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 505,000,000 shares consisting of 500,000,000 shares of common stock
(from 200,000,000) and 5,000,000 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 100%
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 1,200 shares
of the newly designated non-voting Series A Convertible Preferred Stock (the “Series A”). The Series A will become
convertible into approximately 42,253,521
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 $30
million and has a liquidation preference over the common stock and any subsequent series of junior preferred stock equal to the
stated value, plus any accrued but unpaid dividends; the Series A, however, does not have any of the voting rights of common
stockholders. The transaction was accounted for as a share exchange, whereby Holdings is considered the accounting
acquirer. Since the share exchange occurred with a non-shell public company, the transaction included the purchase of the
non-controlling interest of Fortium Holdings Corp. Except as expressly indicated in this Report to the contrary or where the context clearly dictates otherwise, references
in this Report to “Fortium Holdings Corp.” refers to the predecessor of the Company before the Holdings share exchange was
effected in July 2022.
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”). The single authorized share of Series B is entitled to vote with the
Company’s common stock as a single class on any matter brought before the stockholders, and the Series B is entitled to a number
of votes equal to the greater of (A) 100,000,000 votes, or (B) 50.1% of the Company’s voting power as of the applicable date of
determination. Any outstanding Series B will be automatically cancelled upon the Company applying to have its common stock listed on
a national securities exchange. As of the date of this Report, the Series B is unissued. The Series B is intended to enable the Board of Directors to
act quickly to react to any potential hostile takeover. The auto-cancellation provision was included because the super-voting rights
contained in the Series B would violate the rules of a prospective national securities exchange.
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 1,000
shares of Series C. From October 25, 2022 through
November 8, 2022, the Company sold 190.2726308
Units, with each Unit comprised of one
share of Series C and one Warrant to purchase 200%
of the shares
of common stock underlying such share of Series C (the “Units”) at a purchase price of $25,000
per Unit for $4,756,816
in proceeds net of offering expenses of $35,593. The Warrants may be separately sold by the
holders rather than exercised into shares of common stock, and the Company has submitted an application for the Warrants to be traded
on the OTCQB under their own unique ticker symbol.
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 $1 each. The purpose of the sale of these entities was for the Company to divest themselves of their non-core assets and focus exclusively
on the oil and gas production business of Holdings.
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 8,400,000 shares of issued and outstanding common shares of Fortium
Holdings Corp., which were considered as purchase consideration resulting in $5,917,843 of goodwill that was impaired immediately. As
a result, the historical balances represent Holdings. See Note 2, “ Merger” for more details on the accounting
for the share exchange.
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.
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 $312,679 and $1,445,233 in depletion expense for the Company’s oil and gas properties for the nine months ended December 31,
2022 and 2021, and $110,722 and $305,079 for the three months ended December 31, 2022 and 2021, respectively.
Limitation
on Capitalized Costs
Under
the full-cost method of accounting, we are required, at the end of each reporting period, to perform a test to determine the limit on
the book value of our oil and gas properties (the “Ceiling” test). If the capitalized costs of our oil and natural gas properties,
net of accumulated amortization and related deferred income taxes, exceed the Ceiling, the excess or impairment is charged to expense.
The expense may not be reversed in future periods, even though higher oil and gas prices may subsequently increase the Ceiling.
The
Ceiling is defined as the sum of: (a) the present value, discounted at 10% and assuming continuation of existing economic conditions,
of (1) estimated future gross revenues from proved reserves, which is computed using oil and gas prices determined as the unweighted
arithmetic average of the first-day-of-the-month price for each month within the 12-month hedging arrangements pursuant to Staff Accounting
Bulletin (“SAB”) 103, less (2) estimated future expenditures (based on current costs) to be incurred in developing and producing
the proved reserves; plus, (b) the cost of properties being amortized; plus, (c) the lower of cost or estimated fair value of unproven
properties included in the costs being amortized; net of (d) the related tax effects related to the difference between the book and tax
basis of our oil and natural gas properties. A ceiling test was performed as of December 31, 2022 and there were no indications of impairment
noted.
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.
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.
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)”.
Share-Based
Payment Arrangements
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.
Earnings
(Loss) Per Share of Common Stock
Basic
net income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share
(“EPS”) include additional dilution from common stock equivalents, such as 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 $2,100,374
of goodwill in additional paid in capital upon the July 25, 2022 share exchange between Holdings and Fortium Holdings
Corp. The goodwill was the result of the Holdings reporting unit from the previous parent of Holdings, Ecoark.
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 $2,100,374. The Company has determined that there is no impairment on this goodwill as of December 31, 2022 or September
30, 2022.
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.
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 $3,000,000
into the Company as part of the purchase. In addition, the Company raised capital through a private investment in a public equity
(PIPE) and raised approximately $4,800,000
from this PIPE offering, together with $4,214,762
received from Participation Agreements to provide the funds necessary for the Company’s drilling program. The Company
also began receiving drilling capital from the White River Fund during the quarter ended December 31, 2022 and launched the White
River Drilling Club in January 2023 from both of which the Company is receiving a 25% promoted working interest on successfully
completed oil and gas production wells. The Company has determined that there is substantial doubt about their ability to
continue as a going concern.
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.
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 1,200 shares of Series A valued at $30,000,000 in the share exchange transaction.
On an as converted basis, the 1,200 Series A shares convert to 42,253,521 shares of common stock which represents approximately 80% of
the total issued and outstanding shares on a fully diluted basis.
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 1,200
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:
SCHEDULE
OF PURCHASE PRICE ALLOCATION
| Purchase Price Allocation of Fortium Holdings Corp. | |
| | |
| | |
| | |
| Current assets – inventory and deposits | |
$ | 113,472 | |
| Accounts payable and accrued expenses | |
| (67,315 | ) |
| Goodwill | |
| 5,917,843 | |
| | |
| | |
| Purchase price | |
$ | 5,964,000 | |
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 $5,964,000, based on 8,400,000 shares of common stock
outstanding on July 25, 2022 and the closing price that day of $0.71 per share. The Company impaired the goodwill effective with the
Merger on July 25, 2022, as they had decided at that time to sell the Norr and Elysian businesses, although the sales were effected later
in September 2022. The Company sold these two entities for a total of $4 in September 2022. The loss on the sale is reflected as a loss
on disposal in the condensed consolidated statements of operations.
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
SCHEDULE OF PRO FORMA INFORMATION
| | |
1 | | |
2 | | |
3
(1) | | |
4
(2) | | |
5 | |
| | |
Historical Fortium | | |
White River | | |
Other | | |
Other | | |
| |
| | |
Holdings | | |
Holdings | | |
Transaction | | |
Transaction | | |
| |
| | |
Corp | | |
Corp | | |
Adjustments | | |
Adjustments | | |
Pro Forma | |
| | |
| | | |
| | | |
| (1) | | |
| (2) | | |
| | |
| ASSETS | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| CURRENT ASSETS | |
| | | |
| | | |
| | | |
| | | |
| | |
| Cash | |
$ | 140,241 | | |
$ | 251,050 | | |
$ | - | | |
$ | (140,241 | ) | |
$ | 251,050 | |
| Accounts receivable | |
| - | | |
| 634,483 | | |
| - | | |
| - | | |
| 634,483 | |
| Prepaid expenses and other current assets | |
| 71,756 | | |
| 318,771 | | |
| - | | |
| (71,756 | ) | |
| 318,771 | |
| Inventory | |
| - | | |
| 107,026 | | |
| - | | |
| - | | |
| 107,026 | |
| Current assets held for sale | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Total current assets | |
| 211,997 | | |
| 1,311,330 | | |
| - | | |
| (211,997 | ) | |
| 1,311,330 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| NON-CURRENT ASSETS | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Property and equipment, net | |
| 1,466 | | |
| 596,464 | | |
| - | | |
| (1,466 | ) | |
| 596,464 | |
| Capitalized drilling costs | |
| - | | |
| 604,574 | | |
| - | | |
| - | | |
| 604,574 | |
| Oil and gas reserves | |
| - | | |
| 6,626,793 | | |
| - | | |
| - | | |
| 6,626,793 | |
| Right of use asset - operating leases | |
| - | | |
| 243,494 | | |
| - | | |
| - | | |
| 243,494 | |
| Other assets | |
| - | | |
| 14,760 | | |
| - | | |
| - | | |
| 14,760 | |
| Goodwill | |
| - | | |
| 2,100,374 | | |
| - | | |
| - | | |
| 2,100,374 | |
| Total non-current assets | |
| 1,466 | | |
| 10,186,459 | | |
| - | | |
| (1,466 | ) | |
| 10,186,459 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| TOTAL ASSETS | |
$ | 213,463 | | |
$ | 11,497,789 | | |
$ | - | | |
$ | (213,463 | ) | |
$ | 11,497,789 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| CURRENT LIABILITIES | |
| | | |
| | | |
| | | |
| | | |
| | |
| Accounts payable and accrued expenses | |
$ | 23,500 | | |
$ | 918,700 | | |
$ | - | | |
$ | (23,500 | ) | |
$ | 918,700 | |
| Current portion of lease liability - operating leases | |
| - | | |
| 155,263 | | |
| - | | |
| - | | |
| 155,263 | |
| Cash overdraft | |
| - | | |
| 27,918 | | |
| - | | |
| - | | |
| 27,918 | |
| Due to Ecoark Holdings, Inc. | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Total current liabilities | |
| 23,500 | | |
| 1,101,881 | | |
| - | | |
| (23,500 | ) | |
| 1,101,881 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| NON-CURRENT LIABILITIES | |
| | | |
| | | |
| | | |
| | | |
| | |
| Asset retirement obligation | |
| - | | |
| 1,303,751 | | |
| - | | |
| - | | |
| 1,303,751 | |
| Lease liability - operating leases, net of current portion | |
| - | | |
| 110,235 | | |
| — | | |
| - | | |
| 110,235 | |
| Total non-current liabilities | |
| - | | |
| 1,413,986 | | |
| - | | |
| - | | |
| 1,413,986 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total liabilities | |
| 23,500 | | |
| 2,515,867 | | |
| - | | |
| (23,500 | ) | |
| 2,515,867 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| STOCKHOLDERS’ EQUITY (DEFICIT) | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Preferred stock, $0.0001 par value | |
| 1 | | |
| - | | |
| - | | |
| - | | |
| 1 | |
| Preferred stock, par value | |
| 1 | | |
| - | | |
| - | | |
| - | | |
| 1 | |
| Common stock, $0.0001 par value | |
| - | | |
| 60 | | |
| (60 | ) | |
| - | | |
| - | |
| Common stock, par value | |
| - | | |
| 60 | | |
| (60 | ) | |
| - | | |
| - | |
| Additional paid-in capital | |
| 4,317,618 | | |
| 25,660,837 | | |
| (4,127,596 | ) | |
| (189,963 | ) | |
| 25,660,896 | |
| Accumulated deficit | |
| (4,126,539 | ) | |
| (16,678,975 | ) | |
| 4,126,539 | | |
| - | | |
| (16,678,975 | ) |
| Total stockholders’ equity (deficit) before non-controlling interest | |
| 191,080 | | |
| 8,981,922 | | |
| (1,117 | ) | |
| (189,963 | ) | |
| 8,981,922 | |
| Non-controlling interest | |
| (1,117 | ) | |
| - | | |
| 1,117 | | |
| - | | |
| - | |
| Total stockholders’ equity (deficit) | |
| 189,963 | | |
| 8,981,922 | | |
| - | | |
| (189,963 | ) | |
| 8,981,922 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 213,463 | | |
$ | 11,497,789 | | |
$ | - | | |
$ | (213,463 | ) | |
$ | 11,497,789 | |
| Adjustments: |
(1) |
To
reflect the retained earnings and other equity balances of Holdings, pre-combination with Fortium Holdings
Corp. |
| |
(2) |
To
reclassify assets sold of Norr/Elysian in September 2022 |
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
$4,363 recognized in management fee revenue in 2022 for the management of the White River E&P I, LP.
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.
NOTE
4: INVENTORIES
Holding’s inventory as of December 31, 2022 and March 31, 2022 of $103,324 and $107,026, respectively, consisted of crude
oil of approximately 4,135 and 4,935 barrels of unsold crude oil, respectively, using the lower of cost (LIFO) or net realizable value.
NOTE
5: PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following as of December 31, 2022 and March 31, 2022:
SCHEDULE
OF PROPERTY AND EQUIPMENT
| | |
December 31, 2022 | | |
March 31, 2022 | |
| | |
| (unaudited) | | |
| | |
| Land | |
$ | 140,000 | | |
$ | 140,000 | |
| Buildings (39 years) | |
| 236,000 | | |
| 236,000 | |
| Machinery and equipment (3 to 10 years) | |
| 2,962,259 | | |
| 278,116 | |
| Total property and equipment | |
| 3,338,259 | | |
| 654,116 | |
| Accumulated depreciation and impairment | |
| (181,267 | ) | |
| (57,652 | ) |
| Property and equipment, net | |
$ | 3,156,992 | | |
$ | 596,464 | |
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 $123,615 and $24,754, respectively. Depreciation does not include
items in fixed assets that are not in service. The Company purchased two additional drilling rigs during the quarter-ended December 31, 2022 which resulted in the
majority of the increase in machinery and equipment.
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 $122,838 and $510,196, respectively. The Company capitalized $214,197 in drilling costs related to the Peabody
12A #18 well in the three months ended December 31, 2022. As of
December 31, 2022, the capitalized drilling costs were $494,408.
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 $999,999 whereby they recognized $405,052 in gains on the assignments
of wells of $1,078,104 that contained plugging liabilities of $684,679. There was a percentage of the Deshotel 24H well in the assignment
that resulted in a reduction of the capitalized drilling costs of $201,525 in this transaction.
On
October 6, 2022, the Company assigned 10%
of their working interest in the Harry O’Neal 20-9 well to two related parties, pursuant to the vesting of various performance
conditions in the employment contracts of Mr. Randy May and Mr. Jay Puchir. There were no recognized reserves booked for this
well.
On
October 10, 2022, the Company entered into a settlement agreement with a Harry O’Neal working interest owner whereby they granted
them a 50% working interest in the Harry O’Neal 20-9 well in exchange for a full release of claims from all prior investments.
There were no recognized reserves booked for this well.
The
following table summarizes the Company’s oil and gas activities by classification for the periods ended December 31, 2022 and 2021.
SCHEDULE OF OIL AND GAS ACTIVITIES
| Activity Category | |
March 31, 2022 | | |
Adjustments
(1) | | |
December 31, 2022 | |
| Proved Developed Producing Oil and Gas Properties | |
| | | |
| | | |
| | |
| Cost | |
$ | 4,915,968 | | |
$ | (2,231,401 | ) | |
$ | 2,684,567 | |
| Accumulated depreciation, depletion and amortization | |
| (3,225,527 | ) | |
| 991,724 | | |
| (2,233,803 | ) |
| Changes in estimates | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 1,690,441 | | |
$ | (1,239,677 | ) | |
$ | 450,764 | |
| | |
| | | |
| | | |
| | |
| Undeveloped and Non-Producing Oil and Gas Properties | |
| | | |
| | | |
| | |
| Cost | |
$ | 4,936,352 | | |
$ | (28,266 | ) | |
$ | 4,908,086 | |
| Changes in estimates | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 4,936,352 | | |
$ | (28,266 | ) | |
$ | 4,908,086 | |
| | |
| | | |
| | | |
| | |
| Grand Total | |
$ | 6,626,793 | | |
$ | (1,267,944 | ) | |
$ | 5,358,850 | |
| Activity Category | |
March 31, 2021 | | |
Adjustments (1) | | |
December 31, 2021 | |
| Proved Developed Producing Oil and Gas Properties | |
| | | |
| | | |
| | |
| Cost | |
$ | 7,223,379 | | |
$ | - | | |
$ | 7,223,379 | |
| Accumulated depreciation, depletion and amortization | |
| (739,037 | ) | |
| (928,604 | ) | |
| (1,667,641 | ) |
| Changes in estimates | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 6,484,342 | | |
$ | (928,604 | ) | |
$ | 5,555,738 | |
| | |
| | | |
| | | |
| | |
| Undeveloped and Non-Producing Oil and Gas Properties | |
| | | |
| | | |
| | |
| Cost | |
$ | 5,868,137 | | |
$ | 303,500 | | |
$ | 6,171,637 | |
| Changes in estimates | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 5,868,137 | | |
$ | 303,500 | | |
$ | 6,171,637 | |
| | |
| | | |
| | | |
| | |
| Grand Total | |
$ | 12,352,479 | | |
$ | (625,104 | ) | |
$ | 11,727,375 | |
| (1) |
Relates
to dispositions of reserves, and depletion expenses. |
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 $684,679
in ARO for sales of leases during the nine months
ended December 31, 2022, and $22,545
in the nine months ended December 31, 2021. Amounts
reflected in the statements of operations are net of any oil and gas reserves being sold with the plugging liabilities.
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:
SCHEDULE OF ASSET RETIREMENT OBLIGATIONS
| | |
December 31, 2022 | | |
December 31, 2021 | |
| | |
| (unaudited) | | |
| (unaudited) | |
| Balance, beginning of period | |
$ | 1,303,751 | | |
$ | 1,531,589 | |
| Accretion expense | |
| 52,063 | | |
| 117,715 | |
| Reclamation obligations settled | |
| - | | |
| - | |
| Disposition due to sale of property | |
| (684,679 | ) | |
| (22,545 | ) |
| Additions | |
| - | | |
| - | |
| Changes in estimates | |
| - | | |
| - | |
| Balance, end of period | |
$ | 671,135 | | |
$ | 1,626,759 | |
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 10% per annum for the periods ended December
31, 2022 and December 31, 2021.
NOTE
8: NOTES PAYABLE - RELATED PARTIES
The
Company borrowed $512,000 from related parties that were repaid within a few weeks in the nine months ended December 31, 2022.
NOTE
9: LONG-TERM DEBT
Long-term
debt consisted of the following as of December 31, 2022 and March 31, 2022.
SCHEDULE
OF LONG-TERM DEBT
| | |
December 31, 2022 | | |
March 31, 2022 | |
| | |
| (unaudited) | | |
| | |
| Truck loan – Amur Capital (a) | |
$ | 76,057 | | |
$ | - | |
| Truck loan – Mitsubishi (b) | |
| 49,120 | | |
| - | |
| Tractor loan – Simmon Bank(d) | |
| 47,659 | | |
| - | |
| Loan – Amur Capital(e) | |
| 36,635 | | |
| - | |
| Total long-term debt | |
| 209,471 | | |
| - | |
| Less: current portion | |
| (65,518 | ) | |
| - | |
| Long-term debt, net of current portion | |
$ | 143,953 | | |
$ | - | |
| (a) |
On
May 13, 2022, entered into long-term secured note payable for $87,964 for two service trucks maturing April 13, 2026. The note is secured
by the collateral purchased and accrued interest annually at 11.99% with principal and interest payments due monthly. There is no
accrued interest as of December 31, 2022. |
| |
|
| (b) |
On
June 21, 2022, entered into long-term secured note payable for $61,973 for a service truck maturing December 21, 2024. The note is
secured by the collateral purchased and accrued interest annually at 11.99% with principal and interest payments due monthly. There
is no accrued interest as of December 31, 2022. |
| |
|
| (c) |
On
October 13, 2022, White River Operating LLC, an indirect subsidiary of the Company, issued a secured promissory note payable for
$1,500,000,
which was used for two drilling rigs purchased (total value of $1,800,000,
where the Company paid a total of $300,000).
The note bears interest at the lesser of (i) the prime rate published in the “Bonds, Rates and Yields” section of The
Wall Street Journal plus 7.50%;
and (ii) the maximum rate permitted by applicable law, and payments consist of interest and principal in the amount of $25,000
per month through October 13, 2025 when the remaining balance of principal and interest is due. Randy May and Jay Puchir personally
guaranteed this note. Pursuant to a letter agreement dated December 2, 2022, the Company and the borrower agreed to terms of early
repayment of this note. On December 6, 2022, the Company paid $1,540,065 to
repay all principal and interest and fees in satisfaction of the note, which included a termination fee of $65,065. This repayment was mandated by a subsequent lender. See Note 10.
|
| (d) |
On
October 11, 2022, entered into long-term secured note payable for $50,142 for a tractor maturing October 11, 2025. The note is secured
by the collateral purchased and accrued interest annually at 7.99% with principal and interest payments due monthly. There is no
accrued interest as of December 31, 2022. |
| |
|
| (e) |
On
October 18, 2022, entered into long-term secured note payable for $37,599 for equipment maturing October 18, 2027. The note is secured
by the collateral purchased and accrued interest annually at 11.99% with principal and interest payments due monthly. There is no
accrued interest as of December 31, 2022. |
The
following is a list of maturities as of December 31:
SCHEDULE
OF MATURITIES
| | | |
| | |
| 2023 | | |
$ | 65,518 | |
| 2024 | | |
| 70,735 | |
| 2025 | | |
| 47,757 | |
| 2026 | | |
| 17,549 | |
| 2027 | | |
| 7,912 | |
| Total | | |
$ | 209,471 | |
Interest
expense on long-term debt during the nine months ended December 31, 2022 and 2021 are $10,841 and $0, respectively.
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 $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 proceeds
are being used for working capital and growth capital.
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 12% per annum, payable monthly, subject to an increase to 18% per
annum in case of an event of default as provided for therein. In addition, all overdue accrued and unpaid principal and interest is subject
to a late fee at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law which if applicable
accrues daily from the date such principal and interest is due.
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) $1.00
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 70%
of the lowest closing price of the common stock for the 10 prior trading days.
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 120% of such principal amount, plus accrued but unpaid interest and any other amounts outstanding under the Note, with each
payment resulting in a reduction in the principal of the Note at 100% (as compared to 120%). Furthermore, at any time after the issuance
date of the Note, the Company may, after written notice to the Purchaser, prepay the Note in an amount equal to 120% of the then outstanding
principal amount, plus accrued but unpaid interest and any other amounts outstanding under the Note. The Company will also be required
to offer to pay the Note at 120% of the principal amount plus any unpaid accrued interest, upon the occurrence of certain events including
(i) a change of control or sale of assets, (ii) a sale by the Company of equity or debt securities for gross proceeds to the Company
of at least $5 million, and (iii) upon the maturity of the Note.
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 $100,000. Upon an event of default,
the Purchaser may cause the Note to become immediately due and payable and require the Company to pay 125% of the then outstanding principal
amount, plus accrued but unpaid interest and any other amounts outstanding under the Note.
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.
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 $923,956. The Company recognized a gain
of the change in fair value of the derivative liability related to the Note of $9,582 for the period ended December 31, 2022. (see Note
11). The Company recorded an amortization of original issue discount of $6,525 for the nine months ended December 31, 2022. The Company
recognized $6,027 in interest expense on this convertible Note for the nine months ended December 31, 2022, all of which is accrued for
at December 31, 2022.
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 1,666,667
shares of common stock, subject to upward adjustment to the extent the closing price per share of the Company’s common stock
is below $1.00
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) 90
days after the Effective Date. In such event, the number of shares will be increased to the quotient obtained by dividing $1,666,666.67
by the closing price of the common stock. The value of $1,666,667 was expensed as stock-based compensation under
this agreement pursuant to ASC 505. The Company also agreed to indemnify the Consultant pursuant to indemnification provisions
attached to the Consulting Agreement.
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.
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:
SCHEDULE
OF FAIR VALUE OF EACH WARRANTS
| | |
Nine
Months Ended
December 31,
2022 | | |
Year Ended
March 31,
2022 | | |
Inception | |
| Expected term | |
| 0.70 – 0.75 years | | |
| - | | |
| 0.75 years | |
| Expected volatility | |
| 113 - 172 | % | |
| - | | |
| 113% – 160 | % |
| Expected dividend yield | |
| - | | |
| - | | |
| - | |
| Risk-free interest rate | |
| 4.64 – 4.73 | % | |
| - | | |
| 4.64 | % |
| Market price | |
| $0.40 – $1.43 | | |
| - | | |
| | |
The
Company’s remaining derivative liabilities as of December 31, 2022, March 31, 2022 and inception associated with the offerings
are as follows.
SCHEDULE
OF REMAINING DERIVATIVE LIABILITIES ASSOCIATED WITH OFFERINGS
| | |
December 31,
2022
(unaudited) | | |
March 31,
2022 | | |
Inception | |
| Fair value of 190.2726308 shares of Series C Preferred Stock (see Note 12) | |
$ | 2,253,621 | | |
$ | - | | |
$ | 3,337,025 | |
| Fair value of Warrants issued in connection with Series C Preferred Stock (see Note 12) | |
| 9,185,546 | | |
| - | | |
| 11,544,312 | |
| Fair value of conversion option on convertible note payable (see Note 10) | |
| 914,374 | | |
| - | | |
| 923,956 | |
| Total | |
$ | 12,353,541 | | |
$ | - | | |
| | |
Activity
related to the derivative liabilities for the nine months ended December 31, 2022 is as follows:
SCHEDULE
OF ACTIVITY RELATED TO THE DERIVATIVE LIABILITIES
| Beginning balance as of March 31, 2022 | |
$ |
- | |
| Issuances of Series C Preferred Stock and Warrants – derivative liabilities | |
| 14,881,337 | |
| Bifurcation of conversion option on convertible note payable | |
| 923,956 | |
| Change in fair value of derivative liabilities | |
| (3,451,752 | ) |
| Ending balance as of December 31, 2022 | |
$ | 12,353,541 | |
The
change in fair value of the derivative liability of $(3,451,752) includes $1,083,404 that was a change in the value of the preferred
stock for the nine months ended December 31, 2022.
There
were no derivative liabilities in the nine months ended December 31, 2021.
NOTE
12: STOCKHOLDERS’ EQUITY (DEFICIT)
On
September 28, 2022, increased its authorized capital to 505,000,000 shares consisting
of 500,000,000 shares of common stock (from 200,000,000) and 5,000,000 shares of preferred stock. See Note 1.
The
Company executed the Exchange Agreement on July 25, 2022 and pursuant to the Exchange Agreement that day acquired 100% of the outstanding
shares of capital stock of Holdings from Ecoark, Holding’s sole stockholder. In exchange the Company issued
Ecoark 1,200 shares of the newly designated Series A. See Note 1 under “Description of Business” for more details
on the Series A.
The
Series A has a stated value of $30 million and has a liquidation preference over the common stock and any subsequent series of junior
preferred stock equal to the stated value, plus any accrued but unpaid dividends.
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 1,000
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 17,450,000 restricted shares of common stock at prices ranging from $0.71 to $1.25 per
share (combined value of $12,604,500). These issuances represented 11,950,000 shares that are service-based grants ($8,699,500 value)
and 5,500,000 shares that are performance-based grants ($3,905,000 value). The performance criteria are based on the average number of
gross barrels of oil produced per day (BOPD) ranging from 1,000 to 5,000 BOPD. The service-based grants vest through July 31, 2032. None
of the 17,450,000 restricted shares of common stock have been issued by the transfer agent as of November 30, 2022, and on November 15,
2022, 25,000 of these service-based shares were cancelled as the employee terminated their employment prior to any issuance or vesting
of those shares. None of the shares have vested. On December 1, 2022, the remaining 17,425,000 restricted stock grants were cancelled.
The Company then entered into new RSU agreements on December 1, 2022 with these individuals, that represented 5,500,000 performance-based
RSUs valued at $5,005,000, and 11,925,000 service-based RSUs valued at $10,851,750. The performance-based grants are based on the average
number of gross barrels of oil produced per day (BOPD) ranging from 1,000 to 5,000 BOPD; and the service-based grants vest through November
30, 2032. The Company has expensed $1,727,404 in stock-based compensation through December 31, 2022 related to these grants.
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.
The
Company determined the value of share-based compensation using the Black-Scholes fair value option-pricing model using the following
weighted average assumptions for options granted during the former year ended December 31, 2018. All options stand completely vested.
SCHEDULE OF STOCK OPTIONS WEIGHTED AVERAGE ASSUMPTIONS
| | |
Date of
Grant | |
| Expected term (years) | |
| 10 | |
| Expected volatility | |
| 283 | % |
| Risk-free interest rate | |
| 2.55 | % |
| Dividend yield | |
| 0 | % |
As
summary of option activity under the 2016 Plan as of December 31, 2022, and March 31, 2022 and changes during the periods then ended
are presented below:
SCHEDULE OF STOCK OPTION ACTIVITY
| | | |
Number of
Options | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual
Term | |
| Balance outstanding at March 31, 2021 | | |
| 60,421 | | |
$ | 5.20 | | |
| 6.77 | |
| Granted | | |
| - | | |
| - | | |
| - | |
| Exercised | | |
| - | | |
| - | | |
| - | |
| Forfeited | | |
| - | | |
| - | | |
| - | |
| Expired | | |
| - | | |
| - | | |
| - | |
| Cancelled | | |
| - | | |
| - | | |
| - | |
| Balance outstanding at March 31, 2022 | | |
| 60,421 | | |
$ | 5.20 | | |
| 5.77 | |
| Exercisable at March 31, 2022 | | |
| 60,421 | | |
$ | 5.20 | | |
| 5.77 | |
| | | |
Number of
Options | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual
Term | |
| Balance outstanding at March 31, 2022 | | |
| 60,421 | | |
$ | 5.20 | | |
| 5.77 | |
| Granted | | |
| - | | |
| - | | |
| - | |
| Exercised | | |
| - | | |
| - | | |
| - | |
| Forfeited | | |
| - | | |
| - | | |
| - | |
| Expired | | |
| - | | |
| - | | |
| - | |
| Cancelled | | |
| - | | |
| - | | |
| - | |
| Balance outstanding at December 31, 2022 | | |
| 60,421 | | |
$ | 5.20 | | |
| 5.02 | |
| Exercisable at December 31, 2022 | | |
| 60,421 | | |
$ | 5.20 | | |
| 5.02 | |
Warrants
On
August 10, 2017, the Company entered into a Securities Purchase Agreement with two investors to purchase from the Company 42,510
shares of the Company’s common stock for
an aggregate purchase price of $525,000.
The investors received a warrant to purchase an additional 5,314
shares at an exercise price of $14.25
per share, and a warrant to purchase an additional
5,314
shares at an exercise price of $19.00
per share.
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 1,400,000
warrants that have a term of five
years and an exercise price of $0.01,
which were issued to the related party on September 14, 2021. On September 14, 2021, 700,000
of these warrants were assigned to a third party and all 1,400,000
warrants were exercised for $14,000
immediately thereafter.
As
discussed herein, the Company issued 9,513,632
Warrants in the Series C Offering. These Warrants have a five-year
term and are exercisable according to the terms of the warrant agreements calculated at $0.69 for December 31, 2022.
The following table reflects Warrant activity:
SCHEDULE OF WARRANTS ACTIVITY
| Warrants | |
Shares | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual
Term | | |
Aggregate
Intrinsic
Value | |
| Outstanding at March 31, 2021 | |
| 10,628 | | |
$ | 16.625 | | |
| 1.45 | | |
$ | - | |
| Granted | |
| - | | |
| - | | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
| Forfeited or expired | |
| - | | |
| - | | |
| - | | |
| - | |
| Outstanding at March 31, 2022 | |
| 10,628 | | |
$ | 16.625 | | |
| 0.45 | | |
$ | - | |
| Exercisable at March 31, 2022 | |
| 10,628 | | |
$ | 16.625 | | |
| 0.45 | | |
$ | - | |
| Warrants | |
Shares | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual
Term | | |
Aggregate
Intrinsic
Value | |
| Outstanding at March 31, 2022 | |
| 10,628 | | |
$ | 16.625 | | |
| 0.45 | | |
$ | - | |
| Granted | |
| 9,513,632 | | |
| 0.69 | | |
| 4.80 | | |
| - | |
| Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
| Forfeited or expired | |
| (10,628 | ) | |
| (16.625 | ) | |
| (0.45 | ) | |
| - | |
| Outstanding at December 31, 2022 | |
| 9,513,632 | | |
$ | 0.69 | | |
| 4.80 | | |
$ | - | |
| Exercisable at December 31, 2022 | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
The
following assumptions were used for the nine months ended December 31, 2022 and year ended March 31, 2022:
SCHEDULE OF FAIR VALUE ASSUMPTION OF WARRANTS
| |
|
Nine
Months
Ended
December
31,
2022 |
|
|
Year
Ended
March
31,
2022 |
|
| Expected
term |
|
|
5
years |
|
|
|
- |
|
| Expected
volatility |
|
|
113-172 |
% |
|
|
- |
% |
| Expected
dividend yield |
|
|
- |
|
|
|
- |
|
| Risk-free
interest rate |
|
|
3.99-4.35 |
% |
|
|
0.10 |
% |
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
0% and 11.36%. The right of use asset is composed of the sum of all lease payments, at present value, and is amortized straight line
over the life of the expected lease term. For the expected term of the lease the Company used the initial terms ranging between 36 and
39 months. Upon the election by the Company to extend the lease for additional years, that election will be treated as a lease modification
and the lease will be reviewed for re-measurement.
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 $320,922 ($184,532 in financing leases and $136,390 in operating leases) (through maturity at November 2026).
As of December 31, 2022, the Company’s lease liability was $302,225 ($152,570 in financing leases and $149,655 in operating leases)
(through maturity at November 2026).
SCHEDULE
OF MATURITY OF OPERATING LEASE LIABILITY
| Maturity of lease liability for the operating leases for the period ended December 31, | |
| |
| 2023 | |
$ | 146,432 | |
| 2024 | |
$ | 4,319 | |
| Imputed interest | |
$ | (1,096 | ) |
| Total lease liability | |
$ | 149,655 | |
| Disclosed as: | |
| |
| Current portion | |
$ | 145,476 | |
| Non-current portion | |
$ | 4,179 | |
SCHEDULE
OF MATURITY OF FINANCE LEASE LIABILITY
| Maturity of lease liability for the financing leases for the period ended December 31, | |
| |
| 2023 | |
$ | 55,427 | |
| 2024 | |
$ | 55,427 | |
| 2025 | |
$ | 55,427 | |
| 2026 | |
$ | 50,808 | |
| Imputed interest | |
$ | (64,519 | ) |
| Total lease liability | |
$ | 152,570 | |
| Disclosed as: | |
| |
| Current portion | |
$ | 29,020 | |
| Non-current portion | |
$ | 123,550 | |
SCHEDULE
OF AMORTIZATION OF RIGHT OF USE ASSET
| Amortization of the right of use asset for the period ended December 31, | |
| |
| 2023 | |
$ | 169,392 | |
| 2024 | |
$ | 47,345 | |
| 2025 | |
$ | 50,387 | |
| 2026 | |
$ | 53,798 | |
| | |
| | |
| Total | |
$ | 320,922 | |
Total
Lease Cost
Individual
components of the total lease cost incurred by the Company is as follows:
SCHEDULE
OF TOTAL LEASE COST
| | |
Nine months
ended
December 31,
2022 | | |
Nine months
ended
December 31,
2021 | |
| | |
| (unaudited) | | |
| (unaudited) | |
| Operating lease expense | |
$ | 108,366 | | |
$ | 106,206 | |
| | |
| | | |
| | |
| Financing lease expense | |
| | | |
| | |
| Depreciation of capitalized finance lease assets | |
| 5,173 | | |
| - | |
| Interest expense on finance lease liabilities | |
| 5,425 | | |
| - | |
| Finance lease expense | |
$ | 118,964 | | |
$ | 106,206 | |
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 $620,603
and $56,269,
respectively from these entities for their portion of the production expenses over the revenues received. These amounts are
monitored closely and fluctuate each month. In January 2023, the Company received a progress payment of $239,425.
The
May Family Foundation controls 15.77%
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 6.9%
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 1,200 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 $28,953,510, effective with the issuance of the 1,200 Series A. There was no impact on the condensed consolidated
statements of operations.
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.
SCHEDULE
OF FAIR VALUE ESTIMATES
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total Gains
and (Losses) | |
| December 31, 2022 | |
| | | |
| | | |
| | | |
| | |
| Derivative liabilities | |
$ | - | | |
$ | - | | |
$ | 12,353,541 | | |
$ | 3,451,752 | |
| | |
| | | |
| | | |
| | | |
| | |
| 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):
SCHEDULE
OF RECONCILIATION OF LIABILITIES
| | |
December 31,
2022 | |
| | |
(unaudited) | |
| Beginning balance | |
$ | - | |
| Net change in unrealized (depreciation) appreciation included in earnings | |
| 3,451,752 | |
| Classification of Series C Preferred stock and warrants | |
| (14,881,337 | ) |
| Bifurcation of convertible note payable | |
| (923,956 | ) |
| Sales | |
| - | |
| Transfers in and out | |
| - | |
| Ending balance | |
$ | (12,353,541 | ) |
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, $5,746,941, associated with the drilling and completion
of an initial deep horizontal well in the Austin Chalk formation. The Participation Agreement required the drilling costs that were paid
into a designated escrow account at the commencement of the drilling in January 2021, which it was. BlackBrush agreed to assign to the
other parties to the Participation Agreement, subject to certain exceptions and limitations specified therein, specified portions of
its leasehold working interest in certain Austin Chalk formation units. The Participation Agreement provides for an initial allocation
of the working interests and net revenue interests among the assignor, BlackBrush and White River SPV 3 LLC and then a re-allocation
upon payout or payment of drilling and completion costs for each well drilled. Prior to payout, Holdings will own 90% of
the working interest and 67.5% of the net revenue interest in each well. Following payout, Holdings will own 70% of working
interest and 52.5% net revenue interest in each well.
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 40% working interest and 28.8% net
revenue interest in the Harry O’Neal 20-9 No. 1 well for $971,609.
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 $1,408,000 for drilling one or more wells on the Company’s mineral lease located in Rankin County, Mississippi for (A) a 50%
working interest and (B) a 32.5% net revenue interest in all such wells (the “Mississippi Agreement”); and (ii) under the
second Agreement, the Fund agreed to pay the Company and initial amount of $1,597,632 for drilling one or more wells on the Company’s
mineral lease located in Concordia Parish, Louisiana in exchange for (A) a 37.5% working interest and (B) a 27% net revenue interest
in all such wells (the “Louisiana Agreement”). In addition, under the Louisiana Agreement, in the event the test well on
the lease is determined to be economically viable, the Fund agreed to pay the Company an additional $595,972.45 in costs to complete
and produce the test well, while the Mississippi Agreement requires an additional $992,963.27 in costs to complete and produce the test
well.
On
December 6, 2022, the Company entered into a Participation Agreement with Ault Energy, LLC for $1,597,632 for drilling one or more wells
on the Company’s mineral lease located in Concordia Parish, Louisiana in exchange for (A) a 37.5% working interest and (B) a 27%
net revenue interest in all such wells. In addition, in the event the test well on the lease is determined to be economically viable,
Ault Energy, LLC agreed to pay the Company an additional $595,972.45 in costs to complete and produce the test well. This amount is reflected
as a receivable as it has not yet been paid by Ault Energy, LLC.
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 $267,520 for drilling a well located
in Rankin County, Mississippi for a 9.5% working interest and (B) a 6.18% net revenue interest in all such wells (the “Mississippi
Agreement #2”). In the event the test well on the lease is determined to be economically viable, the Fund agreed to pay the Company
an additional $188,663 in costs to complete and produce the test well.
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 $400,000, and was granted 5,000,000 shares of restricted common stock
(since cancelled on December 1, 2022 and replaced with 5,000,000 restricted stock units) with half of the Restricted Stock Units (“RSU”) vesting annually over
a five-year period and the remainder vesting based on performance metrics set forth in the agreement. Under his agreement, Mr. May was
also granted the following rights related to the Company’s oil and gas operations:
(A)
an overriding royalty interest or carried working interest to be held in perpetuity from either the Company or its subsidiaries
equal to 5%
in any and all successfully drilled and completed oil and/or gas wells (an “ORRI”) during the term of his
employment.
(B)
a 15% participation right in the funding and ownership interest in any drilling or participation by the Company or any subsidiary in
the drilling by the Company or a third party of an oil and gas well other than the Fund (a “Participation Right”).
Jay
Puchir, our Chief Executive Officer, is receiving an annual base salary of $350,000 and was granted 5,000,000 shares of restricted common
stock (since cancelled on December 1, 2022 and was granted 5,000,000 RSU) with half of the RSUs vesting annually
over a five-year period and the remainder vesting based on performance metrics set forth in the agreement. Under his agreement, Mr. Puchir
was also granted the following rights related to the Company’s oil and gas operations:
(A)
a 5%
overriding royalty interest or carried working interest during the term of his employment.
(B)
a 10% Participation Right otherwise identical to Mr. May’s.
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 $180,000, and was granted 2,000,000 shares of restricted common stock (since cancelled on December 1, 2022 and was granted
5,000,000 RSUs) with the RSUs vesting annually over a 10-year period.
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 $200,000, and was granted 2,000,000 shares of restricted common stock (since cancelled on December 1, 2022 and was granted 5,000,000 RSUs) with the RSUs vesting annually over a 10-year period.
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 $500,000 lump-sum payment and full vesting of all outstanding
equity grants made to the officer.
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.
In
addition, the Company agreed to the following compensation for each non-employee director:
(A)
an annual grant of $100,000 in restricted stock which will vest on the final business day of each quarter equal to one-fourth of the
total stipend, or $25,000 per quarter, with the number of shares to be determined based on the volume weighted average price of the Company’s
common stock as of each quarterly vesting (the “Restricted Stock Grant”).
(B)
an annual cash fee of $50,000 which will vest on the final business day of each quarter equal to one-fourth of the total fee, or $12,500
per quarter (the “Cash Fees”).
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 $200,000 per year and the Cash Fees will be increased to $100,000
per year.
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 91% and 87% of accounts receivable, respectively. In addition, two and three customers represent approximately
43% and 96% of total revenues for the Company for the nine months ended December 31, 2022 and 2021, respectively.
Supplier
Concentration. Certain of the raw materials, components and equipment used by the Company in the manufacture of its products are
available from single-sourced vendors. Shortages could occur in these essential materials and components due to an interruption of supply
or increased demand in the industry. If the Company were unable to procure certain materials, components or equipment at acceptable prices,
it would be required to reduce its manufacturing operations, which could have a material adverse effect on its results of operations.
In addition, the Company may make prepayments to certain suppliers or enter into minimum volume commitment agreements. Should these suppliers
be unable to deliver on their obligations or experience financial difficulty, the Company may not be able to recover these prepayments.
The
Company occasionally maintains cash balances in excess of the FDIC insured limit. The Company does not consider this risk to be material.
Commodity
price risk
We
are exposed to fluctuations in commodity prices for oil and natural gas. Commodity prices are affected by many factors, including but
not limited to, supply and demand.
NOTE
18: SECURED PROMISSORY NOTE
On
September 2, 2022, the Company issued a $200,000 Secured Promissory Note (“Promissory Note”) to an unrelated third party.
The term of the Promissory Note is one-year (September 2, 2023) and the Promissory Note bears interest at the rate of 12% per annum.
Interest payments in the amount of $6,000 are to be paid quarterly on November 30, 2022, February 28, 2023, May 31, 2023 and August 31,
2023. The Promissory Note is secured by the full title and ownership of the current and future intellectual property and results associated
with the Millbrook 3D Seismic project in Wilkinson County, MS which is currently being performed by ClearRock Geophysics LLC. The Company
has recorded interest income of $8,000 on the Promissory Note as of December 31, 2022. On December 30, 2022, the Company was repaid the
$200,000 Promissory Note and the remaining accrued interest income receivable.
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.
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
$68,360 at March 31, 2022 for the pre-combination reporting entity is not reflected on the condensed consolidated balance sheet.
The
Company reclassified the following operations to discontinued operations for the nine months ended December 31, 2022 and 2021, respectively.
SCHEDULE
OF DISCONTINUED OPERATIONS
| | |
2022 | | |
2021 | |
| Revenue | |
$ | 212 | | |
$ | - | |
| Operating expenses | |
| 86,060 | | |
| - | |
| Other (income) loss | |
| - | | |
| - | |
| Net loss from discontinued operations | |
$ | (85,848 | ) | |
$ | - | |
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 | |
$ | 3 | | |
$ | - | |
| Cash | |
| (3,205 | ) | |
| - | |
| Inventory | |
| (40,901 | ) | |
| - | |
| Loss on disposal of discontinued operations | |
$ | (44,103 | ) | |
$ | - | |
The
following represents the calculation of the loss on disposal of Elysian at September 21, 2022:
| | |
2022 | | |
2021 | |
| Proceeds from sale | |
$ | 1 | | |
$ | - | |
| Cash | |
| (552 | ) | |
| - | |
| Prepaid expenses | |
| (100,000 | ) | |
| - | |
| Loss on disposal of discontinued operations | |
$ | (100,551 | ) | |
$ | - | |
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 $50,000 for drilling one or more wells on the Company’s mineral lease located in Rankin County, Mississippi in exchange
for (A) a 1.0412490% working interest and (B) a 0.7809370% net revenue interest in such wells.
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 $150,000,
with the proceeds to be used for drilling one or more wells on the Company’s mineral lease located in Rankin County,
Mississippi in exchange for a total of three units, with each unit comprised of the following: (A) a 1.0412490%
working interest and (B) a 0.7809370%
net revenue interest in such wells.
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 $70,000 in cash, (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. In connection with the execution of the MIPA, the Company paid a $10,000 non-refundable deposit, which will be applied against
the cash portion of the purchase consideration at closing. On February 5, 2023, the Company filed a Continuing Membership Application (“Form CMA”) with FINRA. The
transaction shall close upon the successful clearance of the Form CMA by FINRA.
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.