NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER
30, 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 (“White River”) from
Ecoark Holdings, Inc. (“Ecoark”), White River’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 or Form 10, or other applicable
form, with the Securities and Exchange Commission (the “SEC”) and such Form S-1 or other registration statement has been
declared effective, or such Form 10 or other applicable form 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 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 preferred stock, however, does not have any of the voting rights of common stockholders. White River 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 White River
acquisition.
Ecoark
has advised us that it plans to spin-off the common stock issuable upon conversion of the Series A issued in the Merger with White River, subject to regulatory approvals
including 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 Board authorized the Series B because the
Company is not subject to Section 13 of the Securities Exchange Act of 1934, so the protections and disclosure provided by Section 13(d)
and the rules and regulations promulgated thereunder do not apply to the Company, and the Series B is intended to enable the Board 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
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. Prior to the organization of
Norr, the Company’s Chief Executive Officer had explored this business opportunity and commenced preparation of a business
plan for the business. On March 23, 2021, the Company engaged the services of two consultants and entered into consulting agreements
through Norr pursuant to which each consultant provides services to Norr in exchange for $1,000
per month, payable in cash or, at Norr’s election for a given month or months, options to purchase shares of the
Company’s common stock.
On
September 9, 2021, the Company formed Elysian, a Colorado corporation and wholly-owned subsidiary, for the purpose of engaging in
cannabis operations. On September 14, 2021, Elysian entered into a Stock Purchase Agreement (“SPA”) with Treehouse
Company, Inc. (“Treehouse”), and its sole stockholder Alex Gosselin (the “Seller”) pursuant to which Elysian
shall purchase 80%
of the capital stock of Treehouse from the Seller for $200,000,
subject to certain conditions including regulatory approval.
In
September 2022, the Company has sold both Norr and Elysian pursuant to a Membership Interest Purchase Agreement (“MIPA”)
for Norr, and a Stock Purchase Agreement for Elysian on September 20 and 21, 2022. 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 White River.
On
September 16, 2022, the Board of Directors and stockholders approved the name change of the Company to White River Energy Corp. All paperwork
has been submitted to both the State of Nevada and to the Financial Industry Regulatory Authority (“FINRA”) on September
20, 2022.
The
Company has reflected the operations of both Norr and Elysian postcombination 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 White River resulted in the owners of White River gaining control over the combined entity after the transaction,
and the stockholders of White River Energy Corp 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 (White River) and
was equivalent to the issuance of shares by White River for the net monetary assets of White River Energy Corp accompanied by a recapitalization.
As a result, the historical balances represent White River. See Note 2, “Reverse Merger”.
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 White River
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 subsidiary, White River. All intercompany accounts, balances and transactions
have been eliminated in the consolidation.
Reclassifications
The Company has reclassified certain amounts
in the September 30, 2021 condensed consolidated financial statements to be consistent with the September 30, 2022 presentation. These
changes had no impact on the Company’s financial position or result of operations for the periods presented.
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 $201,957 and $1,140,154 in depletion expense for the Company’s oil and gas properties for the six months ended September 30,
2022 and 2021, and $71,469 and $422,750 for the three months ended September 30, 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 September 30, 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, of ten years for all property and equipment, except leasehold improvements which are depreciated over the
term of the lease, which is shorter than the estimated useful life of the improvements. Computer equipment has an estimated useful life
of three years.
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.
Commodities
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. Prior to July 25, 2022, the
Company classified their reporting segments in two segments: (i) Norr, which was their products segment specializing in skateboards and
accessories; and (ii) Elysian, specializing in cannabis related operations. Effective with the acquisition of White River, the Company
added a third segment for oil and gas production, following which the Company had three distinct segments up until the sale of Norr and Elysian. As a result, no segment reporting is provided
as the only continuing operation is that of White River, and the Company only operates in one segment – oil and gas production.
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.
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 White River, their former parent, Ecoark contributed $3,000,000 into
the Company as part of the purchase. In addition, the Company has commenced the raising of capital through a private investment in a
public equity (PIPE) and has raised approximately $4,500,000 as
of November 8, 2022 from this PIPE offering. The Company has determined that there is no longer substantial doubt about their ability to
continue as a going concern as they have been able to generate sufficient cash flow from operations and those cash flows together with the capital raised in the recent financing are believed by Management to be sufficient
for the Company to continue its operations over the next 12 months.
The
Company has divested the Norr and Elysian businesses effective with the sale of those entities on September 20 and 21,
2022, respectively.
Impact
of COVID-19
COVID-19
has had a profound effect on the U.S. and global economy and may continue to affect the economy and the industries in which we operate,
depending on the vaccine and booster rollouts and the emergence of virus mutations.
COVID-19
did not have a material effect on the Consolidated Statements of Operations or the Consolidated Balance Sheets for the six months ended
September 30, 2022 or prior fiscal year.
COVID-19
has also contributed to the supply chain disruptions which have not yet had a material effect for the Company. The Company will continue
to monitor the supply chain shortages affecting 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: REVERSE MERGER
The
acquisition of White River 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 (White
River Holdings Corp), 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 precombination
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. |
The Company acquired White River Holdings Corp for 1,200 shares of Series A Preferred Stock valued at $30,000,000. On an as converted basis,
the 1,200 Series A shares convert to 42,253,521 shares of common stock.
On
July 25, 2022, the Company completed its acquisition of White River. As a result of this transaction, which is accounted for as a
reverse merger, White River 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, each outstanding share of the common stock of White River was exchanged for the 1,200
shares of Series A Preferred Stock of the Company. This exchange of shares and the resulting controlling ownership of White River
Energy Corp constitutes a reverse acquisition resulting in a recapitalization of White River and purchase accounting being applied
to White River Energy Corp under ASC 805 due to White River being the accounting acquirer and White River Energy Corp, being deemed
an acquired business. This requires financial reporting from the Merger close date forward to reflect only the historic consolidated
results of White River and to include the consolidated results for White River Energy Corp and subsidiaries from July 25, 2022
forward.
The
primary reasons White River consummated the merger with White River Energy Corp were the opportunity to immediately become a public
company without the process of doing its own initial public offering, thereby affording it the opportunity to more quickly raise
capital and provide liquidity options to its stockholders, and at the same time acquiring the infrastructure required of a public
company run by people experienced in investor relations and the public company regulatory compliance issues and filings required by
virtue of appointing certain of Ecoark’s executive officers as executive officers of the Company. The previously existing
businesses of White River Energy Corp 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 White River of White
River Energy Corp via the reverse acquisition are set forth below:
SCHEDULE
OF PURCHASE PRICE ALLOCATION
Purchase
Price Allocation of White River Energy 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 White River Energy Corp assets and liabilities at July 25, 2022.
White River Energy 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
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 reverse merger.
PRO
FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH
31, 2022
SCHEDULE OF PRO FORMA INFORMATION
| |
1 | | |
2 | | |
3
(1) | | |
4
(2) | | |
5 | |
| |
Historical
White River | | |
White River | | |
Other | | |
Other | | |
| |
| |
Energy | | |
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. | |
| - | | |
| 25,068,890 | | |
| - | | |
| - | | |
| 25,068,890 | |
Total current liabilities | |
| 23,500 | | |
| 26,170,771 | | |
| - | | |
| (23,500 | ) | |
| 26,170,771 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
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 | | |
| 27,584,757 | | |
| - | | |
| (23,500 | ) | |
| 27,584,757 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
STOCKHOLDERS’ EQUITY (DEFICIT) | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Preferred stock, $0.0001 par value | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Common stock, $0.0001 par value | |
| 840 | | |
| 60 | | |
| (60 | ) | |
| - | | |
| 840 | |
Additional paid-in capital | |
| 4,316,779 | | |
| 591,947 | | |
| (4,127,596 | ) | |
| (189,963 | ) | |
| 591,167 | |
Accumulated deficit | |
| (4,126,539 | ) | |
| (16,678,975 | ) | |
| 4,126,539 | | |
| - | | |
| (16,678,975 | ) |
Total stockholders’ equity (deficit) before non-controlling interest | |
| 191,080 | | |
| (16,086,968 | ) | |
| (1,117 | ) | |
| (189,963 | ) | |
| (16,086,968 | ) |
Non-controlling interest | |
| (1,117 | ) | |
| - | | |
| 1,117 | | |
| - | | |
| - | |
Total stockholders’ equity (deficit) | |
| 189,963 | | |
| (16,086,968 | ) | |
| - | | |
| (189,963 | ) | |
| (16,086,968 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
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 White River Holdings Corp,
precombination with White River Energy Corp |
|
(2) |
To reclassify assets sold of Norr/Elysian in September 2022 |
The
consolidated statements of operations and cash flows represent the operations of White River for the six months ended September 30, 2022
and 2021 include cost allocations from White River’s former parent Ecoark as discussed below.
Cost
Allocations
The
consolidated financial statements of White River Holdings Corp 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 White
River Holdings Corp, changes in derivative liabilities on the books of Ecoark for warrants granted in offerings of which proceeds
went towards the operations of White River Holdings Corp, and conversions of debt. 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. No disaggregation is required for
the six and the three months ended September 30, 2022 and 2021, respectively.
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)”.
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
White
River’s inventory as of September 30, 2022 and March 31, 2022 of $91,925 and $107,026, respectively, consisted of crude oil of
approximately 5,299 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 September 30, 2022 and March 31, 2022:
SCHEDULE
OF PROPERTY AND EQUIPMENT
| |
September
30, 2022 | | |
March
31, 2022 | |
| |
(unaudited) | | |
| |
Land | |
$ | 140,000 | | |
$ | 140,000
| |
Buildings | |
| 236,000 | | |
| 236,000 | |
Machinery
and equipment | |
| 1,167,468 | | |
| 278,116 | |
Total
property and equipment | |
| 1,543,468 | | |
| 654,116 | |
Accumulated
depreciation and impairment | |
| (112,183 | ) | |
| (57,652 | ) |
Property
and equipment, net | |
$ | 1,431,285 | | |
$ | 596,464 | |
As
of September 30, 2022, the Company performed an evaluation of the recoverability of these long-lived assets.
Depreciation
expense for the six months ended September 30, 2022 and 2021 was $54,531
and $16,394, respectively.
Depreciation does not include items in fixed assets that are not in service, including the $180,000 deposit made on two
rigs.
NOTE
6: CAPITALIZED DRILLING COSTS AND OIL AND GAS PROPERTIES
Capitalized
Drilling Costs
In
January 2021, the Company commenced a drilling program on their Deshotel 24H well included in their proved reserves. The Company acquired
$1,797,695 along with accumulated depletion of $1,459,252 related to the Deshotel 24H well that are recorded as capitalized drilling
costs. Depletion expense for the six months ended September 30, 2022 and 2021 for the capitalized drilling costs was $80,244 and $417,810,
respectively. As of September 30, 2022, the capitalized drilling costs were $322,806.
Oil
and Gas Properties
The
Company acquired $2,905,947 in proved reserves, $4,908,087 in undeveloped reserves, and $2,293,449 in accumulated depletion on these
reserves in the acquisition of White River on July 25, 2022. Since the acquisition was a reverse merger transaction, the historical balances
are those of White River. On August 1, 2022, the Company sold net reserves of $63,969 for the assumption of plugging liabilities of $95,125,
for a net gain of $31,156.
The
following table summarizes the Company’s oil and gas activities by classification for the periods ended September 30, 2022 and
2021.
SCHEDULE OF OIL AND GAS ACTIVITIES
Activity
Category | |
March
31, 2022 | | |
Adjustments
(1) | | |
September
30, 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 | ) | |
| 1,059,850 | | |
| (2,165,677 | ) |
Changes
in estimates | |
| - | | |
| - | | |
| - | |
Total | |
$ | 1,690,441 | | |
$ | (1,171,551 | ) | |
$ | 518,890 | |
| |
| | | |
| | | |
| | |
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 | | |
$ | (1,199,817 | ) | |
$ | 5,426,976 | |
Activity
Category | |
March
31, 2021 | | |
Adjustments
(1) | | |
September
30, 2021 | |
Proved
Developed Producing Oil and Gas Properties | |
| | | |
| | | |
| | |
Cost | |
$ | 7,223,379 | | |
$ | - | | |
$ | 7,223,379 | |
Accumulated
depreciation, depletion and amortization | |
| (739,037 | ) | |
| (722,344 | ) | |
| (1,461,381 | ) |
Changes
in estimates | |
| - | | |
| - | | |
| - | |
Total | |
$ | 6,484,342 | | |
$ | (722,344 | ) | |
$ | 5,761,998 | |
| |
| | | |
| | | |
| | |
Undeveloped
and Non-Producing Oil and Gas Properties | |
| | | |
| | | |
| | |
Cost | |
$ | 5,868,137 | | |
$ | - | | |
$ | 5,868,137 | |
Changes
in estimates | |
| - | | |
| - | | |
| - | |
Total | |
$ | 5,868,137 | | |
$ | - | | |
$ | 5,868,137 | |
| |
| | | |
| | | |
| | |
Grand
Total | |
$ | 12,352,479 | | |
$ | (722,344 | ) | |
$ | 11,630,135 | |
(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. On July 25,
2022, $751,075
of ARO was acquired in the acquisition of White River. The Company disposed of $671,162 in ARO for sales of leases during the six
months ended September 30, 2022, and $383,450 in the year ended March 31, 2022. Amounts reflected in the statements of operations
are net of any oil and gas reserves being sold with the plugging liabilities. The Company recognized a net gain from dispositions of $391,533 in dispositions of ARO and oil and gas reserves in
the nine months ended September 30, 2022.
The
following table summarizes activity in the Company’s ARO for the six months ended September 30, 2022 and the year ended March 31,
2022:
SCHEDULE OF ASSET RETIREMENT OBLIGATIONS
| |
September
30, 2022 | | |
March
31, 2022 | |
| |
| (unaudited)
| | |
| | |
Balance,
beginning of period | |
$ | 1,303,751 | | |
$ | 1,531,589 | |
Accretion
expense | |
| 35,562 | | |
| 155,612 | |
Reclamation
obligations settled | |
| - | | |
| - | |
Disposition
due to sale of property | |
| (671,162 | ) | |
| (383,450 | ) |
Additions | |
| - | | |
| - | |
Changes
in estimates | |
| - | | |
| - | |
Balance,
end of period | |
$ | 668,151 | | |
$ | 1,303,751 | |
Total
ARO at September 30, 2022 and March 31, 2022 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 September
30, 2022 and March 31, 2022, respectively. These values are discounted to present value at 10% per annum for the periods ended September
30, 2022 and March 31, 2022.
NOTE
8: NOTES PAYABLE - RELATED PARTIES
The
Company borrowed funds from Atikin Investments LLC (“Atikin”), an entity managed by our current Chief
Executive Officer, to pay for operating expenses. The Company formalized the arrangement on August 1, 2020 when it issued to Atikin a
Junior Secured Revolving Promissory Note for a principal amount up to $200,000.
Through
December 31, 2020, the Company borrowed a total $57,500 and repaid $35,000 leaving a balance of $22,500. This note had a maturity date
of December 15, 2020, which was extended to January 15, 2021. The remaining $22,500 and accrued interest of $1,524 was repaid on January
11, 2021.
NOTE
9: LONG-TERM DEBT
Long-term
debt consisted of the following as of September 30, 2022 and March 31, 2022. The long-term debt below was acquired in the July 25, 2022
acquisition of White River was $143,801 at the date of acquisition.
SCHEDULE
OF LONG-TERM DEBT
| |
September
30, 2022 | | |
March
31, 2022 | |
| |
| (unaudited) | | |
| | |
Truck
loan – Amur Capital (a) | |
$ | 80,634 | | |
$ | - | |
Truck
loan – Mitsubishi (b) | |
| 54,738 | | |
| - | |
Total
long-term debt | |
| 135,372 | | |
| - | |
Less:
current portion | |
| (42,668 | ) | |
| - | |
Long-term
debt, net of current portion | |
$ | 92,704 | | |
$ | - | |
(a) |
On
May 13, 2022, entered into long-term secured note payable for $87,964 for two service trucks maturing May 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 September 30, 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 September 30, 2022. |
The
following is a list of maturities as of September 30:
SCHEDULE
OF MATURITIES
Total | |
$ | 135,372 | |
2023 | |
$ | 42,668 | |
2024 | |
| 48,074 | |
2025 | |
| 29,047 | |
2026 | |
| 15,583 | |
Total | |
$ | 135,372 | |
Interest
expense on long-term debt during the six months ended September 30, 2022 and 2021 are $6,168 and $0, respectively.
NOTE
10: STOCKHOLDERS’ EQUITY (DEFICIT)
On
September 28, 2022, the Company’s Board of Directors approved the increasing of 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.
As
of September 30, 2022 and March 31, 2022, there were 8,400,000 shares of the Company’s common stock issued and outstanding, respectively.
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 White River from Ecoark, White River’s sole stockholder. In exchange the Company
issued Ecoark 1,200
shares of the newly designated 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, or other applicable
form, with the SEC and such Form S-1 or other registration statement has been declared effective, or such Form 10 or other
applicable form 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
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 Fortium’s 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 White River
acquisition.
Ecoark
has advised us that it plans to spin-off the common stock issuable upon conversion of the Series A this fall, subject to regulatory approvals
including 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. 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 Board authorized the Series B because the Company is not subject to Section 13 of the Securities
Exchange Act of 1934, so the protections and disclosure provided by Section 13(d) and the rules and regulations promulgated thereunder
do not apply to the Company, and the Series B is intended to enable the Board 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.
From
July 25, 2022 through August 1, 2022, the Company entered into agreements with directors, management and consultants pursuant to
which, among other things, the Company agreed to issue a total of 17,450,000
restricted shares of common stock at prices ranging from $0.71
to $0.75
per share (combined value of $12,604,500).
These issuances represent 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 is 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 September 30, 2022 as none of the
shares have vested. The Company has expensed $657,935
in stock-based compensation in the period ended September 30, 2022 related to these grants. This amount is reflected in additional
paid in capital. In
addition, as more particularly set forth in “Item 5. – Other Information”, the Company has agreed to pay its
non-employee directors’ compensation as follows: $100,000 in restricted stock which will vest on the final business day of
each quarter ($25,000) per quarter, and $50,000 per year ($12,500 per quarter).
On
September 14, 2021, the Company issued 1,400,000 shares of common stock in the exercise of warrants for $14,000.
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
on the date of the reverse merger November 18, 2019.
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 September 30, 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 September 30, 2022 | |
| 60,421 | | |
$ | 5.20 | | |
| 5.27 | |
Exercisable
at September 30, 2022 | |
| 60,421 | | |
$ | 5.20 | | |
| 5.27 | |
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. Both warrants have a call provision when the Company’s common stock trades for five consecutive days at a price equal
or greater than 500% of the exercise price of each warrant agreement. Both of these warrant agreements expired August 10, 2022.
On
July 21, 2021, the Company entered into a Consulting Agreement with Atikin for a period of one year, expiring July 20, 2022 and issued
Atikin, a company controlled by our current Chief Executive Officer, 1,400,000 warrants that have a term of five years and an exercise
price of $0.01, which were issued to Atikin effective upon the execution of a definitive written agreement with a cannabis company, which
occurred on September 14, 2021, the effective date of the Treehouse SPA. 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.
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 | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited
or expired | |
| (10,628 | ) | |
| (16.625 | ) | |
| (0.45 | ) | |
| - | |
Outstanding
at September 30, 2022 | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
Exercisable
at September 30, 2022 | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
The
following assumptions were used for the nine months ended September 30, 2022 and former year ended December 31, 2021:
SCHEDULE OF FAIR VALUE ASSUMPTION OF WARRANTS
| |
Six
Months Ended September
30,
2022 | | |
Year
Ended
March 31, 2022 | |
Expected
term | |
| - | | |
| - | |
Expected
volatility | |
| - | % | |
| - | % |
Expected
dividend yield | |
| - | | |
| - | |
Risk-free
interest rate | |
| - | % | |
| 0.10 | % |
NOTE
11: LEASES
The
Company has adopted ASU No. 2016-02, Leases (Topic 842), as of July 25, 2022 when they acquired White River, 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 only operating leases. As of September 30, 2022, the value of the unamortized lease right
of use asset is $172,141 (through maturity at June 30, 2024). As of September 30, 2022, the Company’s lease liability was $188,496.
SCHEDULE
OF MATURITY OF OPERATING LEASE LIABILITY
Maturity
of lease liability for the operating leases for the period ended September 30, | |
| |
2023 | |
$ | 158,430 | |
2024 | |
$ | 31,532 | |
Imputed
interest | |
$ | (1,466 | ) |
Total
lease liability | |
$ | 188,496 | |
Disclosed
as: | |
| |
Current
portion | |
$ | 157,260 | |
Non-current
portion | |
$ | 31,236 | |
SCHEDULE
OF AMORTIZATION OF RIGHT OF USE ASSET
Amortization
of the right of use asset for the period ended September 30, | |
| |
2023 | |
$ | 143,318 | |
2024 | |
$ | 28,823 | |
| |
| | |
Total | |
$ | 172,141 | |
Total
Lease Cost
Individual
components of the total lease cost incurred by the Company is as follows:
SCHEDULE
OF TOTAL LEASE COST
| |
Six
months ended September 30, 2022 | | |
Six
months ended September 30, 2021 | |
| |
| (unaudited) | | |
| (unaudited)
| |
Operating
lease expense | |
$ | 72,244 | | |
$ | 70,084 | |
NOTE
12: RELATED PARTY TRANSACTIONS
During
the period ended June 30, 2020, the Company borrowed from Atikin, an entity managed by our then and now again our Chief Executive Officer,
to pay for operating expenses. The Company formalized the arrangement on August 1, 2020 when it issued to Atikin a Junior Secured Revolving
Promissory Note for a principal amount up to $200,000. Through December 31, 2020, the Company had borrowed a total $57,500 and repaid
$35,000 leaving a balance of $22,500 as of December 31, 2020. This note had a maturity date of December 15, 2020, which was extended
through January 15, 2021, and has been repaid as of January 11, 2021. Interest expense for the period August 1, 2020 through December
31, 2020 was $1,479, and this was repaid as of January 11, 2021.
On
July 21, 2021, the Company entered into a Consulting Agreement with Atikin for a period of one year, expiring July 20, 2022. Pursuant
to the Consulting Agreement, as amended in September 2021, in exchange for Atikin’s provision of consulting services with respect
to mergers and acquisitions and general business and operational assistance, the Company granted Atikin 1,400,000 warrants that have
a term of five years and an exercise price of $0.01, which were issued to Atikin effective upon the execution of a definitive written
agreement with a cannabis company, which occurred on September 14, 2021, the effective date of the Treehouse SPA. The Company recognized
a charge to the Consolidated Statement of Operations of $905,771 for the fair value of these warrants. 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. The Company
also paid Atikin a $5,000 consulting fee monthly. The Consulting Agreement was terminated June 30, 2022.
On
September 1, 2022, the Company assigned 10% working interests in a well to two related parties that are controlled by officers and directors
of the Company (Sky3D and Atikin) pursuant to the vesting of various performance conditions in the employment contracts of Mr. May and Mr. Puchir.
The
May Family Foundation controls 18.89%
of the outstanding common stock of the Company as of September 30, 2022. Additionally, Atikin, an entity which is controlled by Jay
Puchir, our Chief Executive Officer, controls 8.2%
of the outstanding common stock and Richard Horgan, the former Chief Executive Officer and a former director of the Company, is a
director of the Foundation. Mr. Horgan resigned following the White River transaction. Randy May, our new Executive Chairman, is the
father-in-law of Mr. Horgan. In addition, Mr. May’s daughter and Mr. Horgan’s wife, Alisa Horgan, became a director and
officer of the Company following the White River acquisition. 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.
NOTE
13: 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 six months ended September 30, 2022, the months ended March 31, 2022 and the year ended
December 31, 2021. 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.
NOTE
14: COMMITMENTS
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, White River will own 90%
of the working interest and
67.5% of the net revenue interest in each well. Following payout, White River 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, White River 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.
NOTE
15: CONCENTRATIONS
Customer
Concentration. Three and three customers accounted for more than 10% of the accounts receivable balance at September 30, 2022 and
March 31, 2022 for a total of 74% and 87% of accounts receivable, respectively. In addition, two and three customers represent approximately
48% and 96% of total revenues for the Company for the six months ended September 30, 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
16: 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 accrued interest of $2,000
on the Promissory Note as of September 30, 2022.
NOTE
17: DISCONTINUED OPERATIONS
In
September 2022, the Company sold both Norr and Elysian pursuant to a Membership Interest Purchase Agreement (“MIPA”) for
Norr on September 20, 2022, and a Stock Purchase Agreement for Elysian on September 21, 2022. These entities were sold to unrelated 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 White River.
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 reverse merger with White River, the current assets of $68,360 at
March 31, 2022 for the precombination reporting entity is not reflected on the condensed consolidated balance sheet.
The
Company reclassified the following operations to discontinued operations for the six months ended September 30, 2022 and 2021, respectively.
SCHEDULE
OF DISCONTINUED OPERATIONS
| |
2022 | | |
2021 | |
Revenue | |
$ | 319 | | |
$ | - | |
Operating
expenses | |
| 137,877 | | |
| - | |
Other
(income) loss | |
| - | | |
| - | |
Net
loss from discontinued operations | |
$ | (137,558 | ) | |
$ | - | |
The
Company reclassified the following operations to discontinued operations for the three months ended September 30, 2022 and 2021, respectively.
| |
2022 | | |
2021 | |
Revenue | |
$ | 212 | | |
$ | - | |
Operating
expenses | |
| 5,556 | | |
| - | |
Other
(income) loss | |
| - | | |
| | |
Net
loss from discontinued operations | |
$ | (5,344 | ) | |
$ | - | |
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
18: SUBSEQUENT EVENTS
The
following events occurred from October 1, 2022 up through the date of filing:
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. May and Mr. Puchir.
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.
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 the two workover 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 executed and delivered
personal guarantees in favor of the lender to secure this note.
On
October 14, 2022, the Company entered into a financial planning consulting agreement in the total amount of $500,000. The payment is
due upon completion of the services in the agreement, which have not yet been satisfied.
On
October 24, 2022, the Company entered into a $25,000
letter of credit with Generations Bank as a condition to begin preparations for future drilling operations on its Pisgah field lease.
Beginning
October 19, 2022 up through November 8, 2022, the Company entered into a Securities Purchase Agreement (“SPA”) with
accredited investors (the “Purchasers”) whereby the Purchasers agreed to purchase a total of 182.6419972 Units from the
Company, with each Unit consisting of one share of a newly-designated Series C Convertible Preferred Stock (the “Series
C”) and five-year
Warrants to purchase up to 200% of the shares of Common Stock issuable upon conversion of the Series C (the “Warrants”),
at a purchase price of $25,000
per Unit for a total purchase price of $4,566,050,
of which the Company has received $4,531,050 as of November 8, 2022 (the “Offering”).The net proceeds from the Offering, after Offering expenses and related costs, will be used for working capital and
general corporate purposes including oil and gas drilling on the Company’s working interests in Louisiana and Mississippi.
The
terms of the securities sold in the Offering are outlined below.
Each
share of Series C has a stated value of $25,000 (the “Stated Value”), and will automatically convert into shares of the Company’s
Common Stock upon the earlier to occur of (i) the effectiveness of a registration statement on Form S-1 registering the sale by the holder
of the shares of Common Stock issuable upon conversion of the Series C (a “Registration Statement”) and (ii) December 31,
2023, with the number of shares of Common Stock to be determined by dividing the Stated Value by the lower of (A) $1.00 and (B) 80% of
the 30-day volume-weighted average price for the period commencing on the 10th trading day immediately preceding such date, subject to
adjustment.
The
Warrants are exercisable into 200% of the shares of Common Stock underlying the Series C contained in the Units purchased by the holder,
at an initial exercise price of $1.00 per share (subject to adjustment as provided in the Warrant), beginning at the earlier to occur
of (i) the effectiveness of a Registration Statement registering the sale by the holder of the shares of Common Stock underlying the
Warrant, and (ii) December 31, 2023, and ending on the five-year anniversary of the SPA, or October 19, 2027.
The
offer and sale of the Units and the Series C and Warrants contained therein pursuant to the SPA was not registered under the Securities
Act of 1933 and was exempt from registration pursuant to Section 4(a)(2) thereof and Rule 506(b) promulgated thereunder.
Pursuant
to a Registration Rights Agreement with the Purchasers, the Company has agreed to register the sale by the Purchasers of the shares of
Common Stock issuable upon conversion of the Series C and exercise of the Warrants by filing a Registration Statement on Form S-1 within
30 days after the final closing of the Offering.
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.