company will receive a 25% promoted working interest on successfully completed drilling projects. See above under “Funding Through Limited Partnership.”
Critical Accounting Policies, Estimates and Assumptions
The critical accounting policies that the Company deems most important to its operations are described in the footnotes to the financial statements contained in this Report, and are listed here below:
| ● | Use of Estimates | |
| ● | Oil and Gas Properties | |
| ● | Limitation on Capitalized Costs | |
| ● | Oil and Gas Reserves | |
| ● | Joint Interest Activities | |
| ● | Inventories | |
| ● | Accounting for Asset Retirement Obligation | |
| ● | Revenue Recognition | |
| ● | Fair Value Measurements | |
| ● | Impairment of Long-lived Assets | |
| ● | Derivative Financial Instruments | |
| ● | Recently Issued Accounting Standards |
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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.
We are required to maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on his evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, Mr. Jay Puchir, who is presently serving as our Chief Executive Officer and Principal Financial Officer has concluded that our disclosure controls and procedures were not effective to ensure that the information relating to our company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of material weaknesses in our internal control over financial reporting.
Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
From time-to-time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this Report, we are not aware of any pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.
ITEM 1A – RISK FACTORS
See the Company’s filed Form 10-Q for the quarterly period ended September 30, 2022 filed on November 14, 2022 and the registration statement on Form S-1 (File No. 333-268707) for the Risk Factors applicable to the Company and its securities.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
All unregistered sales of equity securities were previously disclosed.
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
*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.
+ Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request.
^ Management contract or compensatory plan or arrangement.
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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.
| WHITE RIVER ENERGY CORP | ||
| Dated: February 13, 2023 | By: | /s/ Jay Puchir |
| Jay Puchir | ||
| Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | ||
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