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Risk
Factors
Investing
in our securities involves risks. Before you make a decision to buy our securities, in addition to the risks and uncertainties discussed
above under “Cautionary Statement Regarding Forward-Looking Statements,” you should carefully consider the specific risks
set forth herein. If any of these risks actually occur, it may materially harm our business, financial condition, liquidity and results
of operations. As a result, the market price of our securities could decline, and you could lose all or part of your investment. Additionally,
the risks and uncertainties described in this prospectus or any prospectus supplement are not the only risks and uncertainties that we
face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may become material
and adversely affect our business.
Risks
Related to Our Company
We
have historically incurred significant losses, and may be unable to generate profitability. If we continue to incur significant
losses, we may have to curtail our operations, which may prevent us from successfully operating and expanding our business.
Historically,
we have relied upon cash from financing activities to fund substantially all of the cash requirements of our activities and have incurred
significant losses and experienced negative cash flow. For the three months ended March 31, 2023 and 2022, we incurred a net loss of
$971,366 and $3,089,095, respectively, and for the fiscal year ended December 31, 2022, we incurred a net loss of $13,418,814. We had
stockholders’ deficit of $7,402,353 and $6,525,059 as of March 31, 2023 and December 31, 2022, respectively. We cannot predict
if we will be profitable. We may continue to incur losses for an indeterminate period of time and may be unable to sustain profitability.
An extended period of losses and negative cash flow may prevent us from successfully operating and expanding our business. We may be
unable to sustain or increase our profitability on a quarterly or annual basis.
We
may not achieve the perceived benefits of the Merger and the market price of our Common Stock following the Merger may decline.
The
market price of our Common Stock may decline as a result of the Merger for a number of reasons, including if: investors react negatively
to the prospects of the Company’s business; the effect of the Merger on the Company’s business and prospects is not consistent
with the expectations of our management or of financial or industry analysts; or the Company does not achieve the perceived benefits
of the Merger as rapidly or to the extent anticipated by our management or financial or industry analysts.
Our
stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with
the Merger.
If
the Company is unable to realize the strategic and financial benefits currently anticipated from the Merger, our pre-closing stockholders
will have experienced substantial dilution of their ownership interests without receiving the expected commensurate benefit, or only
receiving part of the commensurate benefit to the extent the Company is able to realize only part of the expected strategic and financial
benefits currently anticipated from the Merger.
We
may require significant additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be
forced to limit the scope of our operations.
We
may not have sufficient capital to fund our future operations without significant additional capital investments, including the planned
drilling of oil and gas wells. If adequate additional financing is not available on reasonable terms or at all, we may not be able to
carry out our corporate strategy and we would be forced to modify our business plans (e.g., limit our growth, and/or decrease or eliminate
capital expenditures), any of which may adversely affect our financial condition, results of operations and cash flow. Such reduction
could materially adversely affect our business and our ability to compete.
We
may need to undertake equity, equity-linked or debt financings to secure additional funds. If we raise additional funds through future
issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities
we issue could have rights, preferences and privileges superior to those of holders of our Common Stock. Any debt financing that we secure
in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters,
including the ability to pay dividends. This may make it more difficult for us to obtain additional capital and to pursue business opportunities.
Additionally, the restrictive covenants in the AR Debentures may adversely affect our ability to finance future operations or capital
needs or to engage in other business activities. Such agreements limit our ability, among other things, to incur certain additional indebtedness,
grant security interests or liens on the Company’s assets (other than certain permitted liens) and enter into any transaction involving
the repurchase of shares of Common Stock, except as permitted under the AR Debentures.
We
may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or
financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and respond to business
challenges could be significantly impaired, and our business may be adversely affected. Our capital needs will depend on numerous factors,
including, without limitation, our profitability, and the amount of our capital expenditures, including acquisitions. Moreover, the costs
involved may exceed those originally contemplated. Failure to obtain intended economic benefits could adversely affect our business,
financial condition and operating performances.
The
cost of obtaining new cryptocurrency mining equipment is capital intensive, and may increase.
The
cost of obtaining new cryptocurrency mining equipment is capital intensive, and may increase in the future. If we are unable to obtain
adequate numbers of new and replacement miners at scale, we may not be able to mine cryptocurrency as efficiently or in similar amounts
as our competition and, as a result, our business and financial results could suffer. The price of new miners may be linked to the market
price of Bitcoin and other cryptocurrencies, and, our costs of obtaining new and replacement miners may increase, which may have a material
and adverse effect on our financial condition and results of operations.
Our
reliance on a third-party mining pool service provider for our mining revenue payouts may have a negative impact on our operations.
We
receive cryptocurrency mining rewards from our mining activity through a third-party mining pool operator. Mining pools allow miners
to combine their processing power, increasing their chances of solving a block and getting paid by the network. The rewards are distributed
by the pool operator, proportionally to our contribution to the pool’s overall mining power, used to generate each block. Should
the pool operator’s system suffer downtime due to a cyber-attack, software malfunction or other similar issues, it will negatively
impact our ability to mine and receive revenue. Furthermore, we are dependent on the accuracy of the mining pool operator’s record
keeping to accurately record the total processing power provided to the pool for a given Bitcoin mining application in order to assess
the proportion of that total processing power we provided. If we are unable to consistently obtain accurate proportionate rewards from
our mining pool operators, we may experience reduced reward for our efforts, which would have an adverse effect on our business and operations.
Bitcoin
is subject to halving; and will halve several times in the future and Bitcoin value may not adjust to compensate us for the reduction
in the rewards we receive from our mining efforts.
The
primary currency for which we mine, Bitcoin, is subject to “halving.” Halving is a process incorporated into many proof-of-work
consensus algorithms that reduces the coin reward paid to miners over time according to a pre-determined schedule. This reduction in
reward spreads out the release of crypto assets over a long period of time resulting in an ever smaller number of coins being mined,
reducing the risk of coin-based inflation. At a predetermined block, the mining reward is cut in half, hence the term “halving.”
For Bitcoin, the reward was initially set at 50 Bitcoin currency rewards per block and this was cut in half to 25 on November 28, 2012,
at block 210,000, then again to 12.5 on July 9, 2016, at block 420,000. The most recent halving for Bitcoin happened on May 11, 2020,
at block 630,000 and the reward reduced to 6.25. The next halving will likely occur in 2024. This process will reoccur until the total
amount of Bitcoin currency rewards issued reaches 21 million, which is expected around 2140. While Bitcoin prices have had a history
of price fluctuations around the halving of their respective cryptocurrency rewards, there is no guarantee that the price change will
be favorable or would compensate for the reduction in mining reward. We plan to keep our operating costs low by, among other means, acquiring
our own energy-producing assets and more efficient mining machines, but there can be no assurance that the price of Bitcoin will sufficiently
increase upon the next halving to justify the increasingly high costs of mining for Bitcoin. If a corresponding and proportionate increase
in the trading price of these cryptocurrencies does not follow these anticipated halving events, the revenue we earn from our mining
operations would see a corresponding decrease, which would have a material adverse effect on our business and operations.
We
need to manage growth in operations to maximize our potential growth and achieve our expected revenues. Our failure to manage growth
can cause a disruption of our operations that may result in the failure to generate revenues at levels we expect.
In
order to maximize potential growth, we may have to expand our operations. Such expansion will place a significant strain on our management
and our operations. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues
we expect.
Our
mining operating costs could outpace our mining revenues, which could materially impact our business.
Our
mining operations expenses may increase in the future, and may not be offset by a corresponding increase in revenue. Our expenses may
be greater than we anticipate, and our investments to make our business more efficient may not succeed and may outpace monetization efforts.
Increases in our costs without a corresponding increase in our revenue would increase our losses and could have a material adverse effect
on our business, results of operations and financial condition.
Insiders
have substantial control over the Company, and they could delay or prevent a change in our corporate control even if our other stockholders
want it to occur.
As
of the date of this filing, our executive officers and directors, collectively beneficially own approximately 65.52% of our outstanding
shares of Common Stock. These stockholders are able to exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party
from acquiring or merging with our Company even if our other stockholders want it to occur. This may also limit your ability to influence
the Company in other ways.
We
rely on a small number of cryptocurrency mining equipment suppliers, and the loss of any supplier might significantly reduce our revenue
and adversely affect our results of operations.
We
rely on a small number of cryptocurrency mining equipment suppliers, which is essential to our cryptocurrency mining revenue. The loss
of any or all of these suppliers would significantly reduce our revenue, which would have a material adverse effect on our results of
operations. We can provide no assurance that these suppliers will continue to supply us cryptocurrency mining equipment in the future.
We
are exposed to credit risk on our prepayments to cryptocurrency mining equipment suppliers. This risk is heightened during periods when
economic conditions worsen.
We
have made prepayments to suppliers of cryptocurrency mining equipment, and there can be no assurance that we will effectively limit our
credit risk and avoid losses, which could have a material adverse effect on our business, results of operations and financial condition.
We
may not be able to secure adequate insurance, or any insurance at all, on our cryptocurrency mining equipment that are subject to physical
and environmental damage.
Our
miners and mobile data centers are located in areas where we may not be able to secure adequate insurance, or any insurance at all. Our
miners and mobile data centers are subject to physical and environmental damage and any damage, including a complete loss, if it occurs
without being adequately insured, or insured at all, could have a material adverse effect on our business, results of operations and
financial condition.
Additionally,
although we seek to control our insurance risk and costs, the premiums we pay to obtain insurance coverage have increased over time and
are likely to continue to increase in the future. These increases in insurance premiums can occur unexpectedly and without regard to
our efforts to limit them, and, because of these rising costs, we may not be able to obtain similar levels of insurance coverage on reasonable
terms, or at all. If this occurs, we may choose or be forced to self-insure our assets, which could expose us to significant financial
risk due to the high cost of new miners. If insurance costs become unacceptably high and we elect to self-insure, and we experience a
significant casualty event resulting in the loss of some or all of our miners, we could be forced to expend significant capital resources
to acquire new miners to replace those we lose.
Furthermore,
if such casualty loss of our miners is not adequately covered by insurance and we do not have access to sufficient capital resources
to acquire replacement miners, we may not be able to compete in our rapidly evolving and highly competitive industry, which could materially
and adversely affect our financial condition and results of operations, and our business could suffer.
We
may lose our private key to our digital wallet, causing a loss of all of our digital assets.
Digital
assets, such as cryptocurrencies, are stored in a so-called “digital wallet”, which may be accessed to exchange a holder’s
digital assets, and is controllable by the processor of both the public key and the private key relating to this digital wallet in which
the digital assets are held, both of which are unique. We will publish the public key relating to digital wallets in use when we verify
the receipt of transfers and disseminate such information into the network, but we will need to safeguard the private keys relating to
such digital wallets, which are stored in the possession of certain of our officers. If the private key is lost, destroyed, or otherwise
compromised, we may be unable to access our cryptocurrencies held in the related digital wallet which will essentially be lost. If the
private key is acquired by a third party, then this third party may be able to gain access to our cryptocurrencies. Any loss of private
keys relating to digital wallets used to store our cryptocurrencies could have a material adverse effect on our ability to continue as
a going concern or could have a material adverse effect on our business, prospects, financial condition, and operating results.
The
storage and custody of our Bitcoin assets and any other cryptocurrencies that we may potentially acquire or hold in the future are subject
to cybersecurity breaches and adverse software events.
In
addition to the risk of a private key loss to our digital wallet, see “—We may lose our private key to our digital wallet,
causing a loss of all of our digital assets,” the storage and custody of our digital assets could also be subject to cybersecurity
breaches and adverse software events. In order to minimize risk, we plan to establish processes to manage wallets, or software programs
where assets are held, that are associated with our cryptocurrency holdings.
A
“hot wallet” refers to any cryptocurrency wallet that is connected to the Internet. Generally, hot wallets are easier to
set up and access than wallets in “cold” storage, but they are also more susceptible to hackers and other technical vulnerabilities.
“Cold
storage” refers to any cryptocurrency wallet that is not connected to the Internet. Cold storage is generally more secure than
hot storage, but is not ideal for quick or regular transactions and we may experience lag time in our ability to respond to market fluctuations
in the price of our digital assets.
We
plan to hold the majority of our cryptocurrencies in cold storage to reduce the risk of malfeasance; however we may also use third-party
custodial wallets and, from time to time, we may use hot wallets or rely on other options that may develop in the future. If we use a
custodial wallet, there can be no assurance that such services will be more secure than cold storage or other alternatives. Human error
and the constantly evolving state of cybercrime and hacking techniques may render present security protocols and procedures ineffective
in ways which we cannot predict.
Regardless
of the storage method, the risk of damage to or loss of our digital assets cannot be wholly eliminated. If our security procedures and
protocols are ineffective and our cryptocurrency assets are compromised by cybercriminals, we may not have adequate recourse to recover
our losses stemming from such compromise. A security breach could also harm our reputation. A resulting perception that our measures
do not adequately protect our digital assets could have a material adverse effect on our business, prospects, financial condition, and
operating results.
We
are subject to risks associated with our need for significant power for our miners. Government regulators may potentially restrict the
ability of electricity suppliers to provide electricity to mining operations.
Our
Bitcoin mining operations have required significant amounts of power, and, as we continue to expand, we anticipate our demand for power
will continue to grow. If we are unable to continue to obtain sufficient power to operate our miners on a cost-effective basis, we may
not realize the anticipated benefits of our significant capital investments in new miners. There may be significant competition for suitable
mine locations, and government regulators may potentially restrict the ability of electricity suppliers to provide electricity to mining
operations in times of electricity shortage, or may otherwise potentially restrict or prohibit the provision or electricity to mining
operations. Additionally, our mining operations could be materially adversely affected by prolonged power outages. Our cryptocurrency
mining operations require that our miners and mining equipment function without interruption. If we experience and any unplanned or prolonged
outages that re not remediated in a timely manner, or at all, could disrupt our operations. Given the power requirement, it would not
be feasible to run miners on back-up power generators in the event of a government restriction on electricity or a power outage. If we
are unable to receive adequate power supply and are forced to reduce our operations due to the availability or cost of electrical power,
it could have a material adverse effect on our business, results of operations and financial condition.
Interruptions
to our internet access could disrupt our operations, which could adversely affect our business and results of operations.
Our
cryptocurrency mining operations require access to high-speed internet to be successful. If we lose internet access for a prolonged period,
we may be required to reduce our operations or cease them altogether. If this occurs, it could have a material adverse effect on our
business, results of operations and financial condition.
Our
reliance primarily on a single model of miner may subject our operations to increased risk.
We
currently only use Bitmain Antminer type miners, if there are issues with those machines, such as a design flaw in the application-specific
integrated circuit chips they employ, our entire system could be affected. Any system error or failure may significantly delay response
times or even cause our system to fail. Any disruption in our ability to continue mining could result in lower yields and harm our reputation
and business. Any exploitable weakness, flaw, or error common to Bitmain miners affects all our miners; therefore, if a defect or other
flaw exists and is exploited, our entire mine could go offline simultaneously. Any interruption, delay or system failure could have a
material adverse effect on our business, results of operations and financial condition.
We
may not be able to find suitable locations, or any locations at all, for our mobile data centers.
Our
mobile data centers are located close to natural gas wellheads, and we may be forced to leave our current location, not be able to find
suitable locations, or any locations at all, for our current and/or future mobile data centers. If this occurs it could have a material
adverse effect on our business, results of operations and financial condition.
We
depend on the services of a small number of key personnel, and may not be able to operate and grow our business effectively if we lose
their services or are unable to attract qualified personnel in the future.
Our
success depends in part upon the continued service of a small number of key personnel. They are critical to the overall management of
our company, and our strategic direction. We rely heavily on them because they have substantial experience with our company and business
strategies. Our ability to retain them is therefore very important to our future success. We have employment agreements with our key
personnel, but these employment agreements do not ensure that they will not voluntarily terminate their employment with us. The loss
of any key personnel would require the remaining key personnel to divert immediate attention to seeking a replacement. Competition for
senior management personnel is intense, and our inability to find a suitable replacement for any departing key personnel in a timely
basis could adversely affect our ability to operate and grow our business.
Our
future success depends upon, in large part, our continuing ability to attract and retain qualified personnel.
Expansion
of our business and operations may require additional managers and employees with industry experience, in which case our success will
be dependent on our ability to attract and retain experienced management personnel and other employees. There can be no assurance that
we will be able to attract or retain qualified personnel. Competition may also make it more difficult and expensive to attract, hire
and retain qualified managers and employees. If we fail to attract, train and retain sufficient numbers of the qualified personnel, our
prospects, business, financial condition and results of operations will be materially and adversely affected.
We
rely on key contracts and business relationships, and if our current or future business partners or contracting counterparties fail to
perform or terminate any of their contractual arrangements with us for any reason or cease operations, or should we fail to adequately
identify key business relationships, our business could be disrupted and our reputation may be harmed.
If
any of our business partners or contracting counterparties fails to perform or terminates their agreement(s) with us for any reason,
or if our business partners or contracting counterparties with which we have short-term agreements refuse to extend or renew the agreement
or enter into a similar agreement, our ability to carry on operations may be impaired. In addition, we depend on the continued operation
of our long-term business partners and contracting counterparties and on maintaining good relations with them. If one of our long-term
partners or counterparties is unable (including as a result of bankruptcy or a liquidation proceeding) or unwilling to continue operating
in the line of business that is the subject of our contract, we may not be able to obtain similar relationships and agreements on terms
acceptable to us or at all. If a partner or counterparty fails to perform or terminates any of the agreements with us or discontinues
operations, and we are unable to obtain similar relationships or agreements, such events could have an adverse effect on our operating
results and financial condition.
Breaches
of our data systems or unintended disclosure of data could result in large expenditures to repair or replace such systems, to remedy
any security breaches and to protect us from similar events in the future.
Our
infrastructure may be vulnerable to physical or electronic break-ins, computer viruses, or similar disruptive problems. In addition to
shutdowns, our systems are subject to risks caused by misappropriation, misuse, leakage, falsification and accidental release or loss
of information. Disruptions or security compromises of our systems could result in large expenditures to repair or replace such systems,
to remedy any security breaches and protect us from similar events in the future. We also could be exposed to negligence claims or other
legal proceedings, and we could incur significant legal expenses and our management’s attention may be diverted from our operations
in defending ourselves against and resolving lawsuits or claims. In addition, if we were to suffer damage to our reputation as a result
of any system failure or security compromise, it could have a material adverse effect on our business, results of operations and financial
condition.
We
are exposed to risks associated with PCI compliance.
The
PCI Data Security Standard (“PCI DSS”) is a specific set of comprehensive security standards required by credit card brands
for enhancing payment account data security, including but not limited to requirements for security management, policies, procedures,
network architecture, and software design. PCI DSS compliance is required in order to maintain credit card processing services. Compliance
does not guarantee a completely secure environment and notwithstanding the results of this assessment there can be no assurance that
payment card brands will not request further compliance assessments or set forth additional requirements to maintain access to credit
card processing services. Compliance is an ongoing effort and the requirements evolve as new threats are identified. In the event that
we were to lose PCI DSS compliance status (or fail to renew compliance under a future version of the PCI DSS), we could be exposed to
increased operating costs, fines and penalties and, in extreme circumstances, may have our credit card processing privileges revoked,
which would have a material adverse effect on our business.
The
ability to generate enough cash flows to meet, our current or future debt obligations could adversely affect our business. Those risks
could increase if we incur more debt.
As
of May 3, 2023, the Company has an outstanding balance of $149,900 under the loan agreement with the Small Business Administration entered
into on May 31, 2020. In connection with the Closing, the Company entered into the AR Debentures in the aggregate principal amount of
$2,000,000. Our ability to pay interest and principal on our indebtedness and to satisfy our other obligations will depend on our future
operating performance, our financial condition and the availability of refinancing indebtedness, which will be affected by prevailing
economic conditions and financial, business and other factors, many of which are beyond our control. We may not be able to generate sufficient
cash flows to pay the interest on our debt and future working capital, and borrowings or equity financing may not be available to pay
or refinance such debt. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing
of our debt include financial market conditions, the value of our assets and our performance at the time we need capital.
In
the future, we may incur significant indebtedness in order to make future acquisitions or to develop our properties. If we were to take
on additional future debt, a substantial decrease in our operating cash flow or an increase in our expenses could make it difficult for
us to meet debt service requirements and could require us to modify our operations, including by selling assets, reducing or delaying
capital investments, seeking to raise additional capital or refinancing or restructuring our debt. We may or may not be able to complete
any such steps on satisfactory terms. Any ability to generate sufficient cash flows to satisfy our debt obligations or contractual commitments,
or to refinance our debt on commercially reasonable terms, could materially and adversely affect our financial condition and results
of operations.
Government
regulations related to the Internet could increase our cost of doing business, affect our ability to grow or may otherwise negatively
affect our business.
Governmental
agencies and federal and state legislatures have adopted, and may continue to adopt, new laws and regulatory practices in response to
the increasing use of the Internet and other online services. These new laws may be related to issues such as online privacy and data
protection requirements, copyrights, trademarks and service mark, sales taxes, fair business practices, domain name ownership, and the
requirement that our operating units register to do business as foreign entities or otherwise be licensed to do business in jurisdictions
where they have no physical location or other presence. In addition, these new laws, regulations or interpretations relating to doing
business through the Internet could increase our costs materially and adversely affect our revenue and results of operations.
Regulatory
changes or actions may restrict the use of cryptocurrencies in a manner that adversely affects an investment in us.
As
cryptocurrencies have grown in popularity and in market size, the Federal Reserve Board, U.S. Congress and certain U.S. agencies (e.g.,
the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Network and the Federal Bureau of Investigation)
have begun to examine cryptocurrencies. On March 9, 2022, President Biden signed an executive order on cryptocurrencies. While the executive
order did not mandate any specific regulations, it instructs various federal agencies to consider potential regulatory measures, including
the evaluation of the creation of a U.S. Central Bank digital currency. Future changes to existing regulations or entirely new regulations
may affect our business in ways it is not presently possible for us to predict with any reasonable degree of reliability.
Digital
assets currently face an uncertain regulatory landscape in not only the United States but also in such foreign jurisdictions as the European
Union and China. While certain governments such as Germany, have issued guidance as to how to treat cryptocurrencies, most regulatory
bodies have not issued specific policy determinations.
Future
changes to existing regulations or entirely new regulations may affect our business in ways it is not presently possible for us to predict
with any reasonable degree of reliability, but such change could be substantial and adverse to us and could adversely affect an investment
in us. For example, several tax proposals have been set forth that would, if enacted, make significant changes to U.S. tax laws applicable
to cryptocurrencies. Such proposals include the Biden Administration’s budget proposal, released on March 9, 2023, which includes
(i) the imposition of an excise tax of up to 30 percent of the costs of electricity used in digital asset mining, and (ii) the imposition
of information reporting requirements with respect to digital assets and digital asset brokers. Further, the Infrastructure Investment
and Jobs Act (the “IIJA”), enacted November 15, 2021, contains, among other things, an expanded definition of the term “broker”
for certain tax and information reporting obligations that could require cryptocurrency miners, including us, to provide to the IRS information
relating to cryptocurrency transactions that cryptocurrency miners, including us, generally do not, and may not be able to, obtain, potentially
rendering compliance impossible. Generally, the cryptocurrency provisions contained in the IIJA began applying to digital transactions
beginning in 2023. The IRS has suspended the application of those provisions of the IIJA until the Treasury Department issues final regulations,
which may provide further guidance on whether we are a “broker” under the IIJA. The U.S. Congress may consider, and could
include, one or both of these proposals in connection with tax reform that may be undertaken. It is unclear whether these or similar
changes will be enacted and, if enacted, how soon any such changes could take effect. The passage of any legislation as a result of these
proposals and other similar changes in U.S. federal income tax laws could adversely affect our business and future profitability.
Unfavorable
general economic conditions in the United States, Europe, Asia, or in other major markets could negatively impact our financial performance.
Unfavorable
general economic conditions, such as a recession or economic slowdown in the United States, Europe, Asia, or in one or more of our other
major markets, could negatively affect demand for our services and our results of operations. Under difficult economic conditions, businesses
may seek to reduce spending on our services, or shift away from our services to in-house alternatives.
We
encounter competition in our business, and any failure to compete effectively could adversely affect our results of operations.
We
anticipate that our competitors will continue to expand and aggressive expansion of our competitors or the entrance of new competitors
into our markets could have a material adverse effect on our business, results of operations and financial condition.
Acquisitions,
joint ventures or similar strategic relationships may disrupt or otherwise have a material adverse effect on our business and financial
results.
As
part of our strategy, we may explore strategic acquisitions and combinations, or enter into joint ventures or similar strategic relationships.
These transactions are subject to the following risks:
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Acquisitions,
joint ventures or similar relationships may cause a disruption in our ongoing business, distract our management and make it difficult
to maintain our standards, controls and procedures; |
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may not be able to integrate successfully the services, products, and personnel of any such transaction into our operations; |
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may not derive the revenue improvements, cost savings and other intended benefits of any such transaction; and |
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There
may be risks, exposures and liabilities of acquired entities or other third parties with whom we undertake a transaction, that may
arise from such third parties’ activities prior to undertaking a transaction with us. |
Acquisitions
may result in significant impairment charges and may operate at losses. We can provide no assurance that future acquisitions, joint ventures
or strategic relationships will be accretive to our business overall or will result in profitable operations.
Our
business and financial condition will be materially adversely affected if we are required to register as an investment company under
the Investment Company Act.
We
are not, and do not intend to become, an “investment company” as defined in the U.S. Investment Company Act of 1940, as amended
(the “Investment Company Act”). Although the SEC and courts are providing increasing guidance on the treatment of cryptocurrencies
for purposes of federal securities law, this continues to be an evolving area of law. Therefore, it is possible that the SEC or a court
could take a position that may be adverse to the position we have taken on these matters. If we are required to register as an investment
company but fails to do so, the consequences may be severe. Among the various remedies it may pursue, the SEC may seek an order of a
court to enjoin us from continuing to operate as an unregistered investment company. In addition, all contracts that we have entered
into in the course of our business, including securities that we have offered and sold to investors, will be rendered unenforceable except
to the extent of any equitable remedies that might apply. An affected investor in such case may pursue the remedy of rescission. If we
were to register as an investment company, we may be forced to significantly change our structure and operations in order to comply with
the substantive requirements of the Investment Company Act. In particular, we may be forced to change our capital structure in order
to satisfy the limits on leverage and classes of securities imposed by the Investment Company Act, modify the composition of our Board
in order to maintain the required number of independent directors and the requirements of “independence” set forth in rules
under the Investment Company Act, restrict transactions that we may engage in with affiliated persons, fair value our assets in the manner
required by the Investment Company Act, etc. Compliance with the requirements of the Investment Company Act applicable to registered
investment companies may make it difficult for us to continue our operations as a company that is engaged in the business of developing
blockchain infrastructure and in activities related to cryptocurrency mining.
The
unaudited pro forma condensed combined financial information included in this document may not be indicative of what our actual financial
position or results of operations would have been.
The
unaudited pro forma condensed combined financial information for the Company in this registration statement on Form S-1 is presented
for illustrative purposes only and is not necessarily indicative of what our actual financial position or results of operations would
have been had the Merger been completed on the dates indicated. See the section entitled “Unaudited Pro Forma Condensed Combined
Financial Information” for more information.
The
COVID-19 pandemic could negatively impact our future operations and results.
We
are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our
business is highly uncertain and difficult to predict, as the responses that we, other businesses and governments are taking continue
to evolve. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is
possible that it could cause a local and/or global economic recession. Policymakers around the globe have responded with fiscal policy
actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remain uncertain.
The
severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the
duration and severity of the pandemic and the extent and severity of the impact on our service providers and suppliers, all of which
are uncertain and cannot be predicted. As of the date of issuance of our financial statements, the extent to which the COVID-19 pandemic
may in the future materially impact our financial condition, liquidity or results of operations is uncertain.
Our
Charter provides for indemnification of officers and directors at our expense and limits their liability, which may result in a major
cost to us and hurt the interests of our stockholders because corporate resources may be expended for the benefit of officers and/or
directors.
Our
Charter and applicable Delaware law provide for the indemnification of our directors and officers against attorney’s fees and other
expenses incurred by them in any action to which they become a party arising from their association with or activities on our behalf.
This indemnification policy could result in substantial expenditures by us that we will be unable to recoup.
We
have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities
arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection
with the securities being registered, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent)
submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter, if it were to
occur, is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially
reduce the market and price for our shares if such a market ever develops.
Increased
political scrutiny regarding the energy use and climate change impacts of crypto asset mining operations could result in new laws, regulations
and policies that impose restrictions or compliance costs on our Bitcoin mining operations.
Crypto
asset mining has become heavily scrutinized from a climate change and energy consumption perspective in recent years. Politicians, environmental
groups and climate activists alike have called for increased oversight, regulation and reporting of energy use and greenhouse gas (“GHG”)
emissions of crypto asset mining companies, among other measures. Certain members of the U.S. Congress and other non-governmental organizations
have made investigations into, and published claims and reports regarding, the crypto asset mining industry’s impact on global
GHG emissions and energy consumption and have raised concerns over the diversion of power sources for crypto mining and possible impacts
on consumer electricity prices. For example, in early 2022, a group of U.S. Senators solicited information from various crypto asset
mining companies on their respective energy use and emissions. Then, in July 2022, that same group of Senators authored a letter to the
Environmental Protection Agency (“EPA”) and Department of Energy urging the agencies to investigate energy and climate impacts
of mining companies and to consider regulations requiring the monitoring and reporting of emissions and energy consumption by certain
crypto asset operations. Moreover, the Crypto Asset Environmental Transparency Act was introduced to the U.S. Senate on March 6, 2023,
and, if passed, would impose emissions reporting obligations on mining operations that consume electricity above a specified threshold
and would direct the EPA to investigate the environmental and climate impacts of the crypto asset mining industry. Separately, in September
2022, the Biden Administration released its report on Climate and Energy Implications of Crypto-Assets in the United States, which recommends
that the federal government take action to develop environmental performance standards for crypto asset technologies, assess the impact
of crypto asset mining on electricity system reliability, and minimize emissions and other environmental impacts associated with crypto
asset mining, among other recommendations. Certain state governments have also introduced legislation imposing restrictions on the crypto
asset mining industry, citing similar concerns. We are unable to predict whether currently proposed legislation or regulatory initiatives
will be implemented, but any action by the federal government or the states in which we operate to restrict, limit, condition or otherwise
regulate our crypto asset mining operations, whether as part of a climate change or energy transition policy initiative or otherwise,
could adversely affect our business, financial condition and results of operations. Similarly, public statements by government officials
and non-governmental organizations regarding the impact of crypto asset mining on global energy consumption, GHG emissions and grid stability,
whether valid or not, could harm our reputation and stakeholder goodwill.
Risks
Relating to Ownership of our Common Stock
Our
ability to uplist our Common Stock to NYSE American is subject to us meeting applicable listing criteria.
We
intend to apply for our Common Stock to be listed on the NYSE American. NYSE American requires companies desiring to list their common
stock to meet certain listing criteria including total number of stockholders; minimum stock price, total value of public float, and
in some cases total shareholders’ equity and market capitalization. Our failure to meet such applicable listing criteria could
prevent us from listing our Common Stock on NYSE American. In the event we are unable to uplist our Common Stock, our Common Stock will
continue to trade on the OTCQB, which is generally considered less liquid and more volatile than the NYSE American. Our failure to uplist
our Common Stock could make it more difficult for you to trade our Common Stock, could prevent our Common Stock trading on a frequent
and liquid basis and could result in the value of our Common Stock being less than it would be if we were able to uplist.
In
order to raise sufficient funds to expand our operations, we may have to issue additional securities at prices which may result in substantial
dilution to our stockholders.
If
we raise additional funds through the sale of equity or convertible debt, our current stockholders’ percentage ownership will be
reduced. In addition, these transactions may dilute the value of our Common Stock outstanding. We may also have to issue securities that
may have rights, preferences and privileges senior to our Common Stock.
Our
Common Stock is quoted on the OTCQB, which may have an unfavorable impact on our stock price and liquidity.
Our
Common Stock is quoted on the OTCQB. The quotation of our shares on the OTCQB may result in a less liquid market available for existing
and potential stockholders to trade shares of our Common Stock, could depress the trading price of our Common Stock and could have a
long-term adverse impact on our ability to raise capital in the future.
There
is limited liquidity on the OTCQB, which enhances the volatile nature of our equity.
When
fewer shares of a security are being traded on the OTCQB, volatility of prices may increase and price movement may outpace the ability
to deliver accurate quote information. Due to lower trading volumes in shares of our Common Stock, there may be a lower likelihood that
orders for shares of our Common Stock will be executed, and current prices may differ significantly from the price that was quoted at
the time of entry of the order.
Our
stock price is likely to be highly volatile because of our limited public float.
The
market price of our Common Stock is likely to be highly volatile because there has been a relatively thin trading market for our Common
Stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell shares
of our Common Stock following periods of volatility because of the market’s adverse reaction to volatility. Other factors that
could cause such volatility may include, among other things: actual or anticipated fluctuations in our operating results; the absence
of securities analysts covering us and distributing research and recommendations about us; overall stock market fluctuations; economic
conditions generally; announcements concerning our business or those of our competitors; our ability to raise capital when we require
it, and to raise such capital on favorable terms; conditions or trends in the industry; litigation; changes in market valuations of other
similar companies; announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships or joint ventures;
future sales of Common Stock; actions initiated by the SEC or other regulatory bodies; and general market conditions. Any of these factors
could have a significant and adverse impact on the market price of our Common Stock. These broad market fluctuations may adversely affect
the trading price of our Common Stock.
Our
Common Stock may be subject to significant price volatility which may have an adverse effect on your ability to liquidate your investment
in our Common Stock.
The
market for our Common Stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that
our share price will be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our share price is
attributable to a number of factors. First, our Common Stock may be sporadically and/or thinly traded. As a consequence of this lack
of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of
those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number
of our Common Stock are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those
sales without adverse impact on its share price. Secondly, an investment in us is a speculative or “risky” investment due
to our lack of meaningful profits to date and uncertainty of future profits. As a consequence of this enhanced risk, more risk-adverse
investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.
Our
Common Stock is thinly traded, so an investor may be unable to sell at or near ask prices or at all.
The
shares of our Common Stock are traded on the OTCQB and are thinly traded, meaning that the number of persons interested in purchasing
our Common Stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a
number of factors, including the fact that we are a smaller reporting company that is relatively unknown to stock analysts, stockbrokers,
institutional investors and others in the investment community who generate or influence sales volume. Even in the event that we come
to the attention of such persons, they would likely be reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we become more seasoned and viable. As a consequence, our stock price may not reflect an
actual or perceived value. Also, there may be periods of several days or more when trading activity in our shares is minimal or non-existent,
as is currently the case, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally
support continuous sales without an adverse effect on share price. A broader or more active public trading market for our Common Stock
may not develop or if developed, may not be sustained. Due to these conditions, you may not be able to sell your shares at or near ask
prices or at all if you need money or otherwise desire to liquidate your shares.
Currently,
there is a limited public market for our securities, and there can be no assurances that any public market will ever develop and, even
if developed, it is likely to be subject to significant price fluctuations.
We
have a trading symbol for our Common Stock, namely “CRKR.” However, our Common Stock has been thinly traded, if at all. Consequently,
there can be no assurances as to whether:
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market for our shares will develop; |
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prices at which our Common Stock will trade; or |
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extent to which investor interest in us will lead to the development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy and sell orders for investors. |
Until
our Common Stock is fully distributed and an orderly market develops in our Common Stock, if ever, the price at which it trades is likely
to fluctuate significantly. Prices for our Common Stock will be determined in the marketplace and may be influenced by many factors,
including the depth and liquidity of the market for shares of our Common Stock, developments affecting our business, including the impact
of the factors referred to elsewhere in these risk factors and general economic and market conditions. No assurances can be given that
an orderly or liquid market will ever develop for the shares of our Common Stock.
We
cannot predict the extent to which an active public trading market for our Common Stock will develop or be sustained. If an active public
trading market does not develop or cannot be sustained, you may be unable to liquidate your investment in our Common Stock.
We
cannot predict the extent to which an active public market for our Common Stock will develop or be sustained due to a number of factors,
including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors,
and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons,
they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of
our shares of Common Stock until such time as we became more seasoned and viable. As a consequence, there may be periods of several days
or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady
volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you
any assurance that an active public trading market for our Common Stock will develop or be sustained. If such a market cannot be sustained,
you may be unable to liquidate your investment in our Common Stock.
Other
factors which could cause volatility in the market price of our Common Stock include, but are not limited to:
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actual
or anticipated fluctuations in our financial condition and operating results or those of companies perceived to be similar to us; |
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actual
or anticipated changes in our growth rate relative to our competitors; |
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commercial
success and market acceptance of blockchain, Bitcoin and other cryptocurrencies; |
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actions
by our competitors, such as new business initiatives, acquisitions and divestitures; |
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strategic
transactions undertaken by us; |
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integration
of new businesses and opportunities into our existing business; |
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implementation
of new technologies in the industry; |
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additions
or departures of key personnel; |
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prevailing
economic conditions; |
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sales
of our common stock by our officers, directors or significant stockholders; |
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other
actions taken by our stockholders; |
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future
sales or issuances of equity or debt securities by us; |
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business
disruptions caused by earthquakes, tornadoes or other natural disasters; |
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legal
proceedings involving our company, our industry or both; |
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changes
in market valuations of companies similar to ours; and |
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the
prospects of the industry in which we operate. |
We
have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future. Any return on your investment
may be limited to increases in the market price of our Common Stock.
We
have never paid cash dividends on our Common Stock and do not anticipate paying cash dividends on our Common Stock in the foreseeable
future. The payment of dividends on our Common Stock will depend on our earnings, financial condition and other business and economic
factors affecting us at such time as the Board may consider relevant. If we do not pay dividends, our Common Stock may be less valuable
because a return on your investment might only occur if the market price of our Common Stock appreciates.
Our
Board has broad discretion to issue additional securities.
We
are entitled under our Charter to issue up to 500,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock, although these
amounts may change in the future subject to stockholder approval. Shares of our Preferred Stock provide our Board broad authority to
determine voting, dividend, conversion and other rights. Any additional stock issuances could be made at a price that reflects a discount
or premium to the then-current market price of our Common Stock. In addition, in order to raise capital, we may need to issue securities
that are convertible into or exchangeable for a significant amount of our Common Stock. Our Board may generally issue those shares of
Common Stock and Preferred Stock, or convertible securities to purchase those shares, without further approval by our stockholders. Any
Preferred Stock we may issue could have such rights, preferences, privileges and restrictions as may be designated from time-to-time
by our Board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions.
We may also issue additional securities to our directors, officers, employees and consultants as compensatory grants in connection with
their services, both in the form of stand-alone grants or under our stock incentive plans. The issuance of additional securities may
cause substantial dilution to our stockholders.
The
conversion or exercise, as applicable, of the outstanding PIPE Preferred Stock, PIPE Warrants, Options, Series D Preferred Stock and
AR Debentures could substantially dilute your investment and adversely affect the market price of our Common Stock.
The
PIPE Preferred Stock are convertible into an aggregate of 99,292,858 shares of Common Stock and the PIPE Warrants are exercisable for
an aggregate of 198,585,716 shares of Common Stock. In addition, there are outstanding Options to purchase an aggregate of 8,000,000
shares of Common Stock for $0.25 per share which are only exercisable if specific production hurdles are achieved, pursuant to the Option
Agreements. 4,423 outstanding Series D Preferred Stock were issued in connection with the exchange of the Original Debentures for the
AR Debentures and such Series D Preferred Stock are convertible into shares of Common Stock at a price of $0.175 per share. Additionally,
the AR Debentures are convertible into shares of Common Stock at a price of $0.175, subject to adjustments therein.
In
addition, sales of a substantial number of shares of Common Stock issued upon the conversion or exercise, as applicable, of the outstanding
PIPE Preferred Stock, PIPE Warrants, Options, Series D Preferred Stock and AR Debentures, or even the perception that such sales could
occur, could adversely affect the market price of our Common Stock. The conversion or exercise
of such securities could result in dilution in the interests of our other stockholders and adversely affect the market price of
our Common Stock.
Failure
to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could result in
a restatement of our financial statements, cause investors to lose confidence in our financial statements and our Company and have a
material adverse effect on our business and stock price.
We
produce our financial statements in accordance with GAAP. Effective internal controls are necessary for us to provide reliable financial
reports to help mitigate the risk of fraud and to operate successfully as a publicly traded company. As a public company, we are required
to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of
2002, or Section 404. Further, Section 404 requires annual management assessments of the effectiveness of our internal controls over
financial reporting. Testing and maintaining internal controls can divert our management’s attention from other matters that are
important to our business. We may not be able to conclude on an ongoing basis that we have effective internal controls over financial
reporting in accordance with Section 404. If we are unable to conclude that we have effective internal controls over financial reporting,
investors could lose confidence in our reported financial information and our company, which could result in a decline in the market
price of our Common Stock, and cause us to fail to meet our reporting obligations in the future, which in turn could impact our ability
to raise additional financing if needed in the future.
Risks
Related to the Price of Bitcoin
The
trading price of shares of our Common Stock has appeared at times to have a correlation with the trading price of Bitcoin, which may
be subject to pricing risks, including “bubble” type risks, and has historically been subject to wide swings.
Recently,
the trading price of our Common Stock has appeared to have a correlation with the trading price of Bitcoin. Specifically, we have experienced
adverse effects on our stock price when the value of Bitcoin has fallen, and we may experience similar outcomes if our stock price tracks
the general status of that cryptocurrency. Furthermore, if the market for Bitcoin company stocks or the stock market in general experiences
a loss of investor confidence, the trading price of our stock could decline for reasons unrelated to our business, operating results
or financial condition. The trading price of our Common Stock could be subject to arbitrary pricing factors that are not necessarily
associated with traditional factors that influence stock prices or the value of non-cryptocurrency assets such as revenue, cash flows,
profitability, growth prospects or business activity levels since the value and price, as determined by the investing public, may be
influenced by future anticipated adoption or appreciation in value of cryptocurrencies or blockchains generally, factors over which we
have little or no influence or control.
We
may face risks of Internet disruptions, which could have an adverse effect on the price of cryptocurrencies.
A
disruption of the Internet may affect the use of cryptocurrencies and subsequently the value of our securities. Generally, cryptocurrencies
and our business of mining cryptocurrencies is dependent upon the Internet. A significant disruption in Internet connectivity could disrupt
a currency’s network operations until the disruption is resolved and have an adverse effect on the price of cryptocurrencies and
our ability to mine cryptocurrencies.
The
impact of geopolitical and economic events on the supply and demand for cryptocurrencies is uncertain.
Geopolitical
crises may motivate large-scale purchases of Bitcoin and other cryptocurrencies, which could increase the price of Bitcoin and other
cryptocurrencies rapidly. Our business and the infrastructure on which our business relies is vulnerable to damage or interruption from
catastrophic occurrences, such as war, civil unrest, terrorist attacks, geopolitical events, disease, such as the COVID-19 pandemic,
and similar events. Specifically, the uncertain nature, magnitude and duration of hostilities stemming from Russia’s recent military
invasion of Ukraine, including the potential effects of sanctions limitations, retaliatory cyber-attacks on the world economy and markets,
and potential shipping delays, have contributed to increased market volatility and uncertainty, which could have an adverse impact on
macroeconomic factors that affect our business. This may increase the likelihood of a subsequent price decrease as crisis-driven purchasing
behavior dissipates, adversely affecting the value of our inventory following such downward adjustment. Such risks are similar to the
risks of purchasing commodities in general uncertain times, such as the risk of purchasing, holding or selling gold. Alternatively, as
an emerging asset class with limited acceptance as a payment system or commodity, global crises and general economic downturn may discourage
investment in cryptocurrencies as investors focus their investment on less volatile asset classes as a means of hedging their investment
risk. As an alternative to fiat currencies that are backed by central governments, Bitcoin, which is relatively new, is subject to supply
and demand forces. How such supply and demand will be impacted by geopolitical events is largely uncertain but could be harmful to us
and investors in our Common Stock. Political or economic crises may motivate large-scale acquisitions or sales of Bitcoin either globally
or locally. Such events could have a material adverse effect on our ability to continue as a going concern or to pursue our strategy
at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin
we mine or otherwise acquire or hold for our own account.
Acceptance
and/or widespread use of cryptocurrency is uncertain.
There
is a relatively limited use of any cryptocurrency in the retail and commercial marketplace, thus contributing to price volatility that
could adversely affect an investment in our securities. Banks and other established financial institutions may refuse to process funds
for cryptocurrency transactions, process wire transfers to or from cryptocurrency exchanges, cryptocurrency-related companies or service
providers, or maintain accounts for persons or entities transacting in cryptocurrency. Conversely, a significant portion of Bitcoin demand
is generated by investors seeking a long-term store of value or speculators seeking to profit from the short- or long-term holding of
the asset. Price volatility undermines Bitcoin’s role as a medium of exchange, as retailers are much less likely to accept it as
a form of payment. Market capitalization for Bitcoin as a medium of exchange and payment method may always be low. The relative lack
of acceptance of cryptocurrencies in the retail and commercial marketplace, or a reduction of such use, limits the ability of end users
to use them to pay for goods and services. Such lack of acceptance or decline in acceptance could have a material adverse effect on our
ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business,
prospects or operations and potentially the value of Bitcoin or any other cryptocurrencies we mine or otherwise acquire or hold for our
own account.
The
markets for Bitcoin may be under-regulated and, as a result, the market price of Bitcoin may be subject to significant volatility or
manipulation, which could decrease consumer confidence in cryptocurrencies and have a materially adverse effect on our business and results
of operations.
Cryptocurrencies
that are represented and trade on a ledger-based platform and those who hold them may not enjoy the same benefits as traditional securities
available on trading markets and their investors. Stock exchanges have listing requirements and vet issuers, requiring them to be subjected
to rigorous listing standards and rules, and monitor investors transacting on such platform for fraud and other improprieties. These
conditions may not necessarily be replicated on a distributed ledger platform, depending on the platform’s controls and other policies.
The more lax a distributed ledger platform is about vetting issuers of cryptocurrency assets or users that transact on the platform,
the higher the potential risk for fraud or the manipulation of the ledger due to a control event. We believe that Bitcoin is not a security
under federal and state law.
Bitcoin
and other cryptocurrency market prices have historically been volatile, are impacted by a variety of factors, and are determined primarily
using data from various exchanges, over-the-counter markets and derivative platforms. Furthermore, such prices may be subject to factors
such as those that impact commodities, more so than business activities, which could be subjected to additional influence from fraudulent
or illegitimate actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result
of, and may continue to result in, speculation regarding future appreciation in the value of cryptocurrencies, or our share price, making
their market prices more volatile or creating “bubble” type risks for both Bitcoin and shares of our Common Stock.
These
factors may inhibit consumer trust in and market acceptance of cryptocurrencies as a means of exchange which could have a material adverse
effect on our business, prospects, or operations and potentially the value of any Bitcoin or other cryptocurrencies we mine or otherwise
acquire.
It
may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoin, ether, or other cryptocurrencies, participate in blockchains
or utilize similar cryptocurrency assets in one or more countries, the ruling of which would adversely affect us.
Although
currently cryptocurrencies generally are not regulated or are lightly regulated in most countries, several countries continue taking
regulatory actions in the future that could severely restrict the right to acquire, own, hold, sell or use these cryptocurrency assets
or to exchange for fiat currency. In September 2021, China instituted a blanket ban on all crypto transactions and mining, including
services provided by overseas crypto exchanges in mainland China, effectively making all crypto-related activities illegal in China.
In other nations, including Russia, it is illegal to accept payment in Bitcoin or other crypto assets for consumer transactions, and
banking institutions are barred from accepting deposits of Bitcoin. In January 2022, the Central Bank of Russia called for a ban on cryptocurrency
activities ranging from mining to trading. Such restrictions may adversely affect us as the large-scale use of cryptocurrencies as a
means of exchange is presently confined to certain regions globally. Such circumstances could have a material adverse effect on us, which
could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or other cryptocurrencies
we mine or otherwise acquire or hold for our own account, and thus harm investors.
Our
cryptocurrencies may be subject to loss, theft or restriction on access.
There
is a risk that some or all of our cryptocurrencies could be lost or stolen. Access to our cryptocurrency assets could also be restricted
by cybercrime. Hackers or malicious actors may launch attacks to steal, compromise or secure cryptocurrencies, The loss or destruction
of a private key required to access our digital wallets may be irreversible and we may be denied access for all time to our cryptocurrency
holdings or the holdings of others held in those compromised wallets. Our loss of access to our private keys or our experience of a data
loss relating to our digital wallets could adversely affect our investments and assets. Such events could have a material adverse effect
on our business.
Demand
for Bitcoin is driven, in part, by its status as the most prominent and secure crypto asset. It is possible that crypto assets other
than Bitcoin could have features that make them more desirable to a material portion of the crypto asset user base, resulting in a reduction
in demand for Bitcoin, which could have a negative impact on the price of Bitcoin and adversely affect an investment in us.
Bitcoin,
as an asset, holds “first-to-market” advantages over other crypto assets. This first-to-market advantage is driven in large
part by having the largest user base and, more importantly, the largest mining power in use to secure its blockchain and transaction
verification system. Having a large mining network results in greater user confidence regarding the security and long-term stability
of a crypto asset’s network and its blockchain; as a result, the advantage of more users and miners makes a crypto asset more secure,
which makes it more attractive to new users and miners, resulting in a network effect that strengthens the first-to-market advantage.
Despite
the marked first-mover advantage of the Bitcoin network over other crypto asset networks, it is possible that another crypto asset could
become materially popular due to either a perceived or exposed shortcoming of the Bitcoin network protocol that is not immediately addressed
by the Bitcoin contributor community or a perceived advantage of an altcoin that includes features not incorporated into Bitcoin. If
a crypto asset obtains significant market share (either in market capitalization, mining power or use as a payment technology), this
could reduce Bitcoin’s market share as well as other crypto assets we may become involved in and have a negative impact on the
demand for, and price of, such crypto assets and could adversely affect an investment in us. It is possible that we will mine alternative
crypto assets in the future, but we may not have as much experience to date in comparison to our experience mining Bitcoin, which may
put us at a competitive disadvantage.
Bitcoin
has forked multiple times and additional forks may occur in the future which may affect the value of Bitcoin we hold or mine.
To
the extent that a significant majority of users and mining companies on a cryptocurrency network install software that changes the cryptocurrency
network or properties of a cryptocurrency, including the irreversibility of transactions and limitations on the mining of new cryptocurrency,
the cryptocurrency network would be subject to new protocols and software. However, if less than a significant majority of users and
mining companies on the cryptocurrency network consent to the proposed modification, and the modification is not compatible with the
software prior to its modification, the consequence would be what is known as a “fork” of the network, with one prong running
the pre-modified software and the other running the modified software. The effect of such a fork would be the existence of two versions
of the cryptocurrency running in parallel yet lacking interchangeability and necessitating exchange-type transaction to convert currencies
between the two forks. Additionally, it may be unclear following a fork which fork represents the original cryptocurrency and which is
the new cryptocurrency. Different metrics adopted by industry participants to determine which is the original asset include: referring
to the wishes of the core developers of a cryptocurrency, blockchains with the greatest amount of hashing power contributed by miners
or validators; or blockchains with the longest chain. A fork in the network of a particular cryptocurrency could adversely affect an
investment in our securities or our ability to operate.
Since
August 1, 2017, Bitcoin’s blockchain was forked multiple times creating alternative versions of the cryptocurrency such as Bitcoin
Cash, Bitcoin Gold and Bitcoin SV. The forks resulted in a new blockchain being created with a shared history, and a new path forward.
The value of the newly created versions including Bitcoin Cash, Bitcoin Gold and Bitcoin SV may or may not have value in the long run
and may affect the price of Bitcoin if interest is shifted away from Bitcoin to the newly created cryptocurrencies. The value of Bitcoin
after the creation of a fork is subject to many factors including the value of the fork product, market reaction to the creation of the
fork product, and the occurrence of forks in the future. As such, the value of Bitcoin could be materially reduced if existing and future
forks have a negative effect on Bitcoin’s value.
Incorrect
or fraudulent cryptocurrency transactions may be irreversible.
Cryptocurrency
transactions are irrevocable and stolen or incorrectly transferred cryptocurrencies may be irretrievable. As a result, any incorrectly
executed or fraudulent cryptocurrency transactions could have a material adverse effect on our ability to continue as a going concern
or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations of and potentially
the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account.
Cryptocurrencies,
including those maintained by or for us, may be exposed to cybersecurity threats and hacks.
Flaws
in cryptocurrency codes may be exposed by malicious actors. Several errors and defects have been found previously, including those that
disabled some functionality for users and exposed users’ information. Exploitations of flaws in the source code that allow malicious
actors to take or create money have previously occurred. Our devices, as well as our miners, computer systems and those of third parties
that we use in our operations, are vulnerable to cyber security risks, including cyber-attacks such as viruses and worms, phishing attacks,
denial-of-service attacks, physical or electronic break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering
with our miners and computer systems or those of third parties that we use in our operations. As technological change occurs, the security
threats to our cryptocurrencies will likely change and previously unknown threats may emerge. Human error and the constantly evolving
state of cybercrime and hacking techniques may render present security protocols and procedures ineffective in ways which we cannot predict.
Such events could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or
other cryptocurrencies we mine or otherwise acquire or hold for our own account.
Risks
Related to the Exok Assets
Oil,
natural gas and NGL prices are highly volatile. An extended decline in commodity prices may adversely affect our business, financial
condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments.
Following
our acquisition and development of the Exok Assets, a portion of our revenues, profitability and cash flows will depend upon the prices
for oil, natural gas and natural gas liquids (“NGL”). The prices we would receive for oil, natural gas and NGL production
are volatile and a decrease in prices can materially and adversely affect our financial results and impede our growth, including our
ability to maintain or increase our borrowing capacity, to repay current or future indebtedness and to obtain additional capital on attractive
terms. Changes in oil, natural gas and NGL prices have a significant impact on the amount of oil, natural gas and NGL that we can produce
economically, the value of our reserves and on our cash flows. Historically, world-wide oil, natural gas and NGL prices and markets have
been subject to significant change and may continue to change in the future. Prices for oil, natural gas and NGLs may fluctuate widely
in response to relatively minor changes in supply and demand, market uncertainty and a variety of additional factors that are beyond
our control, such as:
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the
domestic and foreign supply of and demand for oil, natural gas and NGL; |
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the
price and quantity of foreign imports of oil, natural gas and NGL; |
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political
and economic conditions and events in foreign oil and natural gas producing countries, including embargoes, continued hostilities
in the Middle East, Ukraine and other sustained military campaigns, the armed conflict in Ukraine and associated economic sanctions
on Russia, conditions in South America, Central America, China and Russia, and acts of terrorism or sabotage; |
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the
ability of and actions taken by members of Organization of the Petroleum Exporting Countries and other oil-producing nations in connection
with their arrangements to maintain oil prices and production controls; |
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the
impact on worldwide economic activity of an epidemic, outbreak or other public health events, such as COVID-19; |
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the
proximity of our production to and capacity of oil, natural gas and NGL pipelines and other transportation and storage facilities; |
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federal
regulations applicable to exports of liquefied natural gas (“LNG”), including the export of the first quantities of LNG
liquefied from natural gas produced in the lower 48 states of the United States; |
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the
level of consumer product demand; |
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weather
conditions; |
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U.S.
and non-U.S. governmental regulations, including environmental initiatives and taxation; |
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overall
domestic and global economic conditions; |
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the
value of the dollar relative to the currencies of other countries; |
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stockholder
activism or activities by non-governmental organizations to restrict the exploration, development and production of oil, natural
gas and NGL to minimize emissions of carbon dioxide, a greenhouse gas; |
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technological
advances affecting energy consumption, energy conservation and energy supply; |
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the
price and availability of alternative fuels; and |
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the
impact of energy consumption, supply, and conservation policies and activities by governmental authorities, international agreements,
and non-governmental organizations to limit, restrict, suspend or prohibit the performance or financing of oil, natural gas and NGL
exploration, production, development or marketing activities. |
Drilling
for and producing oil and gas wells is a high-risk activity with many uncertainties that could adversely affect our business, financial
condition or results of operations.
Drilling
oil and gas wells, including development wells, involves numerous risks, including the risk that we may not encounter commercially productive
oil, natural gas and NGL reserves (including “dry holes”). We must incur significant expenditures to drill and complete wells,
the costs of which are often uncertain. It is possible that we will make substantial expenditures on drilling and not discover reserves
in commercially viable quantities. Specifically, we often are uncertain as to the future cost or timing of drilling, completing and operating
wells, and our drilling operations and those of our third-party operators may be curtailed, delayed or canceled. The cost of our drilling,
completing and operating wells may increase and our results of operations and cash flows from such operations may be impacted, as a result
of a variety of factors, including:
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unexpected
drilling conditions; |
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title
problems; |
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pressure
or irregularities in formations; |
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equipment
failures or accidents; |
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adverse
weather conditions, such as winter storms, flooding and hurricanes, and changes in weather patterns; |
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compliance
with, or changes in, environmental laws and regulations relating to air emissions, hydraulic fracturing and disposal of produced
water, drilling fluids and other wastes, laws and regulations imposing conditions and restrictions on drilling and completion operations
and other laws and regulations, such as tax laws and regulations; |
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the
availability and timely issuance of required governmental permits and licenses; |
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the
availability of, costs associated with and terms of contractual arrangements for properties, including mineral licenses and leases,
pipelines, rail cars, crude oil hauling trucks and qualified drivers and related services, facilities and equipment to gather, process,
compress, store, transport and market crude oil, natural gas and related commodities; |
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compliance
with environmental and other governmental requirements; and |
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environmental
hazards, such as natural gas leaks, oil and produced water spills, pipeline or tank ruptures, encountering naturally occurring radioactive
materials, and unauthorized discharges of brine, well stimulation and completion fluids, toxic gases or other pollutants into the
air, surface and subsurface environment. |
A
failure to recover our investment in the Exok Assets, increases in the costs of our drilling operations or those of third-party operators,
and/or curtailments, delays or cancellations of our drilling operations or those of our third-party operators in each case due to any
of the above factors or other factors, may materially and adversely affect our business, financial condition and results of operations.
The
Exok Assets currently have no producing properties and there is no assurance that we will be able to successfully drill producing wells.
If the Exok Assets are not commercially productive of crude oil or natural gas, any funds spent on exploration and production may be
lost.
All
of the Exok Assets are in the pre-production stage and there is no assurance that we will be able to obtain the requisite permits to
begin drilling or successfully drill producing wells. We are dependent on establishing sufficient reserves at the Exok Assets for additional
cash flow and a return of our investment. If the Exok Assets are not economic, all of the funds that we have invested, or will invest,
will be lost. In addition, the failure of the Exok Assets to produce commercially may make it more difficult for us to raise additional
funds in the form of additional sale of our equity securities or working interests in other property in which we may acquire an interest.
Since
we will operate a new business segment and have no operating history related to the exploration and production of oil and gas assets,
investors have no basis to evaluate our ability to operate profitably in this segment.
We
began cryptocurrency mining operations in October 2021 and have not generated any revenue in the exploration and production of oil and
gas assets to date. We face many of the risks commonly encountered by other new businesses, including the lack of an established operating
history, need for additional capital and personnel, and competition. There is no assurance that our business will be successful or that
we can ever operate profitably. Additionally, our management will have less time to devote to the Company’s crypto operations.
We may not be able to effectively manage the demands required of a new business segment in a new industry, such that we may be unable
to successfully maintain our current business or implement our business plan or achieve profitability.
There
may be conflicts of interest between certain of our officers and directors and our non-management stockholders.
Conflicts
of interest create the risk that management may have an incentive to act adversely to the interests of other stockholders. A conflict
of interest may arise between our officers and directors’ personal pecuniary interests and their fiduciary duty to our stockholders.
Furthermore, our officers and directors’ own pecuniary interests may not align with their fiduciary duties to our stockholders.
As further described in the section entitled “Certain
Relationships and Related Transactions,” Edward Kovalik (Chief Executive Officer and Chair), Gary
C. Hanna (President and Director) and Paul Kessler (Director) have certain overriding royalty interests in the Exok Assets. To avoid
any potential conflict of interest with certain members of the Board and management owning certain overriding royalty interests under
the Exok Assets, all of the Company’s drilling programs will be approved by an independent committee of the Board on a quarterly
basis.
Our
plan to develop the Exok Assets and exercise the Exok Option may require substantial additional capital, which we may be unable to raise
on acceptable terms in the future.
We
currently plan to develop the Exok Assets. Obtaining permits, seismic data, as well as exploration, development and production activities
entail considerable costs, and we may need to raise substantial additional capital, through future private or public equity offerings,
strategic alliances or debt financing. Additionally, pursuant to the Exok Agreement, the Company may exercise the Exok Option, from
the Closing Date until the later of (x) the date that is ninety (90) days following the Closing Date and (y) August 15, 2023, to
purchase 32,695 additional gross acres from Exok for a purchase price of $22,182,000, payable in
(a) $18,000,000 in cash and (b) $4,182,000 in total equity consideration.
Our
future capital requirements will depend on many factors, including:
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the
scope, rate of progress and cost of our exploration, appraisal, development and production activities; |
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oil
and natural gas prices; |
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our
ability to obtain the requisite permits to begin drilling; |
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our
ability to locate and acquire hydrocarbon reserves; |
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our
ability to produce oil or natural gas from those reserves; |
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the
terms and timing of any drilling and other production-related arrangements that we may enter into; |
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the
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Even
if we succeed in selling additional equity securities to raise funds, at such time the ownership percentage of our existing stockholders
would be diluted, and new investors may demand rights, preferences or privileges senior to those of existing stockholders. If we raise
additional capital through debt financing, the financing may involve covenants that restrict our business activities. If we are not successful
in raising additional capital, we may be unable to continue our future exploration, development and production activities, and we may
be unable to purchase additional gross acres pursuant to the Exok Option within the requisite exercise period.
We
will face strong competition from other oil and gas companies.
We
will encounter competition from other oil and gas companies in all areas of our operations, including the acquisition of exploratory
prospects and proven properties. Our competitors include major integrated oil and gas companies and numerous independent oil and gas
companies, individuals and drilling and income programs. Many of our competitors are large, well-established companies that have been
engaged in the oil and gas business much longer than we have and possess substantially larger operating staffs and greater capital resources
than we do. These companies may be able to pay more for exploratory projects and productive oil and gas properties and may be able to
define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In
addition, these companies may be able to expend greater resources on the existing and changing technologies that we believe are and will
be increasingly important to attaining success in the industry. Such competitors may also be in a better position to secure oilfield
services and equipment on a timely basis or on favorable terms. These companies may also have a greater ability to continue drilling
activities during periods of low oil and gas prices, such as the current commodity price environment, and to absorb the burden of current
and future governmental regulations and taxation. We may not be able to conduct our operations, evaluate and select suitable properties
and consummate transactions successfully in this highly competitive environment.
Government
regulation and liability for oil and natural gas operations may adversely affect our business and results of operations.
If
we are successful in our exploration, production and development activities, we will be subject to extensive federal, state, and local
government regulations, which may change from time to time. Matters subject to regulation include discharge permits for drilling operations,
drilling bonds and other financial assurance, reports concerning operations, the spacing of wells, unitization and pooling of properties,
and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate
of flow of oil and natural gas from wells below actual production capacity in order to conserve supplies of oil and natural gas. These
laws and regulations may affect the costs, manner, and feasibility of our operations by, among other things, requiring us to make significant
expenditures in order to comply and restricting the areas available for oil and gas production. Failure to comply with these laws and
regulations may result in substantial liabilities to third-parties or governmental entities. We are also subject to changing and extensive
tax laws, the effects of which cannot be predicted. The implementation of new, or the modification of existing, laws or regulations,
could have a material adverse effect on us, such as by imposing, penalties, fines and/or fees, taxes and tariffs on carbon that could
have the effect of raising prices to the end user and thereby reducing the demand for our products.
Our
operations will be subject to federal, state and local laws and regulations related to environmental and natural resources protection
and occupational health and safety which may expose us to significant costs and liabilities and result in increased costs and additional
operating restrictions or delays.
Our
planned oil, natural gas and NGL exploration, production and development operations will be subject to stringent federal, state, local
and other applicable laws and regulations governing worker health and safety, the release or disposal of materials into the environment
or otherwise relating to environmental protection. Numerous governmental entities, including the EPA, the U.S. Occupational Safety and
Health Administration (“OSHA”), and analogous state agencies, including the Colorado Department of Public Health & Environment
(“CDPHE”) have the power to enforce compliance with these laws and regulations. These laws and regulations may, among other
things, require the acquisition of permits to conduct drilling; govern the amounts and types of substances that may be released into
the environment; limit or prohibit construction or drilling activities in environmentally-sensitive areas such as wetlands, wilderness
areas or areas inhabited by endangered species; require investigatory and remedial actions to mitigate pollution conditions; impose obligations
to reclaim and abandon well sites and pits; and impose specific criteria addressing worker protection. Compliance with such laws and
regulations may impact our operations and production, require us to install new or modified emission controls on equipment or processes,
incur longer permitting timelines, restrict the areas in which some or all operational activities may be conducted, and incur significantly
increased capital or operating expenditures, which costs may be significant. The regulatory burden on the oil and gas industry increases
the cost of doing business in the industry and consequently affects profitability.
Additionally,
certain environmental laws impose strict, joint and several liability for costs required to remediate and restore sites where hydrocarbons,
materials or wastes have been stored or released. Failure to comply with these laws and regulations may also result in the assessment
of sanctions, including administrative, civil and criminal penalties, the imposition of investigatory, remedial and corrective action
obligations or the incurrence of capital expenditures, the occurrence of restrictions, delays or cancellations in the permitting, development
or expansion of projects and the issuance of orders enjoining some or all of our operations in affected areas. Moreover, accidental spills
or other releases may occur in the course of our operations, and we cannot assure you that we will not incur significant costs and liabilities
as a result of such spills or releases, including any third-party claims for damage to property, natural resources or persons. We may
not be able to fully recover such costs from insurance. One or more of these developments that impact us, our service providers or our
customers could have a material adverse effect on our business, results of operations and financial condition and reduce demand for our
products.
Our
oil and gas exploration, production, and development activities may be subject to a series of risks related to climate change and energy
transition initiatives.
The
threat of climate change continues to attract considerable attention in the United States and around the world. Numerous proposals have
been made and could continue to be made at the international, national, regional and state levels of government to monitor and limit
emissions of GHGs. These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG disclosure obligations and
regulations that directly limit GHG emissions from certain sources. President Biden highlighted addressing climate change as a priority
under his Administration and has issued, and may continue to issue, executive orders related to this.
At
the federal level, the EPA has adopted rules that, among other things, establish construction and operating permit reviews for GHG emissions
from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural
gas system sources, and impose new standards reducing methane emissions from oil and gas operations through limitations on venting and
flaring and the implementation of enhanced emission leak detection and repair requirements. Although there has recently been considerable
uncertainty surrounding regulation of methane emissions from oil and gas facilities, the EPA is currently also proposing new and updated
rules for both new and existing sources. The EPA’s proposed rules, if finalized, would making existing regulations more stringent,
expand the scope of source types covered by the rules, and require states to develop plans to reduce methane and volatile organic compound
(“VOC”) emissions from existing sources that must be at least as effective as presumptive standards set by EPA. In addition,
the U.S. Congress may continue to consider and pass legislation related to the reduction of GHG emissions, including methane and carbon
dioxide. For example, the Inflation Reduction Act of 2022 (the “IRA”), which appropriates significant federal funding for
renewable energy initiatives and, for the first time ever, imposes a fee on GHG emissions from certain facilities, was signed into law
in August 2022. Furthermore, the SEC has proposed rules that, amongst other matters, will establish a framework for the reporting of
climate risks. Separately, the SEC has also announced that it is scrutinizing existing climate-change related disclosures in public filings,
increasing the potential for enforcement if the SEC were to allege an issuer’s existing climate disclosures misleading or deficient.
These ongoing regulatory actions and the emissions fee and funding provisions of the IRA could increase operating costs within the oil
and gas industry and accelerate the transition away from fossil fuels, which could in turn adversely affect our business and results
of operations. We note that the regulatory activities discussed above are subject to intense political debate and could be subject to
major modification depending upon the outcome of the 2024 election cycle.
At
the international level, the United Nations-sponsored Paris Agreement, though non-binding, calls for signatory nations to limit their
GHG emissions through individually-determined reduction goals every five years after 2020. In February 2021, President Biden recommitted
the United States to long-term international goals to reduce emissions, including those under the Paris Agreement. President Biden announced
in April 2021 a new, more rigorous nationally determined emissions reduction level of 50 to 52 percent from 2005 levels in economy-wide
net GHG emissions by 2030. Moreover, the international community convenes annually to negotiate further pledges and initiatives, such
as the Global Methane Pledge (a collective goal to reduce global methane emissions by 30 percent from 2020 levels by 2030). The impacts
of these orders, pledges, agreements and any legislation or regulation promulgated to fulfill the United States’ commitments under
the Paris Agreement or other international agreements cannot be predicted at this time.
Litigation
risks are also increasing, as a number of states, municipalities and other plaintiffs have sought to bring suit against oil and natural
gas exploration and production companies in state or federal court, alleging, among other things, that such energy companies created
public nuisances by producing fuels that contributed to global warming effects, such as rising sea levels, and therefore, are responsible
for roadway and infrastructure damages as a result, or alleging that the companies have been aware of the adverse effects of climate
change for some time but defrauded their investors by failing to adequately disclose those impacts. Involvement in such a case, regardless
of the substance of the allegations, could have adverse reputational impacts and an unfavorable ruling in any such case could significantly
impact our operations and could have an adverse impact on our financial condition or operations.
There
are also increasing financial risks for oil and gas producers as certain shareholders, bondholders and lenders may elect in the future
to shift some or all of their investments into non-fossil fuel energy related sectors. Certain institutional lenders who provide financing
to fossil-fuel energy companies have shifted their investment practices to those that favor “clean” power sources, such as
wind and solar, making those sources more attractive, and some of them may elect not to provide funding for fossil fuel energy companies
in the short or long term. Many of the largest U.S. banks have made “net zero” carbon emission commitments and have announced
that they will be assessing financed emissions across their portfolios and taking steps to quantify and reduce those emissions. Additionally,
there is also the possibility that financial institutions will be pressured or required to adopt policies that limit funding for fossil
fuel energy companies. Although there has been recent political support to counteract these initiatives, these and other developments
in the financial sector could lead to some lenders restricting access to capital for or divesting from certain industries or companies,
including the oil and gas sector, or requiring that borrowers take additional steps to reduce their GHG emissions. Any material reduction
in the capital available to us or our fossil fuel-related customers could make it more difficult to secure funding for exploration, development,
production, transportation, and processing activities, which could reduce the demand for our products and services.
Our
oil and gas exploration, production, and development activities may be subject to physical risks related to potential climate change
impacts.
Increasing
concentrations of GHGs in the Earth’s atmosphere may produce climate changes that could have significant physical effects, such
as increased frequency and severity of storms, droughts, wildfires, and floods and other climatic events, as well as chronic shifts in
temperature and precipitation patterns. These climatic developments have the potential to cause physical damage to our assets or those
of our vendors and suppliers and could disrupt our supply chains and thus could have an adverse effect on our operations.
Additionally,
changing meteorological conditions, particularly temperature, may result in changes to the amount, timing, or location of demand for
energy or its production. While our operational consideration of changing climatic conditions and inclusion of safety factors in design
is intended to reduce the uncertainties that climate change and other events may potentially introduce, our ability to mitigate the adverse
impacts of these events depends in part on the effectiveness of our facilities and disaster preparedness and response and business continuity
planning, which may not have considered or be prepared for every eventuality.
Our
business and ability to secure financing may be adversely impacted by increasing stakeholder and market attention to ESG matters.
Businesses
across all industries are facing increasing scrutiny from stakeholders related to their ESG practices. Businesses that are perceived
to be operating in contrast to investor or stakeholder expectations and standards, which are continuing to evolve, or businesses that
are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement
to do so, may suffer from reputational damage and the business, financial condition, and/or stock price of such business entity could
be materially and adversely affected. Increasing attention to climate change, societal expectations on companies to address climate change,
investor and societal expectations regarding voluntary ESG related disclosures, increasing mandatory ESG disclosures, and consumer demand
for alternative forms of energy may result in increased operating and compliance costs, reduced demand for our products, reduced profits,
increased legislative and judicial scrutiny, investigations and litigation, reputational damage, and negative impacts on our access to
capital markets. To the extent that societal pressures or political or other factors are involved, it is possible that the Company could
be subject to additional governmental investigations, private litigation or activist campaigns as stockholders may attempt to effect
changes to the Company’s business or governance practices.
While
we may elect to seek out various voluntary ESG targets in the future, such targets are aspirational. We may not be able to meet such
targets in the manner or on such a timeline as initially contemplated, including as a result of unforeseen costs or technical difficulties
associated with achieving such results. Similarly, while we may decide to participate in various voluntary ESG frameworks and certification
programs, such participation may not have the intended results on our ESG profile. In addition, voluntary disclosures regarding ESG matters,
as well as any ESG disclosures currently required or required in the future, could result in private litigation or government investigation
or enforcement action regarding the sufficiency or validity of such disclosures. Moreover, failure or a perception (whether or not valid)
of failure to implement ESG strategies or achieve ESG goals or commitments, including any GHG emission reduction or carbon intensity
goals or commitments, could result in private litigation and damage our reputation, cause investors or consumers to lose confidence in
us, and negatively impact our operations and goodwill. Notwithstanding our election to pursue aspirational ESG-related targets in the
future, we may receive pressure from investors, lenders or other groups to adopt more aggressive climate or other ESG-related goals,
but we cannot guarantee that we will be able to implement such goals because of potential costs, technical or operational obstacles or
other market or technological developments beyond our control.
Restrictions
and regulations regarding hydraulic fracturing could result in increased costs, delays and cancellations in our planned oil, natural
gas, and NGL exploration, production and development activities.
Our
drilling operations will include hydraulic fracturing activities. Hydraulic fracturing is typically regulated by state oil and gas commissions,
but the practice continues to attract considerable public, scientific and governmental attention in certain parts of the country, resulting
in increased scrutiny and regulation, including by federal agencies. Many states have adopted rules that impose new or more stringent
permitting, public disclosure or well construction requirements on hydraulic fracturing activities. For example, Colorado requires the
disclosure of chemicals used in hydraulic fracturing and recently extended setback requirements for drilling activities. Local governments
may also impose, or attempt to impose restrictions on the time, place, and manner in which hydraulic fracturing activities may occur.
The EPA has also asserted federal regulatory authority over certain aspects of hydraulic fracturing. Additionally, certain federal and
state agencies have evaluated or are evaluating potential impacts of hydraulic fracturing on drinking water sources or seismic events.
These ongoing studies could spur initiatives to further regulate hydraulic fracturing or otherwise make it more difficult and costly
to perform hydraulic fracturing activities. Any new or more stringent federal, state, local or other applicable legal requirements such
as presidential executive orders or state or local ballot initiatives relating to hydraulic fracturing that impose restrictions, delays
or cancellations in areas where we plan to operate could cause us to incur potentially significant added costs to comply with such requirements
or experience delays, curtailment, or preclusion from the pursuit of exploration, development or production activities.
Our
planned oil, natural gas and NGL exploration and production activities could be adversely impacted by restrictions on our ability to
obtain water or dispose of produced water.
Our
operations will require water for our planned oil and natural gas exploration during drilling and completion activities. Our access to
water may be limited due to reasons such as prolonged drought, private third party competition for water in localized areas or our inability
to acquire or maintain water sourcing permits or other rights as well as governmental regulations or restrictions adopted in the future.
For example, the Governor of Colorado recently signed into law HB 1242 which places restrictions on the use of fresh water for oil and
gas operations and requires oil and gas operators to report their water use. Any difficulty or restriction on locating or contractually
acquiring sufficient amounts of water in an economical manner could adversely impact our planned operations.
Additionally,
we must dispose of the fluids produced during oil and natural gas production, including produced water. We may choose to dispose of produced
water into deep wells by means of injection, either directly ourselves or through third party contractors. While we may seek to reuse
or recycle produced water instead of disposing of such water, our costs for disposing of produced water could increase significantly
as a result of increased regulation or if reusing and recycling water becomes impractical. Disposal wells are regulated pursuant to the
Underground Injection Control (“UIC”) program established under the federal Safe Drinking Water Act (“SDWA”)
and analogous state laws. The UIC program requires permits from the EPA or an analogous state agency for construction and operation of
such disposal wells, establishes minimum standards for disposal well operations, and restricts the types and quantities of fluids that
may be disposed.
In
recent years, wells used for the disposal by injection of flowback water or certain other oilfield fluids below ground into non-producing
formations have been associated with an increased number of seismic events, with research suggesting that the link between seismic events
and wastewater disposal may vary by region and local geology. The U.S. geological survey has recently identified Colorado as one of six
states with the most significant hazards from induced seismicity. Concerns by the public and governmental authorities have prompted several
state agencies to require operators to take certain prescriptive actions or limit disposal volumes following unusual seismic activity.
The Colorado Oil and Gas Conservation Commission (“COGCC”) requires operators to monitor and evaluate for seismicity risks
in certain situations. Restrictions on produced water disposal well injection activities or suspensions of such activities, whether due
to the occurrence of seismic events or other regulatory actions could increase our costs to dispose of produced water and adversely impact
our results of operations.
Laws
and regulations pertaining to the protection of threatened and endangered species and their habitats could delay, restrict or prohibit
our planned oil, natural gas, and NGL exploration and production operations and adversely affect the development and production of our
reserves.
The
Endangered Species Act (“ESA”) and comparable state laws protect endangered and threatened species and their habitats. Under
the ESA, the U.S. Fish and Wildlife Service (“FWS”) may designate critical habitat areas that it believes are necessary for
survival of species listed as threatened or endangered. Similar protections are offered to migratory birds under the MBTA. Such designations
could require us to develop mitigation plans to avoid potential adverse effects to protected species and their habitats, and our oil
and gas operations may be delayed, restricted or prohibited in certain locations or during certain seasons, such as breeding and nesting
seasons, when those operations could have an adverse effect on the species. Moreover, the future listing of previously unprotected species
as threatened or endangered in areas where we are operating in the future could cause us to incur increased costs arising from species
protection measures or could result in delays, restrictions or prohibitions on our planned development and production activities.
Related
Party Transactions Prior to the Merger
Bristol
Capital, LLC
Bristol
Capital, LLC is managed by Paul L. Kessler. Mr. Kessler served as Executive Chairman of the Company from December 29, 2016, through November
24, 2020, when Mr. Kessler resigned his position, but continued to serve as member of the Board. On December 1, 2021, Mr. Kessler was
again appointed Executive Chairman of the Company. In connection with the Merger, Mr. Kessler resigned as Executive Chairman.
Mr. Kessler is currently a director of the Company.
Consulting
Agreement
On
December 29, 2016, the Company entered into a Consulting Services Agreement (the “Consulting Agreement”) with Bristol Capital.
Pursuant to the Consulting Agreement, Mr. Kessler agreed to serve as Executive Chairman of the Company. The initial term of the Agreement
is from December 29, 2016 through March 28, 2017. The term of the Consulting Agreement will be automatically extended for additional
terms of 90-day periods, unless either the Company or Bristol Capital gives prior written notice of non-renewal to the other party no
later than thirty (30) days prior to the expiration of the then current term. Upon the execution of the agreement the Company granted
Bristol Capital options to purchase up to an aggregate of 30,000 shares of Common Stock at an exercise price of $0.25 per share, as amended.
During
the term, the Company will pay Bristol Capital, as amended, a monthly fee $18,750 payable in cash or Preferred Stock, at the Company’s
election. In addition, Bristol Capital may receive an annual bonus in an amount and under terms determined by the Compensation Committee
of the Board and approved by the Board in its sole and absolute discretion. The Company shall also, in association with the Uplisting,
issue to Bristol Capital (i) shares of Common Stock equal to 5% of the fully diluted shares of Common Stock, calculated with the
inclusion of Bristol Capital’s equity stock holdings and shares issuable upon conversion of convertible instruments, preferred
stock, options, and warrants; and (ii) a one-time non-accountable expense reimbursement of $200,000.
On
November 22, 2018, the Company agreed to issue 202,022 shares of Preferred Stock for settlement of $496,875 due under the Consulting
Agreement as of October 31, 2018.
On
August 3, 2020, the Company cancelled the 202,022 shares of Preferred Stock previously determined to be issued, and issued 49,688 shares
of Series A Preferred Stock for the settlement of the previous outstanding amount due. In addition, on August 3, 2020, the Company issued
38,438 shares of Series A Preferred Stock for the settlement of $384,375 due under the Consulting Agreement as of July 31, 2020.
On
March 1, 2021, the Company issued 22,500 shares of Series A Preferred Stock to Bristol Capital for the settlement of $225,000 due under
the Consulting Agreement as of July 31, 2021.
During
the three months ended March 31, 2023 and 2022, the Company incurred expenses of approximately $56,250, for each period for consulting
services provided by Bristol Capital. As of March 31, 2023 and December 31, 2022, the amount accrued to Bristol Capital for consulting
services was $375,000 and $318,750, respectively.
The
Consulting Agreement was terminated at Closing.
Non-Accountable
Expense Reimbursement
On
September 7, 2021, Bristol Capital received a one-time non-accountable expense reimbursement of $200,000 in consideration for significant
efforts and diligence in negotiating and structuring investment transactions.
Reimbursement
of Legal Fees
In
January 2022, Bristol Capital was reimbursed for $12,040 in legal fees.
Bristol
Capital Advisors, LLC
Bristol
Capital Advisors, LLC (“Bristol Capital Advisors”) is managed by Paul L. Kessler.
Operating
Sublease
On
June 16, 2016, the Company entered into a Standard Multi-Tenant Sublease (the “Sublease”) with Bristol Capital Advisors.
The leased premises are owned by an unrelated third party and Bristol Capital Advisors passes the lease costs down to the Company. The
term of the Sublease is for 5 years and 3 months beginning on July 1, 2016, with monthly payments of approximately $8,000. During the
year ended December 31, 2022 and 2021, the Company paid lease obligations of $0 and $83,054, respectively, under the Sublease. On September
30, 2021, the lease term ended, and the Company vacated the premises.
Bristol
Investment Fund, Ltd.
Bristol
Investment Fund, Ltd. (“Bristol Investment Fund”) is managed by Bristol Capital Advisors, which in turn is managed by Paul
L. Kessler.
Securities
Purchase Agreement – December 2016
On
December 1, 2016, the Company entered into the Securities Purchase Agreement (the “Bristol Purchase Agreement”) with Bristol
Investment Fund, pursuant to which the Company sold to Bristol Investment Fund, for a cash purchase price of $2,500,000, securities comprising
of: (i) a secured convertible debenture (the “Bristol Convertible Debenture”), (ii) Series A common stock purchase warrants
and (iii) Series B common stock purchase warrants. Pursuant to the Bristol Purchase Agreement, the Company paid $25,000 to Bristol Investment
Fund and issued 25,000 shares of Common Stock with a grant date fair value of $85,000 to Bristol Investment Fund to cover legal fees.
The Company recorded as a debt discount of $25,791 related to the cash paid and the relative fair value of the shares issued for legal
fees.
(A) Secured
Convertible Debenture
On
December 1, 2016, the Company issued the Bristol Convertible Debenture with an initial principal balance of $2,500,000, and a maturity
date of December 30, 2018. The Bristol Convertible Debenture will accrue interest on the aggregate unconverted and then outstanding principal
amount at the rate of 12% per annum. Interest is payable quarterly on (i) January 1, April 1, July 1 and October 1, beginning on January
1, 2017, (ii) on each date the purchaser converts, in whole or in part, the Bristol Convertible Debenture into Common Stock (as to that
principal amount then being converted), and (iii) on the day that is 20 days following the Company’s notice to redeem some or all
of the of the outstanding principal of the Bristol Convertible Debenture (only as to that principal amount then being redeemed) and on
the maturity date. Interest may be paid in cash, Common Stock, or a combination thereof at the sole discretion of the Company.
The
Bristol Convertible Debenture is convertible into shares of Common Stock at any time at the option of the holder. The initial conversion
price was $3.00 (as converted) per share, subject to adjustment. In the event of default occurs, the conversion price shall be the lesser
of (i) the initial conversion price of $3.00 and (ii) 50% of the average of the three lowest trading prices during the 20 trading days
immediately prior to the applicable conversion date.
The
Bristol Convertible Debenture contains anti-dilution provisions where, if the Company, at any time while the Bristol Convertible Debenture
is outstanding, sells or grants any option to purchase, right to reprice, or otherwise dispose of or issue any Common Stock or common
stock equivalents, at an effective price per share less that is lower than the conversion price then in effect, the conversion price
shall be reduced to the lower effective price per share.
On
December 19, 2019, the maturity date of the Bristol Convertible Debenture was amended to December 30, 2021.
On
May 1, 2020, the maturity date of the Bristol Convertible Debenture was amended to December 31, 2022.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 decreased the conversion price to $0.25. As of December 31, 2020, the Bristol Convertible Debenture held by Bristol Investment
Fund was convertible into 10,000,000 shares of Common Stock.
On
October 31, 2021, in consideration for the release of senior security interest in certain of the assets, properties, and rights of discontinued
operations that were sold during the year, the Bristol Convertible Debenture was amended to reduce the conversion price to $0.175.
During
March 31, 2022, the Bristol Convertible Debenture principal in the amount of $3,150 was converted into 18,000 shares of Common Stock
using a conversion price of $0.175.
On
December 31, 2022, the maturity date of the Bristol Convertible Debenture was amended to May 31, 2023.
As
of March 31, 2023, the Bristol Convertible Debenture with a principal amount of $2,496,850 held by Bristol Investment Fund was convertible
into 14,267,714 shares of Common Stock using a conversion price of $0.175.
As
of March 31, 2023 and December 31, 2022, the amount of accrued interest payable to Bristol Investment Fund under the Bristol Convertible
Debenture was $1,899,074, and $1,825,195, respectively.
As
discussed further below, the Bristol Purchase Agreement and the Bristol Convertible Debenture were amended and restated in connection
with the Closing.
(B) Series
A Common Stock Purchase Warrants
On
December 1, 2016, the Company issued Series A common stock purchase warrants to acquire up to 833,333 shares of Common Stock at exercise
price of $3.00, and expiring on December 1, 2021. The warrants contain anti-dilution provisions where, if the Company, at any time while
the warrant is outstanding, sells or grants any option to purchase, right to reprice, or otherwise dispose of or issue any Common Stock
or common stock equivalents, at an effective price per share less than the exercise price then in effect, the exercise price shall be
reduced, and the number of warrant shares shall be increased such that the aggregate exercise price payable hereunder, shall be equal
to the aggregate exercise price prior to such adjustment.
On
December 19, 2019, as a result of the anti-dilution provisions, the issuance of the Barlock Convertible Debenture (as defined below)
with a conversion price of $2.50 increased the number of shares of Common Stock issuable upon exercise of the Series A common stock purchase
warrants to 1,000,000, and decreased the exercise price to $2.50.
On
December 19, 2019, Bristol Investment Fund assigned 300,000 Series A common stock purchase warrants to Barlock Capital Management, LLC,
and the expiration date of the warrants was extended to December 1, 2024. After the assignment, Bristol Investment Fund held Series A
common stock purchase warrants to acquire 700,000 shares of Common Stock at an exercise price to $2.50.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 increased the number of shares of Common Stock issuable upon exercise of the Series A common stock purchase warrants to 7,000,000,
and decreased the exercise price to $0.25. As of December 31, 2020, Bristol Investment Fund held Series A common stock purchase warrants
to acquire 7,000,000 shares of Common Stock at an exercise price to $0.25.
On
October 31, 2021, as a result of the anti-dilution provisions, the effect of reducing the conversion price of the Original Debentures
to $0.175 increased the Common Stock issuable upon the exercise of the Series A common stock purchase warrants to 10,000,000, and decreased
the exercise price to $0.175.
On
September 9, 2022, Bristol Investment Fund assigned 20% of its Series A common stock purchase warrants to Leviston Resources, LLC.
As
of March 31, 2023, Bristol Investment Fund held Series A common stock purchase warrants to acquire 10,000,000 shares of Common Stock
at an exercise price of $0.175.
In
addition, the warrants may be exercised, in whole or in part, at any time until they expire. If at any time after the 6-month anniversary
of the closing date there is no effective registration statement, or no current prospectus available for the resale of the warrant shares,
then the warrants may be exercised, in whole or in part, on a cashless basis at any time until they expire.
Prior
to the Closing, the Series A common stock purchase warrants were cancelled and retired and ceased to exist without the payment of any
consideration to the holders thereof.
(C) Series
B Common Stock Purchase Warrants
On
December 1, 2016, the Company issued Series B common stock purchase warrants to acquire up to 833,333 shares of Common Stock at an initial
exercise price of $0.002, and expiring on December 1, 2021. The Series B common stock purchase warrants were exercised immediately on
the issuance date, and the Company received gross proceeds of $1,667.
Upon
issuance of the Bristol Convertible Debenture, the Company valued the warrants using the Black-Scholes Option Pricing model and accounted
for it using the relative fair value of $1,448,293 as debt discount on the consolidated balance sheet. Debt discount is amortized over
the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method which approximates the interest
method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statement of operations.
There was no unamortized debt discount as of March 31, 2023 and December 31, 2022.
Prior
to the Closing, the Series B common stock purchase warrants were cancelled and retired and ceased to exist without the payment of any
consideration to the holders thereof.
Employment
Agreement – Kessler
In
connection with Paul L. Kessler’s appointment to serve as Executive Chairman, the Company and Mr. Kessler entered into an Executive
Chairman Employment Agreement (the “Kessler Employment Agreement”), effective as of December 23, 2021. The Kessler Employment
Agreement provides for an initial term of two years, with automatic one-year renewals thereafter, unless terminated by either party with
30 days’ notice prior to any such renewal date. The Kessler Employment Agreement provides for an initial annual base salary of
$250,000, which may be increased by the Board from time to time, and for a discretionary annual bonus with an annual target bonus opportunity
equal to 150% of Mr. Kessler’s base salary and a maximum bonus opportunity equal to 300% of base salary, with the actual amount
paid to be based upon Company and individual performance, as determined by the Board in its sole discretion. The Kessler Employment Agreement
also requires that the Company issue to Mr. Kessler shares of Common Stock equal to five percent of the fully diluted shares of Common
Stock of the Company, calculated as provided under the Kessler Employment Agreement, in association with the Uplisting. Mr. Kessler
is also eligible to participate in the Company’s long-term equity arrangements and is entitled to certain employee benefits provided
to other executive officers of the Company.
The
Kessler Employment Agreement also provides for certain severance benefits upon Mr. Kessler’s termination by the Company without
“Cause” or due to his resignation for “Good Reason,” each term as defined in the Kessler Employment Agreement,
including (a) cash severance equal to two times the sum of Mr. Kessler’s annual base salary and annual target bonus opportunity
(three times such sum if such termination occurs within 12 months following a “Change of Control,” as such term is defined
in the Kessler Employment Agreement, which is the “Change of Control Protection Period”), and (b) a pro-rata annual bonus
for the year of termination, determined as if Mr. Kessler had remained in good standing with the Company through the end of the performance
period, but pro-rated for his period of employment during such year. Such severance shall be paid in equal annual installments over a
12-month period (or in a lump sum if the termination occurs within the Change of Control Protection Period).
These
severance benefits are contingent upon Mr. Kessler’s execution and non-revocation of a release of claims and compliance with certain
restrictive covenants. Additionally, upon any termination, Mr. Kessler is entitled to (i) any earned but unpaid base salary, (ii) any
annual bonuses earned but unpaid for any calendar years prior to the calendar year in which the termination occurs, (iii) any unreimbursed
business expenses, and (iv) any employee benefits under any employee benefit plan or program in which Mr. Kessler participates as of
the termination date.
At
the Effective Time of the Merger, Mr. Kessler resigned as Executive Chairman but remained a member of the Board.
Barlock
2019 Fund, LP
Barlock
2019 Fund, LP (“Barlock”) is managed by Scott D. Kaufman, who served as Chief Executive Officer of the Company from November
24, 2020, through May 11, 2022, and as co-Chief Executive Officer from May 12, 2022 through August 8, 2022, and as a Director from November
4, 2019, through August 8, 2022, and as Chairman of the Board of Directors from November 24, 2020, through December 1, 2021.
Securities
Purchase Agreement – December 2019
On
December 19, 2019, the Company entered into the Securities Purchase Agreement (the “Barlock Purchase Agreement”) with Barlock,
pursuant to which the Company sold to Barlock, for a cash purchase price of $2,500,000, securities comprising of: (i) a secured convertible
debenture (the “Barlock Convertible Debenture”) and (ii) Series A common stock purchase warrants assigned from Bristol Investment
Fund. Pursuant to the Barlock Purchase Agreement, the Company paid $25,400 to Barlock for legal fees which was recorded as a debt discount.
(A)
Secured Convertible Debenture
On
December 19, 2019, the Company issued the Barlock Convertible Debenture with an initial principal balance of $2,500,000, and a maturity
date of December 30, 2021. The Barlock Convertible Debenture accrues interest on the aggregate unconverted and then outstanding principal
amount at the rate of 12% per annum. Interest is payable quarterly on (i) January 1, April 1, July 1 and October 1, beginning on January
1, 2020, (ii) on each date the purchaser converts, in whole or in part, the Barlock Convertible Debenture into Common Stock (as to that
principal amount then being converted), and (iii) on the day that is 20 days following the Company’s notice to redeem some or all
of the of the outstanding principal of the Barlock Convertible Debenture (only as to that principal amount then being redeemed) and on
the maturity date. Interest may be paid in cash, Common Stock, or a combination thereof at the sole discretion of the Company.
The
Barlock Convertible Debenture is convertible into shares of Common Stock at any time at the option of the holder. The initial conversion
price was $2.50 (as converted) per share, subject to adjustment. In the event default occurs, the conversion price shall be the lesser
of (i) the initial conversion price of $2.50 and (ii) 50% of the average of the three lowest trading prices during the 20 trading days
immediately prior to the applicable conversion date.
The
Barlock Convertible Debenture contains anti-dilution provisions where, if the Company, at any time while the Barlock Convertible Debenture
is outstanding, sells or grants any option to purchase, right to reprice, or otherwise dispose of or issue any Common Stock or common
stock equivalents, at an effective price per share less that is lower than the conversion price then in effect, the conversion price
shall be reduced to the lower effective price per share.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 decreased the conversion price to $0.25. As of December 31, 2020, the Barlock Convertible Debenture was convertible into 10,000,000
shares of Common Stock.
On
October 31, 2021, in consideration for the release of senior security interest in certain of the assets, properties, and rights of discontinued
operations that were sold during the year, the Barlock Convertible Debenture was amended to reduce the conversion price to $0.175, and
the maturity date was amended to December 31, 2023.
In
March 2022, the principal amount of $3,150 under the Barlock Convertible Debenture was converted into 18,000 shares of Common Stock at
a conversion price of $0.175.
As
of March 31, 2023, the Barlock Convertible Debenture with a principal amount of $2,496,850 was convertible into 14,267,714 shares of
Common Stock at a conversion price of $0.175.
As
of March 31, 2023 and December 31, 2022, the amount of accrued interest payable to Barlock under the Barlock Convertible Debenture was
$985,923 and $912,044, respectively.
As
discussed further below, the Barlock Purchase Agreement and the Barlock Convertible Debenture were amended and restated in connection
with the Closing.
(B) Series
A Common Stock Purchase Warrants
On
December 19, 2019, Bristol Investment Fund assigned to Barlock Capital Management, LLC Series A common stock purchase warrants to acquire
up to 300,000 shares of Common Stock at exercise price of $2.50, and expiring on December 1, 2024. The warrants contain anti-dilution
provisions where, if the Company, at any time while the warrant is outstanding, sells or grants any option to purchase, right to reprice,
or otherwise dispose of or issue any Common Stock or common stock equivalents, at an effective price per share less than the exercise
price then in effect, the exercise price shall be reduced, and the number of warrant shares shall be increased such that the aggregate
exercise price payable hereunder, shall be equal to the aggregate exercise price prior to such adjustment.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 increased the number of shares of Common Stock issuable upon exercise of the Series A common stock purchase warrants to 3,000,000,
and decreased the exercise price to $0.25. As of December 31, 2020, Barlock Capital Management, LLC held Series A common stock purchase
warrants to acquire 3,000,000 shares of Common Stock at an exercise price to $0.25.
On
October 31, 2021, as a result of the anti-dilution provisions, the effect of reducing the conversion price of the Original Debentures
to $0.175 increased the number of shares of Common Stock issuable upon exercise of the Series A common stock purchase warrants to 4,285,714,
and decreased the exercise price to $0.175.
As
of March 31, 2023, Barlock Capital Management, LLC held Series A common stock purchase warrants to acquire 4,285,714 shares of Common
Stock at an exercise price to $0.175.
In
addition, the warrants may be exercised, in whole or in part, at any time until they expire. If at any time after the six month anniversary
of the closing date there is no effective registration statement, or no current prospectus available for the resale of the warrant shares,
then the warrants may be exercised, in whole or in part, on a cashless basis at any time until they expire. Shares of Common Stock issuable
upon exercise of warrants are subject to a 4.99% beneficial ownership limitation, which may increase to 9.99% upon notice to the Company.
Upon
issuance of the Barlock Convertible Debenture, the Company valued the warrants using the Black-Scholes Option Pricing model and accounted
for it using the relative fair value of $545,336 as debt discount on the consolidated balance sheet. Debt discount is amortized over
the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method which approximates the interest
method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statement of operations.
There was no unamortized debt discount as of March 31, 2023 and December 31, 2022.
Prior
to the Closing, the Series A common stock purchase warrants were cancelled and retired and ceased to exist without the payment of any
consideration to the holders thereof.
Barlock
Capital Management, LLC
Barlock
Capital Management, LLC, is managed by Scott D. Kaufman. From September 2021 through December 2021, the Company rented executive office
space located at 2700 Homestead Road, Park City, UT 84098, for approximately $3,000 per month from Barlock Capital Management, LLC.
American
Natural Energy Corporation
Scott
D. Kaufman is a director and stockholder of American Natural Energy Corporation (“ANEC”). In addition, Richard G. Boyce,
a former director of the Company who resigned from the Board on July 22, 2022, is also a director of ANEC. On October 22, 2021, the Company
entered into an agreement with ANEC, where ANEC would: (i) allow the Company to moor a barge on the ANEC operations site with the Company’s
mobile data center that houses cryptocurrency miners and a mobile turbine and (ii) supply natural gas to power a mobile turbine that
produces electricity that, in turn, is used to power the miners. ANEC charged the Company for the amount of natural gas used based on
the daily spot price of an unaffiliated third party, and a daily fee of $1,500 during the initial 90-day term, and $2,000 thereafter,
for the use of their operations site to moor the barge. The agreement terminated on May 24, 2022. The total amount paid to ANEC under
the agreement for the three months ended March 31, 2023 and March 31, 2022 was $0 and $230,000, respectively.
In
addition, in January 2022, the Company began renting executive office space located at 2700 Homestead Road, Park City, UT 84098, for
approximately $3,000 per month from ANEC. The amount of rent paid to ANEC for the three months ended March 31, 2023 and March 31, 2022
was $0 and $9,000, respectively.
Scott
D. Kaufman, Former Chief Executive Officer
On
September 7, 2021, Scott D. Kaufman received a one-time non-accountable expense reimbursement of $200,000 in consideration for significant
efforts and diligence in negotiating and structuring investment transactions.
K2PC
Consulting, LLC
K2PC
Consulting, LLC is managed by the spouse of Scott D. Kaufman. The company paid marketing fees to K2PC Consulting, LLC in the amount of
$0 and $7,850, for the three months ended March 31, 2023 and 2022, respectively.
John
D. Maatta, Former Director, Chief Executive Officer and Interim Chief Financial Officer
John
D. Maatta is a former director, and served as Chief Executive Officer of the Company until November 24, 2020, as co-Chief Executive Officer
from May 12, 2022 through July 8, 2022, and again as Chief Executive Officer beginning on July 9, 2022 to May 3, 2023. Mr. Maatta also
served as Interim Chief Financial Officer from March 8, 2023 to May 3, 2023.
On
November 22, 2018, the Company agreed to issue 86,466 shares of Preferred Stock for settlement of the outstanding compensation due to
Mr. Maatta of $212,707, for the period June 17, 2017 through November 15, 2018.
On
August 3, 2020, the Company cancelled the 86,466 shares of Preferred Stock previously determined to be issued, and issued 21,271 shares
of Series A Preferred Stock for the settlement of the previous outstanding amount due. In addition, on August 3, 2020, the Company issued
29,496 shares of Series A Preferred Stock for the settlement of $294,965 in additional outstanding compensation due to Mr. Maatta and
35,100 shares of Series A Preferred Stock for the settlement of $351,000 in loans to the Company made by Mr. Matta. The non-interest-bearing
loans were made as follows: $100,000 to the Company during the year ended December 31, 2019, $125,000 to the Company during the year
ended December 31, 2020 and other amounts on behalf of the Company amounting to $126,000. There were no outstanding balance of the loan
payable to Mr. Maatta as of March 31, 2023 or December 31, 2022.
On
March 1, 2021, 8,500 shares of Series A Preferred Stock were issued to Mr. Maatta in satisfaction of an aggregate of $85,546 due to Mr.
Maatta under his separation agreement.
The
Series A Preferred Stock were converted into shares of Common Stock in the Restructuring Transactions.
CONtv
CONtv
is a joint venture with third parties and Bristol Capital. The Company holds a limited and passive interest of 10% in CONtv. As of March
31, 2023 and December 31, 2022, the investment in CONtv and the amount due to CONtv was $0 for both periods.
The
Merger Agreement and Related Transactions
On
May 3, 2023, Prairie Operating Co., a Delaware corporation formerly named Creek Road Miners, Inc. completed
its previously announced merger with Prairie Operating Co., LLC, a Delaware limited liability company (“Prairie LLC”), pursuant
to the terms of the Amended and Restated Agreement and Plan of Merger, dated as of May 3, 2023 (the “Merger Agreement,” and
the closing thereunder, the “Closing”), by and among the Company, Creek Road Merger Sub, LLC, a Delaware limited liability
company and wholly-owned subsidiary of the Company (“Merger Sub”), and Prairie LLC, pursuant to which, among other things,
Merger Sub merged with and into Prairie LLC, with Prairie LLC surviving and continuing to exist as a Delaware limited liability company
and a wholly-owned subsidiary of the Company (the “Merger”). Upon consummation of the Merger, the Company changed its name
from “Creek Road Miners, Inc.” to “Prairie Operating Co.” The Company continues to trade under the current ticker
symbol “CRKR” and expects to commence trading on the OTCQB under the new name and ticker symbol “PROP” once FINRA
processes the Company’s pending Rule 10b-17 action request pursuant to FINRA Rule 6490.
Prior to the consummation of the Merger, the Company effectuated a series of restructuring transactions in the following order: (i) the
Company’s Series A preferred stock, par value $0.0001 per share (“Series A Preferred Stock”), Series B preferred stock,
par value $0.0001 per share (“Series B Preferred Stock”), and Series C preferred stock, par value $0.0001 per share (“Series
C Preferred Stock”), plus accrued dividends, were converted, in the aggregate, into 76,251,018 shares of the Company’s common
stock, par value $0.0001 per share (“Common Stock”); (ii) the Company’s 12% senior secured convertible debentures (the
“Original Debentures”), plus accrued but unpaid interest and a 30% premium, were exchanged, in the aggregate, for (a) 12%
amended and restated senior secured convertible debentures in the principal amount of $1,000,000 in substantially the same form as their
respective Original Debentures, (b) shares of Common Stock and (c) shares of Series D Preferred Stock, and such Series D Preferred Stock
shall automatically convert into shares of Common Stock at a price of $0.175 per share immediately after the shares of Common Stock is
listed or quoted for trading on the NYSE American securities exchange (or any successor thereto) or any other national securities exchange;
(iii) accrued fees payable to the Company’s board of directors (the “Board”) in the amount of $110,250 were converted
into 630,000 shares of Common Stock; (iv) accrued consulting fees of the Company in the amount of $318,750 payable to Bristol Capital
Advisors, LLC (“Bristol Capital”) were converted into 1,821,429 shares of Common Stock; and (v) all amounts payable pursuant
to certain convertible promissory notes were converted into an aggregate of 6,608,220 shares of Common Stock.
Prior
to the Closing, all of the Company’s then existing warrants to purchase shares of Common Stock and Series B Preferred Stock and
options to purchase shares of Common Stock were cancelled and retired and ceased to exist without the payment of any consideration to
the holders thereof.
At
the effective time of the Merger, membership interests in Prairie LLC were converted into the right to receive each member’s pro
rata share of 65,647,676 shares of Common Stock (the “Merger Consideration”).
In
addition, the Company consummated the previously announced purchase of oil and gas leases, including all of Exok, Inc.’s, an Oklahoma
corporation (“Exok”), right, title and interest in, to and under certain undeveloped oil and gas leases located in Weld County,
Colorado, together with certain other associated assets, data and records, consisting of approximately 3,157 net mineral acres in, on
and under approximately 4,494 gross acres from Exok for $3,000,000 pursuant to the Amended and Restated Purchase and Sale Agreement,
dated as of May 3, 2023, by and among the Company, Prairie LLC and Exok (the “Exok Transaction”).
To
fund the Exok Transaction, the Company received an aggregate of $17.3 million in proceeds from a number of investors (the “PIPE
Investors”), and the PIPE Investors were issued Series D preferred stock, par value $0.01 per share (“Series D Preferred
Stock”), with a stated value of $1,000 per share and convertible into shares of Common Stock at a price of $0.175 per share, and
100% warrant coverage for each of Series A warrants to purchase shares of Common Stock (the “Series A Warrants”) and Series
B warrants to purchase shares of Common Stock (the “Series B Warrants” and together with the Series A Warrants, the “PIPE
Warrants”), in a private placement pursuant to securities purchase agreements entered into with each PIPE Investor (collectively,
the “Securities Purchase Agreements”).
Nature
of Business
Cryptocurrency
Mining
We
generate substantially all our revenue through cryptocurrency we earn through our mining activities. We have historically mined and held
Bitcoin exclusively, which we may sell to fund our operating and capital expenditures. Our mining operations commenced on October 24,
2021. We use special cryptocurrency mining computers (known as “miners”) to solve complex cryptographic algorithms to support
the Bitcoin blockchain and, in return, receive Bitcoin as our reward. Miners measure their processing power, which is known as “hashing”
power, in terms of the number of hashing algorithms solved (or “hashes”) per second, which is the miner’s “hash
rate.” We participate in mining pools that pool the resources of groups of miners and split cryptocurrency rewards earned according
to the “hashing” capacity each miner contributes to the mining pool. Since June 30, 2022 the Company has neither received
meaningful cryptocurrency awards nor generated meaningful revenue from cryptocurrency mining.
Mining
Equipment
All
of our miners were manufactured by Bitmain, and incorporate application-specific integrated circuit (ASIC) chips specialized
to solve blocks on the Bitcoin blockchains using the 256-bit secure hashing algorithm (SHA-256) in return for Bitcoin cryptocurrency
rewards. As of March 31, 2023, we had 510 Bitmain S19J Pro miners with 51.0 Ph/s of hashing capacity and 270 Bitmain S19 miners with
24.3 Ph/s of hashing capacity.
On
December 17, 2021 the Company entered into a Non-Fixed Price Sales and Purchase Agreement (the “Bitmain Agreement”) with
Bitmain Technologies Limited (“Bitmain”) for 600 Bitmain S19XP miners with a reference price of approximately $11,250
per miner. The miners have a total of 84 Ph/s of hashing capacity and an initial estimated purchase commitment of $6,762,000
(the “total reference price”), subject to price adjustments and related offsets, including potential adjustments related
to the market price of miners. The final adjusted price under the contract was $4,016,600
as of March 31, 2023, and the Company has made payments of $4,016,600
(classified as deposits on mining equipment) to Bitmain pursuant to the Bitmain Agreement as of such date.
As
of March 31, 2023, none of the 600 miners purchased from Bitmain have been delivered to the Company. In May 2023, the Company paid
shipping costs of $54,000 and initiated the shipment of miners to the Company from Asia.
Mining
Results
The
Company measures its operations by the number and U.S. Dollar (US$) value of the cryptocurrency rewards it earns from its cryptocurrency
mining activities. The following table presents additional information regarding our cryptocurrency mining operations:
Schedule of Cryptocurrency Mining Operations
| |
Quantity
of Bitcoin | | |
US$
Amounts | |
Balance September 30, 2021 | |
| — | | |
$ | — | |
Revenue recognized
from cryptocurrency mined | |
| 6.7 | | |
| 369,804 | |
Mining pool operating fees | |
| (0.1 | ) | |
| (7,398 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (59,752 | ) |
Balance December 31, 2021 | |
| 6.6 | | |
$ | 302,654 | |
Revenue recognized from
cryptocurrency mined | |
| 8.3 | | |
| 343,055 | |
Mining pool operating fees | |
| (0.2 | ) | |
| (6,868 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (106,105 | ) |
Balance March 31, 2022 | |
| 14.7 | | |
$ | 532,736 | |
Revenue recognized from
cryptocurrency mined | |
| 4.6 | | |
| 166,592 | |
Mining pool operating fees | |
| (0.1 | ) | |
| (3,428 | ) |
Proceeds from the sale
of cryptocurrency | |
| (18.9 | ) | |
| (564,205 | ) |
Realized loss on the sale
of cryptocurrency | |
| — | | |
| (131,075 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (34 | ) |
Balance
June 30, 2022 (1) | |
| 0.3 | | |
$ | 586 | |
Revenue recognized from
cryptocurrency mined | |
| 0.3 | | |
| 7,955 | |
Mining pool operating fees | |
| — | | |
| (156 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (1,035 | ) |
Balance September 30,
2022 (1) | |
| 0.6 | | |
$ | 7,350 | |
Revenue recognized from
cryptocurrency mined | |
| — | | |
| — | |
Mining pool operating fees | |
| — | | |
| — | |
Proceeds from the sale
of cryptocurrency | |
| (0.6 | ) | |
| (11,203 | ) |
Realized
gain on the sale of cryptocurrency | |
| — | | |
| 3,853 | |
Balance December 31, 2022 | |
| — | | |
$ | — | |
Balance beginning | |
| — | | |
$ | — | |
Revenue recognized from
cryptocurrency mined | |
| — | | |
| — | |
Mining pool operating fees | |
| — | | |
| — | |
Proceeds from the sale
of cryptocurrency | |
| — | | |
| — | |
Realized
gain on the sale of cryptocurrency | |
| — | | |
| — | |
Balance March 31, 2023
(1) | |
| — | | |
$ | — | |
Balance
ending | |
| - | | |
$ | - | |
|
(1) |
Since
June 30, 2022 the Company is neither receiving meaningful cryptocurrency awards nor generating meaningful revenue from cryptocurrency
mining. |
Factors
Affecting Profitability
Our
business is heavily dependent on the market price of Bitcoin. The prices of cryptocurrencies, specifically Bitcoin, have experienced
substantial volatility. Further affecting the industry, and particularly for the Bitcoin blockchain, the cryptocurrency reward for solving
a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of
inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half,
hence the term “halving.” For Bitcoin the reward was initially set at 50 Bitcoin currency rewards per block. The Bitcoin
blockchain has undergone halving three times since its inception as follows: (1) on November 28, 2012 at block 210,000; (2) on July 9,
2016 at block 420,000; and (3) on May 11, 2020 at block 630,000, when the reward was reduced to its current level of 6.25 Bitcoin per
block. The next halving for the Bitcoin blockchain is anticipated to occur in March 2024 at block 840,000, when the reward will be reduced
to 3.125 Bitcoin per block. This process will reoccur until the total amount of Bitcoin currency rewards issued reaches 21 million and
the theoretical supply of new Bitcoin is exhausted. Many factors influence the price of Bitcoin, and potential increases or decreases
in prices in advance of, or following, a future halving is unknown.
We
have historically mined and held Bitcoin exclusively, which we may sell to fund our operating and capital expenditures. Since
June 30, 2022 the Company has neither received meaningful cryptocurrency awards nor generated meaningful revenue from cryptocurrency
mining.
Our
business is heavily dependent on the market price of Bitcoin, which has experienced substantial volatility and has recently dropped
to its lowest price since December 2020. As of March 31, 2023 the
market price of Bitcoin was $28,478,
which reflects a decrease of approximately 31% since the beginning of 2022, and a decrease of approximately 58% from its all-time
high of approximately $67,000.
The price movements result in decreased cryptocurrency mining revenue which has had a material adverse effect on our business and
financial results.
Government
Regulation
Cryptocurrency
is increasingly becoming subject to governmental regulation, both in the U.S. and internationally. State and local regulations also may
apply to our activities and other activities in which we may participate in the future. Numerous regulatory bodies have shown an interest
in regulating blockchain or cryptocurrency activities. For example, on March 9, 2022 President Biden signed an executive order on cryptocurrencies.
While the executive order does not mandate any specific regulations, it instructs various federal agencies to consider potential regulatory
measures, including the evaluation of the creation of a U.S. Central Bank digital currency. Future changes to existing regulations or
entirely new regulations may affect our business in ways it is not presently possible for us to predict with any reasonable degree of
reliability. As the regulatory and legal environment evolves, we may become subject to new laws and regulation which may affect our mining
and other activities. For additional discussion regarding our belief about the potential risks existing and future regulation pose to
our business, see the Section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December
31, 2022.
Basis
of Presentation
The
accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable
rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information
and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant
to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2022 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2022 included herein was derived
from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by
GAAP.
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to
fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all
adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not
necessarily indicative of fiscal year-end results.
Note
2. Going Concern Analysis
Historically,
we have relied upon cash from financing activities to fund substantially all of the cash requirements of our activities and have
incurred significant losses and experienced negative cash flow. The Company had net losses from continuing operations of $971,366,
and $3,095,699,
for the three months ended March 31, 2023 and 2022, respectively. We cannot predict if we will be profitable. We may continue to
incur losses for an indeterminate period of time and may be unable to achieve profitability. An extended period of losses and
negative cash flow may prevent us from successfully operating and expanding our business. We may be unable to achieve or sustain
profitability on a quarterly or annual basis. On March 31, 2023, we had cash and cash equivalents of $27,020,
a working capital deficit of approximately $14 million,
and an accumulated deficit of approximately $62 million.
Upon closing of the Merger and related transactions on May 3, 2023, we received proceeds from the issuance of preferred stock of
$17.3 million.
A majority of these proceeds remain within the Company after the Merger and related transactions for use in our
business.
The
assessment of the liquidity and going concern requires the Company to make estimates of future activity and judgments about whether the
Company can meet its obligations and has adequate liquidity to operate. Significant assumptions used in the Company’s forecasted
model of liquidity in the next 12 months include its current cash position, inclusive of the impacts from the Merger and related transactions
discussed above, and its ability to manage spending. Based on an assessment of these factors, management believes that the Company
will have adequate liquidity for its operations for at least the next 12 months.
The
accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets, or the amounts and classification of liabilities that may result from the matters discussed herein.
Note
3. Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying financial statements are consolidated and include the accounts of the Company and its wholly-owned subsidiaries. Intercompany
balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
These
estimates and assumptions include estimates for reserves of uncollectible accounts, accruals for potential liabilities, assumptions made
in valuing equity instruments issued for services or acquisitions, and realization of deferred tax assets.
Reclassification
Certain
prior period amounts have been reclassified to conform to current period presentation. Such reclassifications did not affect net assets,
net loss or cash flows as previously presented.
Concentration
of Credit Risk
Financial
instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents. The Company
places its cash with high quality financial institutions and at times may exceed the FDIC $250,000 insurance limit. The Company does
not anticipate incurring any losses related to these credit risks.
Cryptocurrency
Cryptocurrency
(Bitcoin) is included in current assets in the accompanying consolidated balance sheets. The classification of cryptocurrencies as a
current asset has been made after the Company’s consideration of the significant consistent daily trading volume on readily available
cryptocurrency exchanges and the absence of limitations or restrictions on Company’s ability to sell Bitcoin. Cryptocurrencies
awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy
disclosed below. Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with
an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances
occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount
exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured.
In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely
than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative
impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the
extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses
is not permitted. Cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the
accompanying consolidated statements of cash flows.
Impairment
of Long-Lived Assets
Long-lived
assets are comprised of intangible assets and property and equipment. Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash
flows produced by the asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment
exists, pursuant to the provisions of FASB ASC 360-10 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of.” If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets,
if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including
a discounted value of estimated future cash flows and fundamental analysis. The Company reports an asset to be disposed of at the lower
of its carrying value or its estimated net realizable value.
Property
and equipment
Property
and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of 3 to 9 years.
Leasehold improvements are amortized over the shorter of the useful lives of the related assets, or the lease term. Expenditures for
maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains and losses on disposals
are included in the consolidated statements of operations.
Management
assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from
the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment
loss is recognized to write down the asset to its estimated fair value.
Leases
The
Company accounts for leases in accordance with the provisions of ASC 842, Leases. This standard requires lessees to recognize on the
balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation
of expenses and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or operating lease.
We
determine if an arrangement contains a lease at inception. Right of use (“ROU”) assets represent our right to use an underlying
asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and
liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
We
recognize lease expense for these leases on a straight-line basis over the lease term. We recognize variable lease payments in the period
in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured
using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred.
Revenue
Recognition
The
Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers. The underlying principle of ASC 606 is
to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected.
Revenues
are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration
that we expect to receive in exchange for those goods or services. The Company applies the following five steps in order to determine
the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements:
|
● |
identify
the contract with a customer; |
|
● |
identify
the performance obligations in the contract; |
|
● |
determine
the transaction price; |
|
● |
allocate
the transaction price to performance obligations in the contract; and |
|
● |
recognize
revenue as the performance obligation is satisfied. |
The
Company has entered into digital asset mining pools by executing contracts with the mining pool operators to provide computing power
to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation
only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company
is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction
fees to the mining pool operator which are recorded as a component of cost of revenues) for successfully adding a block to the blockchain.
The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator
to the total computing power contributed by all mining pool participants in solving the current algorithm.
Providing
computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. The provision
of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators. The
transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date
received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from
the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur,
the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm)
and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant
financing component in these transactions.
Fair
value of the cryptocurrency award received is determined using the market rate of the related cryptocurrency at the time of receipt.
There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies
recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment.
In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect
on the Company’s consolidated financial position and results from operations.
Cryptocurrency
Mining Costs
The
Company’s cryptocurrency mining costs consist primarily of direct costs of earning Bitcoin related to mining operations, including
mining pool fees, natural gas costs, turbine rental costs, and mobile data center rental costs, but exclude depreciation and amortization,
which are separately stated in the Company’s consolidated statements of operations.
Stock-Based
Compensation
The
Company periodically issues stock options, warrants and restricted stock to employees and non-employees for services, in capital raising
transactions, and for financing costs. The Company accounts for share-based payments under the guidance as set forth in the Share-Based
Payment Topic 718 of the FASB Accounting Standards Codification, which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options, based on
estimated fair values. The Company estimates the fair value of stock option and warrant awards to employees and directors on the date
of grant using an option-pricing model, and the value of the portion of the award that is ultimately expected to vest is recognized as
expense over the required service period in our Statements of Operations. We estimate the fair value of restricted stock awards to employees
and directors using the market price of our common stock on the date of grant, and the value of the portion of the award that is ultimately
expected to vest is recognized as expense over the required service period in our Statements of Operations.
Income
taxes
We
account for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences,
and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Discontinued
Operations
On
August 6, 2021, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Informa.
Pursuant to the Asset Purchase Agreement, Creek Road Miners Corp. (formerly known as Kick the Can Corp.) sold, transferred, and assigned certain
assets, properties, and rights to Informa related to the business of operating and producing live pop culture events. The
Company released deferred revenue and other liabilities totaling $722,429
and recognized other income of this amount.
On
September 15, 2021, the Company sold our wholly owned subsidiary which contained our Jevo assets and all rights to our Jevo operations
for $1,500,000 and recognized a gain on the transaction of approximately $1,130,740.
The
related assets and liabilities associated with the discontinued operations in our consolidated balance sheets for the three months
ended March 31, 2023 and year ended December 31, 2022, are classified as discontinued operations. Additionally, the financial
results associated with discontinued operations in our consolidated statement of operations for the three months ended March 31, 2023
and 2022, are classified as discontinued operations.
Earnings
(Loss) Per Common Share
Basic
earnings (loss) per share is computed by dividing earnings (loss) attributable to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share is computed by dividing earnings (loss) attributable to common
stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have
been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. The dilutive effect of potentially
dilutive securities is reflected in diluted net income per share if the exercise prices were lower than the average fair market value
of common shares during the reporting period. Potential common shares are excluded from the computation when their effect is antidilutive.
Basic and diluted earnings (loss) attributable to common stockholders is the same for the three months ended March 31, 2023 and 2022,
because the Company has only incurred losses and all potentially dilutive securities are anti-dilutive. Potentially dilutive securities
that were not included in the computation of diluted earnings (loss) attributable to common stockholders at March 31, 2023 because their
inclusion would be anti-dilutive are as follows:
Schedule of Anti-dilutive Securities Excluded from Earnings
Per Share
Potentially
Dilutive Security | |
Quantity | | |
Stated
Value Per Share (1) | | |
Total
Value or Stated Value | | |
Assumed Conversion
Price (1) | | |
Resulting
Common Shares | |
Common stock options | |
| 259,250 | | |
$ | — | | |
$ | — | | |
| — | | |
| 259,250 | |
Common stock warrants | |
| 21,984,266 | | |
| — | | |
| — | | |
| — | | |
| 21,984,266 | |
Series A preferred stock | |
| 273,129 | | |
| 10 | | |
| 2,731,290 | | |
| 0.175 | | |
| 15,607,371 | |
Series B preferred stock | |
| 1,458 | | |
| 1,080 | | |
| 1,574,640 | | |
| 0.500 | | |
| 3,149,280 | |
Series C preferred stock | |
| 7,630 | | |
| 1,111 | | |
| 8,476,930 | | |
| 0.500 | | |
| 16,953,860 | |
Series B preferred stock warrants | |
| 5,000 | | |
| 1,080 | | |
| 5,400,000 | | |
| 0.500 | | |
| 10,800,000 | |
Secured convertible debentures – related
parties | |
| — | | |
| — | | |
| 4,993,700 | | |
| 0.175 | | |
| 28,535,429 | |
Convertible notes payable | |
| — | | |
| — | | |
| 1,400,000 | | |
| 0.500 | | |
| 2,800,000 | |
Total | |
| | | |
| | | |
| | | |
| | | |
| 100,089,456 | |
Related
Parties
The
Company follows ASC 850-10, Related Parties, for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20, the related parties include: (a) affiliates of the Company (“affiliate” means, with
respect to any specified person, any other person that, directly or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with such person, as such terms are used in and construed under Rule 405 under the
Securities Act of 1933, as amended (the “Securities Act”)); (b) entities for which investments in their equity securities would be required, absent the election of the fair
value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing
entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the
trusteeship of management; (d) principal owners of the Company; (e) management of the Company; (f) other parties with which the
Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent
that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that
can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in
one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate interests.
Recently
Issued Accounting Pronouncements
Recent
accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future consolidated financial statements.
Note
4. Deposits on Mining Equipment
Deposits
on mining equipment, consisted of the following:
Schedule of Mining Equipment
| |
Cryptocurrency
Miners | | |
Mobile
Data Centers | | |
Total | |
Balance December 31, 2021 | |
$ | 7,089,000 | | |
$ | 524,230 | | |
$ | 7,613,230 | |
Deposits on equipment during
the period | |
| 1,602,300 | | |
| 530,430 | | |
| 2,132,730 | |
Equipment
delivered during the period | |
| (4,722,300 | ) | |
| (349,980 | ) | |
| (5,072,280 | ) |
Balance December 31, 2022 | |
$ | 3,969,000 | | |
$ | 704,680 | | |
$ | 4,673,680 | |
Balance beginning | |
$ | 3,969,000 | | |
$ | 704,680 | | |
$ | 4,673,680 | |
Deposits on equipment during
the period | |
| 47,600 | | |
| — | | |
| 47,600 | |
Equipment
delivered during the period | |
| — | | |
| — | | |
| — | |
Balance March 31, 2023 | |
$ | 4,016,600 | | |
$ | 704,680 | | |
$ | 4,721,280 | |
Balance ending | |
$ | 4,016,600 | | |
$ | 704,680 | | |
$ | 4,721,280 | |
All
of our miners were manufactured by Bitmain, and incorporate application-specific integrated circuit (ASIC) chips specialized
to solve blocks on the Bitcoin blockchains using the 256-bit secure hashing algorithm (SHA-256) in return for Bitcoin cryptocurrency
rewards. As of March 31, 2023, we had 510 Bitmain S19J Pro miners with 51.0 Ph/s of hashing capacity and 270 Bitmain S19 miners with
24.3 Ph/s of hashing capacity.
On
December 17, 2021 the Company entered into a Non-Fixed Price Sales and Purchase Agreement (the “Bitmain Agreement”) with
Bitmain Technologies Limited (“Bitmain”) for 600 Bitmain S19XP miners with a reference price of approximately $11,250
per miner. The miners have a total of 84 Ph/s of hashing capacity and an initial estimated purchase commitment of $6,762,000
(the “total reference price”), subject to price adjustments and related offsets, including potential adjustments related
to the market price of miners. The final adjusted price under the contract was $4,016,600
as of March 31, 2023, and the Company has made payments of $4,016,600
(classified as deposits on mining equipment) to Bitmain pursuant to the Bitmain Agreement as of such date.
As
of March 31, 2023, none of the 600 miners purchased from Bitmain have been delivered to the Company,
and will remain undelivered until all fees are paid to ship the miners from the Bitmain facility to the Company.
Note
5. Cryptocurrency
The
Company measures its operations by the number and U.S. Dollar (US$) value of the cryptocurrency rewards it earns from its
cryptocurrency mining activities. The Company recognized impairments, or write downs, of cryptocurrency (Bitcoin) rewards to the
lowest fair market value of Bitcoin from the time the reward was earned through the end of the reporting period. The impairments
amounted to $0
and $106,105
for the three months ended March 31, 2023 and March 31, 2022, respectively. If the subsequent market price of Bitcoin increases, the
asset balance will not be adjusted for the increase. The following table presents additional information regarding our
cryptocurrency mining operations:
Schedule of Additional Information of Cryptocurrency Mining
Operations
| |
| | | |
| | |
| |
| Quantity of Bitcoin | | |
| US
$ Amounts
| |
Balance December 31, 2021 | |
| 6.6 | | |
$ | 302,654 | |
Revenue recognized from
cryptocurrency mined | |
| 8.3 | | |
| 343,055 | |
Mining pool operating fees | |
| (0.2 | ) | |
| (6,868 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (106,105 | ) |
Balance March 31, 2022 | |
| 14.7 | | |
$ | 532,736 | |
Revenue recognized from
cryptocurrency mined | |
| 4.6 | | |
| 166,592 | |
Mining pool operating fees | |
| (0.1 | ) | |
| (3,428 | ) |
Proceeds from the sale
of cryptocurrency | |
| (18.9 | ) | |
| (564,205 | ) |
Realized loss on the sale
of cryptocurrency | |
| — | | |
| (131,075 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (34 | ) |
Balance June 30, 2022
(1) | |
| 0.3 | | |
$ | 586 | |
Revenue recognized from
cryptocurrency mined | |
| 0.3 | | |
| 7,955 | |
Mining pool operating fees | |
| — | | |
| (156 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (1,035 | ) |
Balance September 30,
2022 | |
| 0.6 | | |
$ | 7,350 | |
Revenue recognized from
cryptocurrency mined | |
| — | | |
| — | |
Mining pool operating fees | |
| — | | |
| — | |
Proceeds from the sale
of cryptocurrency | |
| (0.6 | ) | |
| (11,203 | ) |
Realized
gain on the sale of cryptocurrency | |
| — | | |
| 3,853 | |
Balance December 31, 2022 | |
| — | | |
$ | — | |
Balance beginning | |
| — | | |
$ | — | |
Revenue recognized from
cryptocurrency mined | |
| — | | |
| — | |
Mining pool operating fees | |
| — | | |
| — | |
Proceeds from the sale
of cryptocurrency | |
| — | | |
| — | |
Realized
gain on the sale of cryptocurrency | |
| — | | |
| — | |
Balance March 31, 2023 | |
| — | | |
$ | — | |
Balance ending | |
| — | | |
$ | — | |
|
(1) |
Since
June 30, 2022 the Company has neither received meaningful cryptocurrency awards nor generated meaningful revenue from cryptocurrency
mining. |
Note
6. Property and Equipment
Property
and equipment, excluding those associated with discontinued operations, stated at cost, less accumulated depreciation and amortization,
consisted of the following:
Schedule of Property and Equipment
| |
March
31, 2023 | | |
December
31, 2022 | |
Cryptocurrency miners | |
$ | 2,152,970 | | |
$ | 2,152,970 | |
Mobile data center | |
| 219,372 | | |
| 219,372 | |
Computer equipment | |
| 6,881 | | |
| 6,881 | |
Total | |
| 2,379,223 | | |
| 2,379,223 | |
Less accumulated depreciation | |
| (811,792 | ) | |
| (747,216 | ) |
Net, Property and equipment | |
$ | 1,567,431 | | |
$ | 1,632,007 | |
Depreciation
expense, excluding that associated with discontinued operations, for the three months ended March 31, 2023 and 2022 amounted to $64,576
and $164,520, respectively.
All
of our miners were manufactured by Bitmain, and incorporate application-specific integrated circuit (ASIC) chips specialized
to solve blocks on the Bitcoin blockchains using the 256-bit secure hashing algorithm (SHA-256) in return for Bitcoin cryptocurrency
rewards. As of March 31, 2023, we had 510 Bitmain S19J Pro miners with 51.0 Ph/s of hashing capacity and 270 Bitmain S19 miners with
24.3 Ph/s of hashing capacity.
Note
7. Amounts Due to Related Parties
Amounts
due to related parties as of March 31, 2023 consisted of the following:
Schedule of Due to Related Parties
| |
Bristol
Capital, LLC | | |
Bristol Investment Fund,
Ltd. | | |
Barlock
2019 Fund,
LP | | |
Total | |
Accrued interest and expenses | |
$ | 375,000 | | |
$ | 1,899,074 | | |
$ | 985,923 | | |
$ | 3,259,997 | |
Current secured convertible
debenture | |
| — | | |
| 2,496,850 | | |
| 2,496,850 | | |
| 4,993,700 | |
Total | |
$ | 375,000 | | |
$ | 4,395,924 | | |
$ | 3,482,773 | | |
$ | 8,253,697 | |
Amounts
due to related parties as of December 31, 2022 consisted of the following:
| |
Bristol
Capital, LLC | | |
Bristol Investment Fund,
Ltd. | | |
Barlock
2019 Fund,
LP | | |
Total | |
Accrued interest and expenses | |
$ | 318,750 | | |
$ | 1,825,195 | | |
$ | 912,044 | | |
$ | 3,055,989 | |
Current secured convertible
debenture | |
| — | | |
| 2,496,850 | | |
| 2,496,850 | | |
| 4,993,700 | |
Total | |
$ | 318,750 | | |
$ | 4,322,045 | | |
$ | 3,408,894 | | |
$ | 8,049,689 | |
As
of March 31, 2023, the secured convertible debentures with an aggregate principal amount of $4,993,700, comprised of a secured convertible
debenture with a principal amount of $2,496,850 held by Bristol Investment Fund and a secured convertible debenture with a principal
amount of $2,496,850 held by Barlock 2019 Fund, LP, were convertible into an aggregate of 28,535,429 shares of common stock (exclusive
of any accrued and unpaid interest), using a conversion price of $0.175.
Note
8. Related Party Transactions
The
Company has entered into transactions with the following related parties:
Related
Party: Bristol Capital, LLC
Bristol
Capital, LLC (“Bristol Capital”) is managed by Paul L. Kessler. Mr. Kessler served as Executive Chairman of the Company from
December 29, 2016, through November 24, 2020, when Mr. Kessler resigned his position, but continued
to serve as member of the Board of Directors. On December 1, 2021, Mr. Kessler was again appointed Executive Chairman of the Company.
Consulting
Agreement
On
December 29, 2016, the Company entered into a Consulting Services Agreement with Bristol Capital. Pursuant to the Consulting Agreement,
Mr. Kessler agreed to serve as Executive Chairman of the Company. The initial term of the Agreement is from December 29, 2016 through
March 28, 2017. The term of the Consulting Agreement will be automatically extended for additional terms of 90-day periods, unless either
the Company or Bristol Capital gives prior written notice of non-renewal to the other party no later than thirty (30) days prior to the
expiration of the then current term. Upon the execution of the agreement the Company granted Bristol Capital options to purchase up to
an aggregate of 30,000 shares of the Company’s common stock at an exercise price of $0.25 per share, as amended.
During
the term, the Company will pay Bristol Capital, as amended, a monthly fee $18,750 payable in cash or preferred stock, at the Company’s
election. In addition, Bristol Capital may receive an annual bonus in an amount and under terms determined by the Compensation Committee
of the Board and approved by the Board in its sole and absolute discretion. The Company shall also, in association with the uplisting
of the Company’s common stock to a national exchange, issue to Bristol Capital (i) shares of common stock equal to 5% of the fully
diluted shares of common stock of the Company, calculated with the inclusion of Bristol Capital’s equity stock holdings and shares
issuable upon conversion of convertible instruments, preferred stock, options, and warrants; and (ii) a one-time non-accountable expense
reimbursement of $200,000.
On
November 22, 2018, the Company agreed to issue 202,022 shares of preferred stock for settlement of $496,875 due under the consulting
agreement as of October 31, 2018.
On
August 3, 2020, the Company cancelled the 202,022 shares of preferred stock previously determined to be issued, and issued 49,688 shares
of Series A preferred stock for the settlement of the previous outstanding amount due. In addition, on August 3, 2020, the Company issued
38,438 shares of Series A preferred stock for the settlement of $384,375 due under the consulting agreement as of July 31, 2020.
On
March 1, 2021, the Company issued 22,500 shares of Series A preferred stock to Bristol Capital for the settlement of $225,000 due under
the consulting agreement as of July 31, 2021.
During
the three months ended March 31, 2023 and 2022, the Company incurred expenses of approximately $56,250, for each period for consulting
services provided by Bristol Capital. As of March 31, 2023 and December 31, 2022, the amount accrued to Bristol Capital for consulting
services was $375,000 and $318,750, respectively.
Non-Accountable
Expense Reimbursement
On
September 7, 2021, Bristol Capital received a one-time non-accountable expense reimbursement of $200,000 in consideration for significant
efforts and diligence in negotiating and structuring investment transactions.
Reimbursement
of Legal Fees
In
January 2022, Bristol Capital was reimbursed for $12,040 in legal fees.
Related
Party: Bristol Capital Advisors, LLC
Bristol
Capital Advisors, LLC (“Bristol Capital Advisors”) is managed by Paul L. Kessler.
Operating
Sublease
On
June 16, 2016, the Company entered into a Standard Multi-Tenant Sublease with Bristol Capital Advisors. The leased premises are owned
by an unrelated third party and Bristol Capital Advisors passes the lease costs down to the Company. The term of the Sublease is for
5 years and 3 months beginning on July 1, 2016, with monthly payments of approximately $8,000. During the year ended December 31, 2022
and 2021, the Company paid lease obligations of $0 and $83,054, respectively, under the Sublease. On September 30, 2021, the lease term
ended, and the Company vacated the premises.
Related
Party: Bristol Investment Fund, Ltd.
Bristol
Investment Fund, Ltd. (“Bristol Investment Fund”) is managed by Bristol Capital Advisors, which in turn is managed by Paul
L. Kessler.
Securities
Purchase Agreement – December 2016
On
December 1, 2016, the Company entered into the Purchase Agreement with Bristol Investment Fund, pursuant to which the Company sold to
Bristol Investment Fund, for a cash purchase price of $2,500,000, securities comprising of: (i) a secured convertible debenture, (ii)
Series A common stock purchase warrants, and (iii) Series B common stock purchase warrants. Pursuant to the Purchase Agreement, the Company
paid $25,000 to Bristol Investment Fund and issued 25,000 shares of Common Stock with a grant date fair value of $85,000 to Bristol Investment
Fund to cover legal fees. The Company recorded as a debt discount of $25,791 related to the cash paid and the relative fair value of
the shares issued for legal fees.
(i)
Secured Convertible Debenture
On
December 1, 2016, the Company issued the Bristol Convertible Debenture with an initial principal balance of $2,500,000, and a maturity
date of December 30, 2018. The Bristol Convertible Debenture will accrue interest on the aggregate unconverted and then outstanding principal
amount at the rate of 12% per annum. Interest is payable quarterly on (i) January 1, April 1, July 1 and October 1, beginning on January
1, 2017, (ii) on each date the purchaser converts, in whole or in part, the Bristol Convertible Debenture into common stock (as to that
principal amount then being converted), and (iii) on the day that is 20 days following the Company’s notice to redeem some or all
of the of the outstanding principal of the Bristol Convertible Debenture (only as to that principal amount then being redeemed) and on
the maturity date. Interest may be paid in cash, common stock, or a combination thereof at the sole discretion of the Company.
The
Bristol Convertible Debenture is convertible into shares of the Company’s common stock at any time at the option of the holder.
The initial conversion price was $3.00 (as converted) per share, subject to adjustment. In the event of default occurs, the conversion
price shall be the lesser of (i) the initial conversion price of $3.00 and (ii) 50% of the average of the three lowest trading prices
during the 20 trading days immediately prior to the applicable conversion date.
The
Bristol Convertible Debenture contains anti-dilution provisions where, if the Company, at any time while the Bristol Convertible Debenture
is outstanding, sells or grants any option to purchase, right to reprice, or otherwise dispose of or issue any common stock or common
stock equivalents, at an effective price per share less that is lower than the conversion price then in effect, the conversion price
shall be reduced to the lower effective price per share.
On
December 19, 2019, the maturity date of the Bristol Convertible Debenture was amended to December 30, 2021.
On
May 1, 2020, the maturity date of the Bristol Convertible Debenture was amended to December 31, 2022.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 decreased the conversion price to $0.25. As of December 31, 2020, the Bristol Convertible Debenture held by Bristol Investment
Fund was convertible into 10,000,000 shares of common stock.
On
October 31, 2021, in consideration for the release of senior security interest in certain of the assets, properties, and rights of discontinued
operations that were sold during the year, the Bristol Convertible Debenture was amended to reduce the conversion price to $0.175.
During
March 31, 2022, the Bristol Convertible Debenture principal in the amount of $3,150 was converted into 18,000 shares of common stock
using a conversion price of $0.175.
On
December 31, 2022 the maturity date of the Bristol Convertible Debenture was amended to May 31, 2023.
As
of March 31, 2023, the Bristol Convertible Debenture with a principal amount of $2,496,850 held by Bristol Investment Fund was convertible
into 14,267,714 shares of common stock using a conversion price of $0.175.
As
of March 31, 2023 and December 31, 2022, the amount of accrued interest payable to Bristol Investment Fund under the Bristol Convertible
Debenture was $1,899,074, and $1,825,195, respectively.
(ii)
Series A Common Stock Purchase Warrants
On
December 1, 2016, the Company issued series A common stock purchase warrants to acquire up to 833,333 shares of common stock at exercise
price of $3.00, and expiring on December 1, 2021. The warrants contain anti-dilution provisions where, if the Company, at any time while
the warrant is outstanding, sells or grants any option to purchase, right to reprice, or otherwise dispose of or issue any common stock
or common stock equivalents, at an effective price per share less than the exercise price then in effect, the exercise price shall be
reduced, and the number of warrant shares shall be increased such that the aggregate exercise price payable hereunder, shall be equal
to the aggregate exercise price prior to such adjustment.
On
December 19, 2019, as a result of the anti-dilution provisions, the issuance of the Barlock Convertible Debenture with a conversion price
of $2.50 increased the number of shares of common stock issuable upon exercise of the series A common stock purchase warrants to 1,000,000,
and decreased the exercise price to $2.50.
On
December 19, 2019, Bristol Investment Fund assigned 300,000 series A common stock purchase warrants to Barlock Capital Management, LLC,
and the expiration date of the warrants was extended to December 1, 2024. After the assignment, Bristol Investment Fund held series A
common stock purchase warrants to acquire 700,000 shares of common stock at an exercise price to $2.50.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 increased the number of shares of common stock issuable upon exercise of the series A common stock purchase warrants to 7,000,000,
and decreased the exercise price to $0.25. As of December 31, 2020, Bristol Investment Fund held series A common stock purchase warrants
to acquire 7,000,000 shares of common stock at an exercise price to $0.25.
On
October 31, 2021, as a result of the anti-dilution provisions, the effect of reducing the conversion price of the Convertible Debentures
to $0.175 increased the common stock issuable upon the exercise of the series A common stock purchase warrants to 10,000,000, and decreased
the exercise price to $0.175.
On
September 9, 2022, Bristol Investment Fund assigned 20% of its series A common stock purchase warrants shares to Leviston Resources,
LLC.
As
of March 31, 2023, Bristol Investment Fund held series A common stock purchase warrants to acquire 10,000,000 shares of common stock
at an exercise price of $0.175.
In
addition, the warrants may be exercised, in whole or in part, at any time until they expire. If at any time after the 6-month anniversary
of the closing date there is no effective registration statement, or no current prospectus available for the resale of the warrant shares,
then the warrants may be exercised, in whole or in part, on a cashless basis at any time until they expire.
(iii)
Series B Common Stock Purchase Warrants
On
December 1, 2016, the Company issued series B common stock purchase warrants to acquire up to 833,333 shares of Common Stock at an initial
exercise price of $0.002, and expiring on December 1, 2021. The series B common stock purchase warrants were exercised immediately on
the issuance date, and the Company received gross proceeds of $1,667.
Upon
issuance of the Bristol Convertible Debenture, the Company valued the warrants using the Black-Scholes Option Pricing model and accounted
for it using the relative fair value of $1,448,293 as debt discount on the consolidated balance sheet. Debt discount is amortized over
the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method which approximates the interest
method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statement of operations.
There was no unamortized debt discount as of March 31, 2023 and December 31, 2022.
Related
Party: Barlock 2019 Fund, LP
Barlock
is managed by Scott D. Kaufman, who served as Chief Executive Officer of the Company from November 24, 2020, through May 11, 2022, and
as co-Chief Executive Officer from May 12, 2022 through August 8, 2022, and as a Director from November 4, 2019, through August 8, 2022,
and as Chairman of the Board of Directors from November 24, 2020, through December 1, 2021.
Securities
Purchase Agreement – December 2019
On
December 19, 2019, the Company entered into the purchase agreement with Barlock, pursuant to which the Company sold to Barlock, for a
cash purchase price of $2,500,000, securities comprising of: (i) the Barlock Convertible Debenture, and (ii) Series A common stock purchase
warrants assigned from Bristol Investment Fund. Pursuant to the purchase agreement, the Company paid $25,400 to Barlock for legal fees
which was recorded as a debt discount.
(i)
Secured Convertible Debenture
On
December 19, 2019, the Company entered issued the Barlock Convertible Debenture with an initial principal balance of $2,500,000, and
a maturity date of December 30, 2021. The Barlock Convertible Debenture accrues interest on the aggregate unconverted and then outstanding
principal amount at the rate of 12% per annum. Interest is payable quarterly on (i) January 1, April 1, July 1 and October 1, beginning
on January 1, 2020, (ii) on each date the purchaser converts, in whole or in part, the Barlock Convertible Debenture into common stock
(as to that principal amount then being converted), and (iii) on the day that is 20 days following the Company’s notice to redeem
some or all of the of the outstanding principal of the Barlock Convertible Debenture (only as to that principal amount then being redeemed)
and on the maturity date. Interest may be paid in cash, common stock, or a combination thereof at the sole discretion of the Company.
The
Barlock Convertible Debenture is convertible into shares of the Company’s common stock at any time at the option of the holder.
The initial conversion price was $2.50 (as converted) per share, subject to adjustment. In the event default occurs, the conversion price
shall be the lesser of (i) the initial conversion price of $2.50 and (ii) 50% of the average of the three lowest trading prices during
the 20 trading days immediately prior to the applicable conversion date.
The
Barlock Convertible Debenture contains anti-dilution provisions where, if the Company, at any time while the Barlock Convertible Debenture
is outstanding, sells or grants any option to purchase, right to reprice, or otherwise dispose of or issue any common stock or common
stock equivalents, at an effective price per share less that is lower than the conversion price then in effect, the conversion price
shall be reduced to the lower effective price per share.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 decreased the conversion price to $0.25. As of December 31, 2020, the Barlock Convertible Debenture held by Barlock was convertible
into 10,000,000 shares of common stock.
On
October 31, 2021, in consideration for the release of senior security interest in certain of the assets, properties, and rights of discontinued
operations that were sold during the year, the Barlock Convertible Debenture was amended to reduce the conversion price to $0.175, and
the maturity date was amended to December 31, 2023.
In
March 2022, the principal amount of $3,150 under the Barlock Convertible Debenture was converted into 18,000 shares of common stock at
a conversion price of $0.175.
As
of March 31, 2023, the Barlock Convertible Debenture with a principal amount of $2,496,850 held by Barlock was convertible into 14,267,714
shares of common stock at a conversion price of $0.175.
As
of March 31, 2023 and December 31, 2022, the amount of accrued interest payable to Barlock under the Barlock Convertible Debenture was
$985,923 and $912,044, respectively.
(ii)
Series A Common Stock Purchase Warrants
On
December 19, 2019, Bristol Investment Fund assigned to Barlock Capital Management, LLC series A common stock purchase warrants to acquire
up to 300,000 shares of common stock at exercise price of $2.50, and expiring on December 1, 2024. The warrants contain anti-dilution
provisions where, if the Company, at any time while the warrant is outstanding, sells or grants any option to purchase, right to reprice,
or otherwise dispose of or issue any common stock or common stock equivalents, at an effective price per share less than the exercise
price then in effect, the exercise price shall be reduced, and the number of warrant shares shall be increased such that the aggregate
exercise price payable hereunder, shall be equal to the aggregate exercise price prior to such adjustment.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 increased the number of shares of common stock issuable upon exercise of the series A common stock purchase warrants to 3,000,000,
and decreased the exercise price to $0.25. As of December 31, 2020, Barlock Capital Management, LLC held series A common stock purchase
warrants to acquire 3,000,000 shares of common stock at an exercise price to $0.25.
On
October 31, 2021, as a result of the anti-dilution provisions, the effect of reducing the conversion price of the secured convertible
debenture to $0.175 increased the number of shares of common stock issuable upon exercise of the series A common stock purchase warrants
to 4,285,714, and decreased the exercise price to $0.175.
As
of March 31, 2023, Barlock Capital Management, LLC held series A common stock purchase warrants to acquire 4,285,714 shares of common
stock at an exercise price to $0.175.
In
addition, the warrants may be exercised, in whole or in part, at any time until they expire. If at any time after the six month anniversary
of the closing date there is no effective registration statement, or no current prospectus available for the resale of the warrant shares,
then the warrants may be exercised, in whole or in part, on a cashless basis at any time until they expire. Shares of common stock issuable
upon exercise of warrants are subject to a 4.99% beneficial ownership limitation, which may increase to 9.99% upon notice to the Company.
Upon
issuance of the secured convertible debenture, the Company valued the warrants using the Black-Scholes Option Pricing model and accounted
for it using the relative fair value of $545,336 as debt discount on the consolidated balance sheet. Debt discount is amortized over
the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method which approximates the interest
method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statement of operations.
There was no unamortized debt discount as of March 31, 2023 and December 31, 2022.
Related
Party: Barlock Capital Management, LLC
Barlock
Capital Management, LLC, is managed by Scott D. Kaufman, who served as Chief Executive Officer of the Company from November 24, 2020,
through May 11, 2022, and as co-Chief Executive Officer from May 12, 2022 through August 8, 2022, and as a Director from November 4,
2019, through August 8, 2022, and as Chairman of the Board of Directors from November 24, 2020, through December 1, 2021. From September
2021 through December 2021, the Company rented executive office space located at 2700 Homestead Road, Park City, UT 84098, for approximately
$3,000 per month from Barlock Capital Management, LLC.
Related
Party: American Natural Energy Corporation
Scott
D. Kaufman is a director and shareholder of American Natural Energy Corporation (“ANEC”). In addition, Richard G. Boyce is
a former director of the Company who resigned from the Board on July 22, 2022, is also a director of ANEC. On October 22, 2021, the Company
entered into an agreement with ANEC, where ANEC would: (i) allow the Company to moor a barge on the ANEC operations site with the Company’s
mobile data center that houses cryptocurrency miners and a mobile turbine, and, (ii) supply natural gas to power a mobile turbine that
produces electricity that, in turn, is used to power the miners. ANEC charged the Company for the amount of natural gas used based on
the daily spot price of an unaffiliated third party, and a daily fee of $1,500 during the initial 90-day term, and $2,000 thereafter,
for the use of their operations site to moor the barge. The agreement terminated on May 24, 2022. The total amount paid to ANEC under
the agreement for the three months ended March 31, 2023 and March 31, 2022 was $0 and $230,000, respectively.
In
addition, in January 2022, the Company began renting executive office space located at 2700 Homestead Road, Park City, UT 84098, for
approximately $3,000 per month from ANEC. The amount of rent paid to ANEC for the three months ended March 31, 2023 and March 31, 2022
was $0 and $9,000, respectively.
Related
Party: Scott D. Kaufman, Chief Executive Officer
On
September 7, 2021, Scott D. Kaufman received a one-time non-accountable expense reimbursement of $200,000 in consideration for significant
efforts and diligence in negotiating and structuring investment transactions.
Related
Party: K2PC Consulting, LLC
K2PC
Consulting, LLC is managed by the spouse of Scott D. Kaufman. The company paid marketing fees to K2PC Consulting, LLC in the amount of
$0 and $7,850, for the three months ended March 31, 2023 and 2022, respectively.
Related
Party: John D. Maatta, Director
John
D. Maatta is a current director, and served as Chief Executive Officer of the Company until November 24, 2020, as co-Chief Executive
Officer from May 12, 2022 through July 8, 2022, and again as Chief Executive Officer beginning on July 9, 2022. On November 22, 2018,
the Company agreed to issue 86,466 shares of preferred stock for settlement of the outstanding compensation due to Mr. Maatta of $212,707,
for the period June 17, 2017 through November 15, 2018.
On
August 3, 2020, the Company cancelled the 86,466 shares of preferred stock previously determined to be issued, and issued 21,271 shares
of Series A preferred stock for the settlement of the previous outstanding amount due. In addition, on August 3, 2020, the Company issued
29,496 shares of Series A preferred stock for the settlement of $294,965 in additional outstanding compensation due to Mr. Maatta, and
35,100 shares of Series A preferred stock for the settlement of $351,000 in loans to the Company made by Mr. Matta. The non-interest-bearing
loans were made as follows: during the year ended December 31, 2019, Mr. Maatta loaned $100,000 to the Company, during the year ended
December 31, 2020, Mr. Matta loaned an additional $125,000 to the Company, and paid for other amounts on behalf of the Company amounting
to $126,000. There were no outstanding balance of the loan payable to Mr. Maatta as of March 31, 2023 or December 31, 2022.
On
March 1, 2021, 8,500 shares of Series A preferred stock were issued to Mr. Maatta in satisfaction of an aggregate of $85,546 due to Mr.
Maatta under his separation agreement.
Related
Party: CONtv
CONtv
is a joint venture with third parties and Bristol Capital, LLC. The Company holds a limited and passive interest of 10% in CONtv. As
of March 31, 2023 and December 31, 2022, the investment in CONtv and the amount due to CONtv was $0 for both periods.
Note
9. Convertible Notes Payable
Creecal
Holdings LLC (Assigned from Leviston Resources LLC)
In
connection with a loan in the principal amount of $500,000 received on May 18, 2022 pursuant to an oral agreement between the Company’s
then-CEO and Leviston Resources LLC on September 9, 2022 the Company documented such loan with the issuance of a convertible note assigned
to Creecal Holdings LLC, dated as of September 8, 2022 in the principal amount of $500,000 (the “Creecal Note”). On March
8, 2023 the then due date of the Creecal Note was amended to May 31, 2023.
The
Creecal Note is convertible at the holder’s option at the conversion price of the Company’s Series C preferred stock then
in effect (the “Creecal Note Conversion Price”), provided that so long as an event of default has not occurred under the
Note and the Company’s Series B preferred stock remains outstanding, the Creecal Note Conversion Price shall not be lower than
the conversion price of the Series B preferred stock. Unless the holder opts to convert the Creecal Note contemporaneously with the
Merger, the Creecal Note
will be immediately due and paid at the closing of the Merger. In the event the Merger is abandoned or cancelled the Creecal Note will
be due 30 days after such event. In connection with the Merger and related transactions discussed in Note 1, all amounts payable under the Creecal
Note were converted into shares of Common Stock.
Alpha
Capital Anstalt
On
August 24, 2022, the Company entered into an Agreement (the “Settlement”) with Alpha Capital Anstalt (“Alpha”).
The Settlement relates to a dispute with the Company’s then-CEO in connection with Alpha’s partial exercise on March 20,
2022 of warrants to purchase 600,000 shares of the Company’s common stock, par value $0.0001 (the “Warrant Shares”),
at an aggregate conversion price of $900,000.
Pursuant
to the Settlement, Alpha agreed to exchange the 600,000 Warrant Shares for a convertible promissory note in the principal amount of $900,000
due August 25, 2023 (the “Alpha Note”). Upon the occurrence and during the continuation of any event of default under the
Alpha Note, interest shall accrue at a default interest rate of 22% per annum. As of December 31, 2022 Alpha had returned 600,000 shares
of common stock in connection with the Settlement.
The
Alpha Note is convertible at Alpha’s option at the conversion price of the Company’s Series C preferred stock then in effect
(the “Alpha Note Conversion Price”). Upon notice that the Merger is imminent, Alpha will convert the Alpha Note at a 10%
discount of the amounts owed thereunder into shares of common stock at the lower of: (i) the Alpha Note Conversion Price; or (ii) the
lowest per share valuation attributed to the common stock in the Merger and any capital raise completed by the Company in connection
with the Merger. In connection with the Merger and related transactions discussed in Note 1,
all amounts payable under the Alpha Note were converted into shares of Common Stock.
Note 10.
SBA/PPP Notes Payable
Small
Business Administration Paycheck Protection Program Loans
On
March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act was enacted and included a provision
for the Small Business Administration (“SBA”) to implement its Paycheck Protection Program (“PPP”). The PPP provides
small businesses with funds to pay payroll costs, including some benefits over a covered period of up to 24 weeks. Funds received under
the PPP may also be used to pay interest on mortgages, rent, and utilities. Subject to certain criteria being met, all or a portion of
the loan may be forgiven. The loans bear interest at an annual rate of one percent (1%), are due two (2) years from the date of issuance,
and all payments are deferred for the first six (6) months of the loan. Any unforgiven balance of loan principal and accrued interest
at the end of the six (6) month loan deferral period is amortized in equal monthly installments over the remaining 18-months of the loan
term.
SBA
Guaranteed PPP Loan
On
April 30, 2020, the Company entered into an SBA guaranteed PPP loan. The Company received aggregate proceeds of $197,600 under the loan.
The loan accrues interest at a rate of 1.00%. On December 11, 2021, the SBA forgave $183,567 of loan principal. As of March 31, 2023
and December 31, 2022, there was no outstanding balance under the loan.
SBA
Loan
On
May 31, 2020, the Company entered into a loan agreement with the SBA. The Company received aggregate proceeds of $149,900 under the loan.
The loan accrues interest at a rate of 3.75%, and will mature in June 2050. As of March 31, 2023 and December 31, 2022, the outstanding
balance under the loan was $149,900, for both periods.
Second
Draw SBA Guaranteed PPP Loan
On
February 24, 2021, the Company entered into a Second Draw SBA guaranteed PPP loan. The Company received aggregate proceeds of $197,662
under the loan. The loan accrues interest at a rate of 1.00%, and will mature in February 2026. On March 10, 2022, the SBA forgave $197,662
of loan principal. As of March 31, 2023 and 2022, there was no outstanding balance under the loan.
The
following table summarizes PPP/SBA loans payable:
Schedule
of Loans Payable
| |
March
31, 2023 | | |
December
31, 2022 | |
| |
As
of | |
| |
March
31, 2023 | | |
December
31, 2022 | |
SBA Guaranteed PPP Loan | |
$ | — | | |
$ | — | |
SBA Loan | |
| 149,900 | | |
| 149,900 | |
Second Draw SBA Guaranteed
PPP Loan | |
| — | | |
| — | |
Total | |
$ | 149,900 | | |
$ | 149,900 | |
Note
11. Contingencies and Commitments
Russia
– Ukraine Conflict
The
Russia – Ukraine conflict is a global concern. The Company does not have any direct exposure to Russia or Ukraine through its operations,
employee base, investments or sanctions. The Company does not receive goods or services sourced from those countries, does not anticipate
any disruption in its supply chain and has no business relationships, connections to or assets in Russia, Belarus or Ukraine. No impairments
to assets have been made due to the conflict. We are unable at this time to know the full ramifications of the Russia – Ukraine
conflict and its effects on our business.
Note
12. Common Stock Options
On
May 9, 2011, the Company adopted the 2016 Incentive Stock Award Plan (the “2011 Plan”), on August 12, 2016, the Company adopted
the 2016 Incentive Stock Award Plan (the “2016 Plan”), on August 3, 2020, the Company adopted the 2020 Stock Plan (the “2020
Plan”), and on December 1, 2021, the Company adopted the 2021 Incentive Stock Award Plan (the “2021 Plan”), collectively
(the “Plans”). The purpose of the Plans is to grant options to purchase our common stock, and other incentive awards, to
our employees, directors and key consultants.
The
maximum number of shares of common stock that may be issued pursuant to awards granted under the 2020 Plan was 500,000. On December 1,
2021, all prior stock award plans were retired, and the 2021 Plan was adopted. The maximum number of shares of common stock that may
be issued pursuant to awards granted under the 2021 Plan is 10,000,000. The shares of our common stock underlying cancelled and forfeited
awards issued under the 2021 Plan may again become available for grant under the 2021 Plan. As of March 31, 2022, there were 3,000,000
shares available for grant under the 2021 Plan, and no shares were available for grant under the 2020 Plan, 2016 Plan, or 2011 Plan.
On
August 21, 2020 the Board approved the repricing of the exercise price of outstanding stock options that had been issued to directors
and employees to $0.25 per share.
Stock-based
compensation cost is measured at the grant date, based on the fair value of the awards that are ultimately expected to vest, and recognized
on a straight-line basis over the requisite service period, which is generally the vesting period.
The
following table summarizes stock option activity during the three months ended March 31, 2023:
Schedule
of Stock Option Activity
| |
| | |
Weighted Average | |
| |
Options | | |
Exercise
Price | |
Outstanding at December 31, 2022 | |
| 259,250 | | |
$ | 0.25 | |
Granted | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | |
Forfeited/Cancelled | |
| — | | |
| — | |
Outstanding at March 31, 2023 | |
| 259,250 | | |
$ | 0.25 | |
| |
| | | |
| | |
Exercisable at December 31, 2022 | |
| 259,250 | | |
| 0.25 | |
Exercisable at March 31, 2023 | |
| 259,250 | | |
| 0.25 | |
The
weighted average remaining contractual life of all options outstanding, vested and exercisable as of March 31, 2023 was 1.8 years. The
aggregate intrinsic value of options outstanding as of March 31, 2023 was zero, based on the fair value of the Company’s common
stock on March 31, 2023.
Additional
information regarding stock options outstanding and exercisable as of March 31, 2023 is as follows:
Schedule
of Stock Option Outstanding and Exercisable
Option | | |
| | |
Remaining | | |
| |
Exercise | | |
Options | | |
Contractual | | |
Options | |
Price | | |
Outstanding | | |
Life
(in years) | | |
Exercisable | |
$ | 0.25 | | |
| 259,250 | | |
| 1.8 | | |
| 259,250 | |
Note
13. Common Stock Warrants
On
January 1, 2022, the Company granted warrants to purchase shares of the Company’s common stock to a consultant in connection with
the issuance of Series C preferred stock as follows: a warrant to purchase 400,000 shares with an exercise price of $1.50 per share,
and a term of 5 years; a warrant to purchase 250,000 shares with an exercise price of $2.50 per share, and term of 5 years; and a warrant
to purchase 250,000 shares with an exercise price of $2.75 per share, and term of 5 years.
On
March 29, 2022, the Company offered 16 warrant holders replacement warrants with an exercise price of $1.50 per common share, in exchange
for any warrants exercised at this time at the exercise price of $1.50 per common share. The issuance of replacement warrants has the
effect of resetting the conversion price of all outstanding shares of Series C preferred stock to $1.50 per common share and resetting
the exercise price of all outstanding warrants to $1.50 per common share in instances where those conversion and exercise prices are
above $1.50.
On
March 30, 2022, warrants to purchase 600,000 shares of the Company’s common stock were exercised by one warrant holder resulting
in $900,000 in cash proceeds being received by the Company. The Company issued replacement warrants to purchase 600,000 shares of the
Company’s common stock to such warrant holder.
The
following table summarizes common stock warrant activity during the three months ended March 31, 2023:
Schedule of Stock Warrants Activity
| |
Common Stock Warrants | | |
Weighted Average Exercise Price | |
Outstanding at December 31, 2022 | |
| 21,984,266 | | |
$ | 0.37 | |
Granted | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | |
Forfeited/Cancelled | |
| — | | |
| — | |
Outstanding at March 31, 2023 | |
| 21,984,266 | | |
$ | 0.37 | (1) |
| |
| | | |
| | |
Exercisable at December 31, 2022 | |
| 21,984,266 | | |
$ | 0.37 | |
Exercisable at March 31, 2023 | |
| 21,984,266 | | |
$ | 0.37 | |
(1) | | On March 29, 2022,
the Company offered 16 warrant holders replacement warrants with an exercise price of $1.50 per common share, in exchange for any warrants
exercised at this time at the exercise price of $1.50 per common share. The issuance of replacement warrants has the effect of resetting
the conversion price of all outstanding shares of Series C preferred stock to $1.50 per common share and resetting the exercise price
of all outstanding warrants to $1.50 per common share in instances where those conversion and exercise prices are above $1.50. |
The
weighted average remaining contractual life of all common stock warrants outstanding as of March 31, 2023 was 2.3 years. The aggregate
intrinsic value of common stock warrants outstanding as of March 31, 2023 was $0, based on the fair value of the Company’s common
stock on March 31, 2023.
Additional
information regarding common stock warrants outstanding and exercisable as of March 31, 2023 is as follows:
Schedule
of Stock Warrants Outstanding and Exercisable
Warrant | | |
| | |
Remaining | | |
| |
Exercise | | |
Warrants | | |
Contractual | | |
Warrants | |
Price | | |
Outstanding | | |
Life (in years) | | |
Exercisable | |
$ | 0.175 | | |
| 14,285,714 | | |
| 1.7 | | |
| 14,285,714 | |
| 0.50 | | |
| 6,318,552 | | |
| 3.7 | | |
| 6,318,552 | |
| 1.00 | | |
| 300,000 | | |
| 1.0 | | |
| 300,000 | |
| 1.50 | | |
| 400,000 | | |
| 3.8 | | |
| 400,000 | |
| 1.53 | | |
| 180,000 | | |
| 1.4 | | |
| 180,000 | |
| 2.50 | | |
| 250,000 | | |
| 3.8 | | |
| 250,000 | |
| 2.75 | | |
| 250,000 | | |
| 3.8 | | |
| 250,000 | |
| Total | | |
| 21,948,266 | | |
| | | |
| 21,948,266 | |
Note 14. Series B Preferred
Stock Warrants
From
March 2021 through December 2021, in connection with the issuance of Series B preferred stock, the Company issued (i) a warrant to acquire
5,000 shares of the Series B preferred stock at an exercise price of $1,000 per share of Series B preferred stock, which became exercisable
immediately upon issuance and which expired on March 26, 2023; and (ii) a warrant to acquire 5,000 shares of the Series B preferred stock
at an exercise price of $1,000 per share of Series B preferred stock, which became exercisable immediately upon issuance and which expires
on March 26, 2024. If at any time after the 60-day anniversary of the closing date there is no effective registration statement, or no
current prospectus available for the resale of the warrant shares, then the warrants may be exercised, in whole or in part, on a cashless
basis at any time until they expire. The Company can force the exercise of the warrants if the VWAP exceeds $3.75 per share per share
for 20 consecutive trading days and the daily average trading volume of the Common Stock exceeds $100,000 in aggregate value for such
period. The warrant holder may not be forced to exercise the warrant if such exercise would cause the holder’s beneficial ownership
to exceed 4.9%.
The
Series B preferred stock issuable upon exercise of the Series B preferred stock warrants are automatically convertible into shares of
common stock at the Series B conversion price. Each share of our Series B preferred stock is convertible into a number of shares of our
common stock determined by dividing the aggregate stated value for the Series B preferred stock being converted ($1,080 per share, as
amended, subject to adjustment as set forth in the currently effective Series B Certificate of Designation) by the then-applicable conversion
price (initially $1.50 per share), subject to adjustment as set forth in the currently effective Series B Certificate of Designation.
As of March 31, 2021, in connection with the issuance of Series B preferred stock, there were outstanding warrants to acquire 10,000
shares of Series B preferred stock at an exercise price of $1,000, resulting in Series B preferred stock with a stated value of $10,800,000,
and convertible into 7,200,000 shares of common stock, using a conversion price of $1.50.
The
following table summarizes Series B preferred stock warrant activity during the three months ended March 31, 2023:
Schedule of Stock Warrants Activity
| |
Series B Preferred Stock Warrants | | |
Weighted Average Exercise Price | |
Outstanding at December 31, 2022 | |
| 10,000 | | |
$ | 1,000 | |
Granted | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | |
Forfeited/Cancelled | |
| (5,000 | ) | |
| 1,000 | |
Outstanding at March 31, 2023 | |
| 5,000 | | |
$ | 1,000 | |
| |
| | | |
| | |
Exercisable at March 31, 2023 | |
| 5,000 | | |
| 1,000 | |
The
weighted average remaining contractual life of all Series B preferred stock warrants outstanding as of March 31, 2023 was 1.0 year.
Note
15. Common Stock
Holders
of our Common Stock are entitled to one vote per share. Our Certificate of Incorporation does not provide for cumulative voting. Holders
of our Common Stock are entitled to receive ratably such dividends, if any, as may be declared by our Board out of legally available
funds. However, the current policy of our Board is to retain earnings, if any, for our operations and expansion. Upon liquidation, dissolution
or winding-up, the holders of our Common Stock are entitled to share ratably in all of our assets which are legally available for distribution,
after payment of or provision for all liabilities. The holders of our Common Stock have no preemptive, subscription, redemption or conversion
rights. The rights, preferences and privileges of holders of our Common Stock are subject to and may be adversely affected by the rights
of the holders of shares of any series of preferred stock that we may designate and issue.
We
implemented a 1-for-20 reverse stock split of our outstanding shares of common stock that was effective on January 23, 2020. Unless otherwise
noted, all share and related option, warrant, and convertible security information presented has been retroactively adjusted to reflect
the reduced number of shares, and the increase in the share price which resulted from this action.
From
August 2021 through October 2021, we consummated the transactions contemplated by the securities purchase agreement with the investors
party thereto, pursuant to which, we generated net cash proceeds of $3,925,050, and issued in a private placement: (i) 2,933,340 shares
of common stock for $1.50 per share and (ii) warrants to acquire 2,933,340 shares of common stock at an exercise price of $1.50 per share,
which became exercisable immediately upon issuance and with a term of 5 years. The issuance generated net cash proceeds of approximately
$3.9 million.
On
January 25, 2022, the Company granted an officer 30,000 shares of common stock as compensation under his employment agreement for services
provided through December 31, 2021.
Note
16. Preferred Stock
Under
the terms of the Certificate of Incorporation, our Board is expressly granted authority to authorize the issuance from time to time of
shares of preferred stock in one or more series, for such consideration and for such corporate purposes as our Board may from time to
time determines, and by filing a certificate pursuant to applicable law of the State of Delaware to establish from time to time for each
such series the number of shares to be included in each such series and to fix the designations, powers, rights and preferences of the
shares of each such series, and the qualifications, limitations and restrictions thereof to the fullest extent permitted by the Certificate
of Incorporation and the laws of the State of Delaware, including, without limitation, voting rights (if any), dividend rights, dissolution
rights, conversion rights, exchange rights and redemption rights thereof.
Series
A Preferred Stock
Holders
of our Series A Preferred Stock are entitled to the number of votes per share equal to 2,000 shares of Common Stock. Holders of our Series
A Preferred Stock are entitled to receive a cumulative dividend on each share of Series A Preferred Stock issued and outstanding at the
rate of twelve percent (12%) per annum on the Aggregate Stated Value (as defined in the Certificate of Designation and Restatement of
Rights, Preferences and restrictions of Series A Preferred Stock, the “Series A Certificate of Designation”) then in effect,
payable quarterly on January 1, April 1, July 1 and October 1. Such dividend is payable in cash but may be paid in shares of Common Stock
in our sole discretion if the shares of Common Stock are listed on a national securities exchange. In the event of any liquidation, dissolution
or winding up of our company, whether voluntary or involuntary, holders of our Series A Preferred Stock are entitled to receive, prior
and in preference to any distribution of any of our assets to the holders of Common Stock by reason of their ownership thereof, for each
share held, an amount equal to the Stated Value (as defined in the Series A Certificate of Designation), plus unpaid dividends, if any.
The Series A Preferred Stock is convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares
of Common Stock as is determined by dividing the Aggregate Stated Value (initially $10.00 per share, subject to adjustment as set forth
in the currently effective Series A Certificate of Designation) by the Conversion Price (as defined in the Series A Certificate of Designation),
in effect on the date the certificate is surrendered for conversion, initially set at $0.25. Each share of Series A Preferred Stock is
redeemable at the option of the holder for the payment of cash by us to the holder equal to the Aggregate Stated Value of the shares
that the holder elects to redeem. The Series A Preferred Stock is entitled to certain protective provisions and we may not take certain
actions without the written consent of at least a majority of the Series A Preferred Stock, including, without limitation, amend, alter
or repeal any provision of the Series A Certificate of Designation to change the rights of the Series A Preferred Stock, create or authorize
additional class or series of stock senior to the Series A Preferred Stock or create, authorize the creation of, issue or authorize the
issuance of, any debt security which is convertible into or exchangeable for any equity security, if such equity security ranks senior
to the Series A Preferred Stock as to dividends or liquidation rights.
On
January 1, 2022, the Company granted an officer 7,722 shares Series A preferred stock for settlement of $77,216 in compensation under
his employment agreement for services provided through March 31, 2022.
On
March 31, 2022, we issued 3,409 shares of our Series A preferred stock to Scott D. Kaufman, our Chief Executive Officer, for settlement
of $34,090 of compensation payable to Mr. Kaufman under his employment agreement from January 1, 2022 through March 31, 2022. In addition,
on March 31, 2022 we issued 4,941 shares of our Series A preferred stock to Paul L. Kessler, our Executive Chairman, for settlement of
$49,410 of compensation payable to Mr. Kessler under his employment agreement from January 1, 2022 through March 31, 2022.
On
June 30, 2022, we issued 5,361 shares of our Series A preferred stock to Scott D. Kaufman, our former co-Chief Executive Officer, for
settlement of $53,610 of compensation payable to Mr. Kaufman under his employment agreement from April 1, 2022 through June 30, 2022.
In addition, on June 30, 2022 we issued 4,941 shares of our Series A preferred stock to Paul L. Kessler, our Executive Chairman, for
settlement of $49,410 of compensation payable to Mr. Kessler under his employment agreement from April 1, 2022 through June 30, 2022.
On
September 30, 2022, we issued: 902 shares of our Series A preferred stock to Scott D. Kaufman, our former co-Chief Executive Officer,
for settlement of $9,020 of compensation payable to Mr. Kaufman under his employment agreement from July 1, 2022 through July 8, 2022;
2,958 shares of our Series A preferred stock to Paul L. Kessler, our Executive Chairman, for settlement of $29,580 of compensation payable
to Mr. Kessler under his employment agreement from July 1, 2022 through September 30, 2022; 8,333 shares of our Series A preferred stock
to John D. Maatta, our Chief Executive Officer, for settlement of $83,333 of compensation payable to Mr. Maatta under his employment
agreement from May 1, 2022 through September 30, 2022; and 3,426 shares of our Series A preferred stock to Scott Sheikh, our Chief Operating
Officer and General Counsel, for settlement of $34,260 of compensation payable to Mr. Sheikh under his employment agreement from July
16, 2022 through September 30, 2022.
On
December 31, 2022, we issued: 3,792 shares of our Series A preferred stock to Paul L. Kessler, our Executive Chairman, for settlement
of $37,920 of compensation payable to Mr. Kessler under his employment agreement from October 1, 2022 through December 31, 2022; 5,000
shares of our Series A preferred stock to John D. Maatta, our Chief Executive Officer, for settlement of $50,000 of compensation payable
to Mr. Maatta under his employment agreement from October 1, 2022 through December 31, 2022; 4,110 shares of our Series A preferred stock
to Scott Sheikh, our Chief Operating Officer and General Counsel, for settlement of $41,100 of compensation payable to Mr. Sheikh under
his employment agreement from October 1, 2022 through December 31, 2022, and 685 shares of our Series A preferred stock to Alan Urban,
our former Chief Financial Officer, for settlement of $6,850 of compensation payable to Mr. Urban under his employment agreement from
October 1, 2022 through December 31, 2022.
On March 31, 2023, we
issued: 3,792 shares of our Series A preferred stock to Paul L. Kessler, our Executive Chairman, for settlement of $37,920 of compensation
payable to Mr. Kessler under his employment agreement from January 1, 2023 through March 31, 2023; 5,000 shares of our Series A preferred
stock to John D. Maatta, our Chief Executive Officer, for settlement of $50,000 of compensation payable to Mr. Maatta under his employment
agreement from January 1, 2023 through March 31, 2023; 4,110 shares of our Series A preferred stock to Scott Sheikh, our Chief Operating
Officer and General Counsel, for settlement of $41,100 of compensation payable to Mr. Sheikh under his employment agreement from January
1, 2023 through March 31, 2023, and 4,110 shares of our Series A preferred stock to Alan Urban, our former Chief Financial Officer, for
settlement of $41,100 of compensation payable to Mr. Urban under his employment agreement from January 1, 2023 through March 31, 2023.
During
the three months ended March 31, 2023, no shares
Series A preferred stock were converted into common stock.
As
of March 31, 2023, there were 273,129 shares of Series A preferred stock outstanding resulting in Series A preferred stock with a stated
value of $2,731,290 and convertible into 15,607,371 shares of common stock, using a conversion price of $0.175.
Series
B Preferred Stock
Holders
of our Series B Preferred Stock have no voting rights. Holders of our Series B Preferred Stock are entitled to receive a cumulative dividend
on each share of Series B Preferred Stock issued and outstanding at the rate of five percent (5%) per annum, in cash or at the holder’s
option, in fully paid and non-assessable shares of Series B Preferred Stock, at the Dividend Conversion Rate (as defined in the Series
B Certificate of Designation). Such dividends are payable quarterly on January 1, April 1, July 1 and October 1. In the event of any
liquidation, dissolution or winding up of our company, whether voluntary or involuntary, holders of our Series B Preferred Stock are
entitled to receive, prior and in preference to any distribution of any of our assets to the holders of Common Stock and Common Stock
Equivalents (as defined in the Series B Certificate of Designation, and which includes the Series A Preferred Stock and the Series C
Preferred Stock) by reason of their ownership thereof, for each share held an amount equal to the Stated Value (as defined in the Series
B Certificate of Designation), plus unpaid dividends or liquidated damages, if any. The Series B Preferred Stock is convertible, at the
option of the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the
Stated Value, currently $1,080 as amended, by the Series B Conversion Price, subject to a minimum of $1.00, but not to exceed $1.50,
subject to further adjustment in the event that the Company, subject to certain exemptions, disposes of or issues any Common Stock or
securities convertible into, exercisable, or exchangeable for Common Stock for no consideration or for consideration less than the applicable
Series B Conversion Price in effect immediately prior to such issuance. We are entitled to redeem some or all of the outstanding shares
of Series B Preferred Stock for cash in an amount equal to the Optional Redemption Amount (as defined in the Series B Certificate of
Designation). The Series B Preferred Stock is entitled to certain protective provisions and we may not take certain actions without the
written consent of at least fifty one percent (51%) in Stated Value of the outstanding shares of the Series B Preferred Stock, including,
without limitation, amend, alter or repeal any provision of the Series B Certificate of Incorporation or the Bylaws that materially and
adversely affects the rights of the Series B Preferred Stock, pay cash dividends or distributions on Junior Securities (as defined in
the Series B Certificate of Designation), or repay, repurchase or offer to repay, or otherwise acquire more than a de minimis number
of shares of Common Stock, Common Stock Equivalents (as defined in the Series B Certificate of Designation) or Junior Securities. Shares
of common stock issuable upon the conversion of Series B Preferred Stock are subject to a 9.99% beneficial ownership limitation.
From
March 2021 through December 2021, we consummated the transactions contemplated by the securities purchase agreement with Leviston Resources
LLC, pursuant to which, we generated net cash proceeds of $4,378,995, and issued in a private placement: (i) 5,000 shares of Series B
preferred stock, convertible by dividing the stated value, currently $1,080, as amended, by the Series B conversion price; and (ii) a
warrant to acquire 5,000 shares of the Series B preferred stock at an exercise price of $1,000 per share of Series B preferred stock,
which became exercisable immediately upon issuance and which expires on March 26, 2023; and (iii) a warrant to acquire 5,000 shares of
the Series B preferred stock at an exercise price of $1,000 per share of Series B preferred stock, which became exercisable immediately
upon issuance and which expires on March 26, 2024. The Series B preferred stock issuable upon exercise of the Series B preferred stock
warrants are automatically convertible into shares of common stock at the Series B conversion price.
In
late-August and early-September 2022, the Company and holders of Series B and Series C preferred stock entered into Support Agreements.
Pursuant to the Support Agreements, the holders of Series B and Series C preferred stock agreed to use their reasonable best efforts to
cooperate with the Company in connection with the Merger. The Support Agreements amend the conversion price of the Series B and Series
C preferred stock to $0.50, amends the exercise price
of all outstanding warrants held by Series B and Series C Preferred Stockholders to $0.50
per common share, and provides for the conversion of the Series B and Series C preferred stock
into shares of the Company’s common stock immediately prior to the closing of the Merger.
During
the three months ended March 31, 2023, no shares of Series B preferred stock were converted into common stock.
As
of March 31, 2023, there were 1,458 shares of Series B preferred stock outstanding resulting in Series B preferred stock with a stated
value of $1,574,640, and convertible into 3,149,280 shares of common stock, using a conversion price of $0.50.
Series
C Preferred Stock
Holders
of our Series C Preferred Stock have no voting rights. Holders of our Series C Preferred Stock are entitled to receive dividends on Series
C Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to any dividends paid on Common Stock. In the event of any liquidation,
dissolution or winding up of our company, whether voluntary or involuntary, holders of our Series C Preferred Stock are entitled to receive,
prior and in preference to any distribution of any of our assets to the holders of Common Stock and Common Stock Equivalents (as defined
in the Certificate of Designation) by reason of their ownership thereof, for each share held an amount equal to the Stated Value (as
defined in the Certificate of Designation), plus fees, if any. The Series C Preferred Stock ranks junior to the Series B Preferred Stock
as to rights upon a liquidation, dissolution or winding up of the Company. The Series C Preferred Stock is convertible, at the option
of the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Stated
Value, currently $1,111, by the Series C Conversion Price, subject to further adjustment in the event that the Company, subject to certain
exemptions, disposes of or issues any Common Stock or securities convertible into, exercisable, or exchangeable for Common Stock for
no consideration or for consideration less than the applicable Series C Conversion Price in effect immediately prior to such issuance.
We are entitled to redeem some or all of the outstanding shares of Series C Preferred Stock for cash in an amount equal to the Optional
Redemption Amount (as defined in the Certificate of Designation). The Series C Preferred Stock is entitled to certain protective provisions
and, without the written consent of at least 50.1% in Stated Value of the outstanding shares of the Series C Preferred Stock, we may
not (or permit any of our subsidiaries to) enter into, create, incur, assume, guarantee or suffer to exist any indebtedness, other than
Permitted Indebtedness (as defined in the Certificate of Designation). Shares of common stock issuable upon the conversion of Series
C Preferred Stock are subject to a 4.99% beneficial ownership limitation, which may increase to 9.99% upon notice to the Company.
On
March 29, 2022, the Company offered 16 warrant holders replacement warrants with an exercise price of $1.50 per common share, in exchange
for any warrants exercised at this time at the exercise price of $1.50 per common share. The issuance of replacement warrants has the
effect of resetting the conversion price of all outstanding shares of Series C preferred stock to $1.50 per common share and resetting
the exercise price of all outstanding warrants to $1.50 per common share in instances where those conversion and exercise prices are
above $1.50.
On
July 7, 2022, 250 shares of Series C preferred stock were converted into 185,167 shares of common stock.
In
late-August and early-September 2022, the Company and holders of Series B and Series C preferred stock entered into Support Agreements.
Pursuant to the Support Agreements, the holders of Series B and Series C preferred stock agreed to use its reasonable best efforts to
cooperate with the Company in connection with the Merger. The Support Agreements amend the conversion price of the Series B and Series
C preferred stock to $0.50, amends the exercise price
of all outstanding warrants held by Series B and Series C Preferred Stockholders to $0.50
per common share, and provides for the conversion of the Series B and Series C preferred stock
into shares of the Company’s common stock immediately prior to the closing of the Merger.
As
of March 31, 2023, there were 7,630 shares of Series C preferred stock outstanding resulting in Series C preferred stock with a stated
value of $8,476,930, and convertible into 16,953,860 shares of common stock, using a conversion price of $0.50.
Note
17. Discontinued Operations
On
August 6, 2021, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Informa. Pursuant to the Agreement,
Creek Road Miners Corp. (formerly known as Kick the Can Corp.) sold, transferred, and assigned certain assets, properties, and rights to Informa related
to the business of operating and producing live pop culture events. The Company released deferred
revenue and other liabilities totaling $722,429 and recorded a gain from sale of discontinued operations of
this amount.
On
September 15, 2021, the Company sold our wholly owned subsidiary which contained our Jevo assets and all rights to our Jevo operations
for $1,500,000 and recognized a gain from sale of discontinued operations on the transaction of approximately $1,130,740. The gain from
sale of discontinued operations consists of the following:
Schedule
of Gain from Sale of Discontinue Operation
Description | |
Amount | |
Net cash paid on the closing date | |
$ | 1,500,000 | |
Less: | |
| | |
Current assets | |
| 36,060 | |
Inventory | |
| 193,300 | |
Fixed assets, net | |
| 16,700 | |
Intangible assets, net | |
| 123,200 | |
Total | |
| 369,260 | |
Gain from sale | |
$ | 1,130,740 | |
CONtv
is a joint venture with third parties and Bristol Capital, LLC. The Company holds a limited and passive interest of 10% in CONtv. As
of March 31, 2023 and December 31, 2022, the investment in CONtv was $0. As of March 31, 2023 and December 31, 2022, the amount due to
CONtv was $0.
Prior
to cryptocurrency mining operations that began in October 2021, the Company produced live and virtual pop culture conventions and events,
and sold a gelatin machine and related consumables that were discontinued in 2021. In addition, the Company operated an eCommerce site
selling pop culture memorabilia that was discontinued on June 30, 2022 (collectively known as “legacy operations”).
The related assets and liabilities associated with the discontinued operations
in our condensed consolidated balance sheets for the three months ended March 31, 2023 and year ended December 31, 2022, are classified
as discontinued operations. Additionally, the financial results associated with discontinued operations in our condensed consolidated
statement of operations for the three months ended March 31, 2023 and 2022, are classified as discontinued operations.
The
assets and liabilities related to discontinued operations consists of the following:
Schedule
of Discontinued Operation of Balance Sheet and Operation Statement
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Assets | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Prepaid expenses | |
$ | — | | |
$ | — | |
Inventory | |
| — | | |
| — | |
Total current assets | |
| — | | |
| — | |
| |
| | | |
| | |
Other assets: | |
| | | |
| | |
Property and equipment, net | |
| — | | |
| — | |
Intangible assets, net | |
| — | | |
| — | |
Total assets | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 485,712 | | |
$ | 485,712 | |
Deferred revenue | |
| — | | |
| — | |
Due to CONtv | |
| — | | |
| — | |
Total liabilities | |
$ | 485,712 | | |
$ | 485,712 | |
In
addition, revenue and expenses from discontinued operations were as follows:
| |
2023 | | |
2022 | |
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Revenue | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Operating costs and expenses: | |
| | | |
| | |
Cost of revenue | |
| — | | |
| — | |
General and administrative | |
| — | | |
| — | |
Total operating expenses | |
| — | | |
| — | |
Loss from operations | |
| — | | |
| — | |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Other income | |
| — | | |
| 31,185 | |
Interest income | |
| — | | |
| — | |
Loss on disposal of fixed assets | |
| — | | |
| — | |
Total other income (expense) | |
| — | | |
| 31,185 | |
| |
| | | |
| | |
Income (loss) from discontinued operations | |
$ | — | | |
$ | 31,185 | |
Note
18. Subsequent Events
Merger
The Company evaluated subsequent
events and transactions that occurred after the balance sheet date up to the date that the condensed consolidated financial statements
were issued. Based upon this review, other than as described below, the Company did not identify any other subsequent events that would
have required adjustments in these condensed consolidated financial statements.
As described in Note 1, on May
3, 2023, the Company consummated the Merger.
Reimbursements
Following
the Merger, the Board approved a one-time payment of $250,000 for each of three current Board members (two former members of Prairie
Operating Co., LLC and the Executive Chairman of the Company prior to the Merger) in light of the significant unpaid time and resources
expended by each of these parties to finalize the Merger, including extensive travel, due diligence, negotiation, structuring, legal
management and investment banking disciplines.
TABLE OF CONTENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and the Board of Directors of
Creek
Road Miners, Inc.
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of Creek Road Miners, Inc. (the “Company”) as of December 31,
2022 and 2021, the related consolidated statements of income, of stockholders’ equity, and of cash flows for
each of the two years in period ended December 31, 2022, including the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and
the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022 in conformity
with accounting principles generally accepted in the United States of America.
Consideration
of the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has incurred losses from operations and has an accumulated deficit. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis
for Opinion
The
Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated
or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation
of the Accounting for and Disclosure of Cryptocurrency Mining Revenue Recognized
We
identified the accounting for and disclosure of cryptocurrency mining revenue recognized as a critical audit matter due to the complexities
involved in auditing completeness and occurrence of the revenue recognized by the Company. During the year ended December 31, 2022, the
Company recognized revenue from mining Bitcoin of approximately $518,000. The Company’s management has exercised significant judgment
in their determination of how existing GAAP should be applied to the accounting for and disclosure of cryptocurrency mining revenue recognized.
We
performed the following procedures (not all inclusive) to address this critical audit matter:
| ● | Evaluated
management’s disclosures of its cryptocurrency activity in the financial footnotes; |
| ● | Compared
the Company’s digital cold storage wallet records to available blockchain records publicly
available; |
| ● | Evaluated
management’s decision to apply ASC 606 to account for and record its cryptocurrency
awards earned in the mining pool, which included evaluating provisions of the agreement with
the Mining Pool operator; |
| ● | Tested
supporting documentation for the valuation of cryptocurrency awards earned; |
| ● | Performed
substantive procedures to determine completeness and occurrence of cryptocurrency assets
earned from the Company’s mining activities. |
Evaluation
of the Fair Value of Computer Equipment Related to Cryptocurrency Mining Activities
We
identified the accounting for and disclosure of the fair value of the miners or computer equipment used in mining bitcoin as a critical
audit matter due to the Company’s exercise of significant judgment in their determination of how the existing accounting principles
generally accepted in the United States should be applied to the valuation of the mining equipment.
The
primary procedures we performed to address this critical audit matter included the following:
| ● | Evaluated
the Company’s processes for valuing its mining equipment; |
| ● | Obtained
independent quotations for similar equipment used by the Company; |
| ● | Evaluated
and tested management’s rationale and supporting documentation associated with the
valuation of its mining equipment. |
/s/
MaughanSullivan LLC
We
have served as the Company’s auditor since 2017.
Manchester,
VT
March
31, 2023
Creek
Road Miners, Inc. and Subsidiaries
Consolidated
Balance Sheets
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Assets | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 246,358 | | |
$ | 2,785,188 | |
Accounts receivable, (no allowance for doubtful accounts) | |
| — | | |
| 427 | |
Receivable from sale of investment | |
| 90,000 | | |
| — | |
Prepaid expenses | |
| 40,702 | | |
| 107,749 | |
Deposits on mining equipment | |
| 4,673,680 | | |
| 7,613,230 | |
Inventory | |
| — | | |
| 18,725 | |
Cryptocurrency | |
| — | | |
| 302,654 | |
Total current assets | |
| 5,050,740 | | |
| 10,827,973 | |
| |
| | | |
| | |
Other assets: | |
| | | |
| | |
Property and equipment, net of accumulated depreciation of $747,216 and $89,136, respectively | |
| 1,632,007 | | |
| 2,226,360 | |
Right of use asset, net of accumulated amortization of $426,918 and $299,583 respectively | |
| — | | |
| 127,335 | |
Deposits and other assets | |
| 110,350 | | |
| 18,201 | |
Total assets | |
$ | 6,793,097 | | |
$ | 13,199,869 | |
| |
| | | |
| | |
Liabilities and Stockholders’ Equity (Deficit) | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 3,232,855 | | |
$ | 801,747 | |
Accrued interest and expenses – related parties | |
| 3,055,989 | | |
| 2,231,558 | |
Convertible notes payable | |
| 1,400,000 | | |
| — | |
Lease liability, current portion | |
| — | | |
| 33,977 | |
Secured convertible debenture(s) – related party(ies) | |
| 4,993,700 | | |
| 2,500,000 | |
Current liabilities associated with discontinued operations | |
| 485,712 | | |
| 472,029 | |
Total current liabilities | |
| 13,168,256 | | |
| 6,039,311 | |
| |
| | | |
| | |
Non-current liabilities: | |
| | | |
| | |
Lease liability, long term portion | |
| — | | |
| 101,116 | |
Secured convertible debenture – related party, net of unamortized debt discount of $0 | |
| — | | |
| 2,500,000 | |
SBA/PPP loans payable | |
| 149,900 | | |
| 361,595 | |
Total non-current liabilities | |
| 149,900 | | |
| 2,962,711 | |
Total liabilities | |
| 13,318,156 | | |
| 9,002,022 | |
| |
| | | |
| | |
Commitments and contingencies | |
| - | | |
| - | |
| |
| | | |
| | |
Stockholders’ equity (deficit): | |
| | | |
| | |
Preferred stock; 5,000,000 shares authorized: | |
| | | |
| | |
Series A convertible preferred stock; $0.0001 par value; 500,000 shares authorized; 256,117 and 223,964 shares issued and outstanding, respectively | |
| 25 | | |
| 22 | |
Series B convertible preferred stock; $0.0001 par value; 20,000 shares authorized; 1,439 and 3,720 shares issued and outstanding, respectively | |
| — | | |
| — | |
Series C convertible preferred stock; $0.0001 par value; 15,000 shares authorized; 7,630 and 7,880 shares issued and outstanding, respectively | |
| 1 | | |
| 1 | |
Preferred
stock value | |
| 1 | | |
| 1 | |
Common stock; $0.0001 par value; 100,000,000 shares authorized; 12,246,036 and 8,191,382 shares issued and outstanding, respectively | |
| 1,224 | | |
| 819 | |
Additional paid-in capital | |
| 54,202,355 | | |
| 51,506,854 | |
Accumulated deficit | |
| (60,728,664 | ) | |
| (47,309,849 | ) |
Total stockholders’ equity (deficit) | |
| (6,525,059 | ) | |
| 4,197,847 | |
Total liabilities and stockholders’ equity (deficit) | |
$ | 6,793,097 | | |
$ | 13,199,869 | |
See
notes to consolidated financial statements.
Creek
Road Miners, Inc. and Subsidiaries
Consolidated
Statements of Operations
See
notes to consolidated financial statements.
Creek
Road Miners, Inc. and Subsidiaries
Consolidated
Statement of Stockholders’ Equity (Deficit)
For
the Years Ended December 31, 2022 and 2021
See
notes to consolidated financial statements.
Creek
Road Miners, Inc. and Subsidiaries
Consolidated
Statement of Stockholders’ Equity
For
the Years Ended December 31, 2022 and 2021 (Continued)
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Interest | | |
Equity
(Deficit) | |
| |
Series
A Preferred Stock Par
value $0.0001 | | |
Series
B Preferred Stock Par
value $0.0001 | | |
Series
C Preferred Stock Par
value $0.0001 | | |
Common
Stock Par
value $0.0001 | | |
Additional
Paid In | | |
Accumulated | | |
Non-controlling | | |
Stockholders’
Equity | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Interest | | |
(Deficit) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance, December 31, 2020 | |
| 173,993 | | |
$ | 17 | | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
| 3,506,752 | | |
$ | 351 | | |
$ | 23,206,367 | | |
$ | (30,039,146 | ) | |
$ | (12,498 | ) | |
$ | (6,844,909 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 9,726,950 | | |
| - | | |
| - | | |
| 9,726,950 | |
Warrants issued for services | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 2,270,015 | | |
| - | | |
| - | | |
| 2,270,015 | |
Exercise of stock options | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 302,644 | | |
| 30 | | |
| 50,595 | | |
| - | | |
| - | | |
| 50,625 | |
Issuance of series A preferred stock to settle accrued
liabilities and compensation | |
| 58,721 | | |
| 6 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 588,044 | | |
| - | | |
| - | | |
| 588,050 | |
Issuance of common stock and warrants, net | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 2,933,340 | | |
| 293 | | |
| 3,924,757 | | |
| - | | |
| - | | |
| 3,925,050 | |
Issuance of series B preferred stock and warrants,
net | |
| - | | |
| - | | |
| 5,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 4,378,995 | | |
| - | | |
| - | | |
| 4,378,995 | |
Issuance of series C preferred stock and warrants,
net | |
| - | | |
| - | | |
| - | | |
| - | | |
| 7,880 | | |
| 1 | | |
| - | | |
| - | | |
| 7,733,600 | | |
| - | | |
| - | | |
| 7,733,601 | |
Conversion of series A preferred stock to common | |
| (8,750 | ) | |
| (1 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| 500,000 | | |
| 50 | | |
| (49 | ) | |
| - | | |
| - | | |
| - | |
Conversion of series B preferred stock to common | |
| - | | |
| - | | |
| (1,280 | ) | |
| - | | |
| - | | |
| - | | |
| 948,646 | | |
| 95 | | |
| (95 | ) | |
| - | | |
| - | | |
| - | |
Dividend on Series A preferred stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (254,322 | ) | |
| - | | |
| - | | |
| (254,322 | ) |
Dividend on Series B preferred stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (118,003 | ) | |
| - | | |
| - | | |
| (118,003 | ) |
Write-off of non-controlling interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 12,498 | | |
| 12,498 | |
Net loss | |
| - | | |
| | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (17,270,703 | ) | |
| - | | |
| (17,270,703 | ) |
Balance, December 31, 2021 | |
| 223,964 | | |
$ | 22 | | |
| 3,720 | | |
$ | - | | |
| 7,880 | | |
$ | 1 | | |
| 8,191,382 | | |
$ | 819 | | |
$ | 51,506,854 | | |
$ | (47,309,849 | ) | |
$ | - | | |
$ | 4,197,847 | |
See
notes to consolidated financial statements.
Creek
Road Miners, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
See
notes to consolidated financial statements.
Creek
Road Miners, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (Continued)
| |
Years Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid for income taxes | |
$ | — | | |
$ | — | |
Cash paid for interest | |
$ | — | | |
$ | — | |
Supplemental disclosures of noncash investing and financing activity: | |
| | | |
| | |
Issuance of series A preferred stock to settle accrued liabilities and compensation | |
$ | 555,700 | | |
$ | 588,044 | |
Issuance of series B preferred stock to settle accrued liabilities | |
$ | 189,466 | | |
$ | — | |
Dividends on preferred stock | |
$ | 364,384 | | |
$ | 372,325 | |
Issuance of common stock for investment | |
$ | 100,000 | | |
$ | — | |
Conversion of preferred stock to common stock | |
$ | 348 | | |
$ | 145 | |
Conversion of secured convertible debentures to common stock | |
$ | 6,300 | | |
$ | — | |
Settlement to exchange warrant shares for convertible note | |
$ | 900,000 | | |
$ | — | |
See
notes to consolidated financial statements.
CREEK
ROAD MINERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2022 and 2021
Note
1. Organization, Nature of Business and Basis of Presentation
Organization
Creek
Road Miners, Inc. (formerly known as Wizard Brands, Inc., Wizard Entertainment, Inc., Wizard World, Inc., and GoEnergy, Inc.) was incorporated
in Delaware on May 2, 2001. Prior to cryptocurrency mining operations that began in October 2021, the Company produced live and virtual
pop culture conventions and events and sold a gelatin machine and related consumables that were discontinued in 2021. In addition, the
Company operated an eCommerce site selling pop culture memorabilia that was discontinued on June 30, 2022 (known collectively as “legacy
operations”).
On
August 6, 2021, we entered into an Asset Purchase Agreement (the “Informa Agreement”) with Informa Pop Culture Events, Inc.,
a Delaware corporation (“Informa”). Pursuant to the Informa Agreement, Creek Road Miners Corp. (fka Kick the Can Corp.) sold,
transferred, and assigned certain assets, properties, and rights to Informa related to the business of operating and producing live pop
culture events. The Company released deferred revenue and other liabilities totaling $722,429 and
recognized other income of this amount.
On
September 15, 2021, we sold our wholly owned subsidiary which contained our Jevo assets and all rights to our Jevo operations for $1,500,000
and recognized a gain on the transaction of approximately $1,130,740.
We
implemented a 1-for-20 reverse stock split of our outstanding shares of common stock that was effective on January 23, 2020. Unless otherwise
noted, all share and related option, warrant, and convertible security information presented has been retroactively adjusted to reflect
the reduced number of shares, and the increase in the share price which resulted from this action.
Merger
Agreement
On
October 24, 2022, the Company, Creek Road Merger Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company,
and Prairie Operating Co., LLC, a Delaware limited liability company (“Prairie”), entered into an Agreement and Plan of Merger
(the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Prairie (the “Merger”), with
Prairie surviving and continuing to exist as a Delaware limited liability company and a wholly-owned subsidiary of the Company.
At
the effective time of the Merger (the “Effective Time”), the Company will (a) deliver the greater of (A) 2,000,000 shares
of its common stock, par value $0.0001 per share (“common stock”), and (B) the product of (x) the number of issued and outstanding
shares of common stock immediately following the consummation of the Restructuring Transactions (as defined below) by the Company multiplied
by (y) 33.33% to the members of Prairie (the “Prairie Members”) and (b) convert certain options to purchase membership interests
of Prairie into restricted performance-based options to purchase, in the aggregate, 8,000,000 shares of common stock for $0.25 per share
only exercisable if specific production hurdles are achieved.
In
connection with the Merger, the Company will cause the following restructuring transactions (the “Restructuring Transactions”):
(1) all holders of the Company’s outstanding shares of Series A preferred stock, Series B preferred stock, Series C preferred stock,
and 12% senior secured convertible debentures (the “Convertible Debentures”), and holders of certain warrants, certain convertible
promissory notes and certain other accrued liabilities, will convert their respective shares of Series A preferred stock, Series B preferred
stock, Series C preferred stock and Convertible Debentures, and respective warrants, convertible promissory notes and accrued liabilities
into shares of common stock and (2) thereafter, the Company shall effect a reverse stock split of the common stock at a ratio between
1-23 and 1-30 (the “Reverse Stock Split”).
Nature
of Business
Cryptocurrency
Mining
We
generate substantially all our revenue through cryptocurrency we earn through our mining activities. We have historically mined and held
Bitcoin exclusively, which we may sell to fund our operating and capital expenditures. Our mining operations commenced on October 24,
2021. We use special cryptocurrency mining computers (known as “miners”) to solve complex cryptographic algorithms to support
the Bitcoin blockchain and, in return, receive Bitcoin as our reward. Miners measure their processing power, which is known as “hashing”
power, in terms of the number of hashing algorithms solved (or “hashes”) per second, which is the miner’s “hash
rate.” We participate in mining pools that pool the resources of groups of miners and split cryptocurrency rewards earned according
to the “hashing” capacity each miner contributes to the mining pool. Since June 30,
2022 the Company is neither receiving meaningful cryptocurrency awards nor generating meaningful revenue from cryptocurrency mining.
Mining
Equipment
All
of our miners were manufactured by Bitmain, and incorporate application-specific integrated circuit (“ASIC”) chips specialized
to solve blocks on the Bitcoin blockchains using the 256-bit secure hashing algorithm (“SHA-256”) in return for Bitcoin cryptocurrency
rewards. As of December 31, 2022, we had 510 Bitmain S19J Pro miners with 51.0 Ph/s of hashing capacity and 270 Bitmain S19 miners with
24.3 Ph/s of hashing capacity, none of which were in service.
On
December 17, 2021 the Company entered into a Non-Fixed Price Sales and Purchase Agreement (the “Bitmain Agreement”) with
Bitmain Technologies Limited (“Bitmain”) for 600 Bitmain S19XP miners with a reference price of approximately $11,250 per
miner. The miners have a total of 84 Ph/s of hashing capacity and an initial estimated purchase commitment of $6,762,000 (the “total
reference price”), subject to price adjustments and related offsets, including potential adjustments related to the market price
of miners. As of December 31, 2022, the Company has made payments of $3,969,000 (classified as deposits on mining equipment) to Bitmain
pursuant to the Bitmain Agreement, and the remaining amount due under the Bitmain Agreement is $47,600 and presented in the table below:
Schedule
of Market Price of Miners
| |
Market Price per Miner | | |
Total Amount | |
July 2022 batch (100 miners) | |
$ | 7,756 | | |
$ | 775,600 | |
August 2022 batch (100 miners) | |
| 7,140 | | |
| 714,000 | |
September 2022 batch (100 miners) | |
| 7,140 | | |
| 714,000 | |
October 2022 batch (100 miners) | |
| 6,510 | | |
| 651,000 | |
November 2022 batch (100 miners) | |
| 5,810 | | |
| 581,000 | |
December 2022 batch (100 miners) | |
| 5,810 | | |
| 581,000 | |
Estimated total amount due | |
| | | |
| 4,016,600 | |
Less: Payments made | |
| | | |
| 3,969,000 | |
Remaining amount due | |
| | | |
$ | 47,600 | |
As
of December 31, 2022, all 600 miners purchased from Bitmain have not been delivered to the Company, and will remain undelivered until
all fees are paid to ship the miners from the Bitmain facility to the Company.
Mining
Results
The
Company measures its operations by the number and U.S. Dollar (US$) value of the cryptocurrency rewards it earns from its cryptocurrency
mining activities. The following table presents additional information regarding our cryptocurrency mining operations:
Schedule
of Cryptocurrency Mining Operations
| |
Quantity of Bitcoin | | |
US$ Amounts | |
Balance September 30, 2021 | |
| — | | |
$ | — | |
Revenue recognized from cryptocurrency mined | |
| 6.7 | | |
| 369,804 | |
Mining pool operating fees | |
| (0.1 | ) | |
| (7,398 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (59,752 | ) |
Balance December 31, 2021 | |
| 6.6 | | |
$ | 302,654 | |
Revenue recognized from cryptocurrency mined | |
| 8.3 | | |
| 343,055 | |
Mining pool operating fees | |
| (0.2 | ) | |
| (6,868 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (106,105 | ) |
Balance March 31, 2022 | |
| 14.7 | | |
$ | 532,736 | |
Revenue recognized from cryptocurrency mined | |
| 4.6 | | |
| 166,592 | |
Mining pool operating fees | |
| (0.1 | ) | |
| (3,428 | ) |
Proceeds from the sale of cryptocurrency | |
| (18.9 | ) | |
| (564,205 | ) |
Realized loss on the sale of cryptocurrency | |
| — | | |
| (131,075 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (34 | ) |
Balance June 30, 2022 (1) | |
| 0.3 | | |
$ | 586 | |
Revenue recognized from cryptocurrency mined | |
| 0.3 | | |
| 7,955 | |
Mining pool operating fees | |
| — | | |
| (156 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (1,035 | ) |
Balance September 30, 2022 (1) | |
| 0.6 | | |
$ | 7,350 | |
Balance beginning | |
| 0.6 | | |
$ | 7,350 | |
Revenue recognized from cryptocurrency mined | |
| — | | |
| — | |
Mining pool operating fees | |
| — | | |
| — | |
Proceeds from the sale of cryptocurrency | |
| (0.6 | ) | |
| (11,203 | ) |
Realized gain on the sale of cryptocurrency | |
| — | | |
| 3,853 | |
Realized gain (loss) on the sale of cryptocurrency | |
| — | | |
| 3,853 | |
Balance December 31, 2022 (1) | |
| — | | |
$ | — | |
Balance ending | |
| — | | |
$ | — | |
(1) | Since
June 30, 2022 the Company is neither receiving meaningful cryptocurrency awards nor generating
meaningful revenue from cryptocurrency mining. |
Factors
Affecting Profitability
Our
business is heavily dependent on the market price of Bitcoin. The prices of cryptocurrencies, specifically Bitcoin, have experienced
substantial volatility. Further affecting the industry, and particularly for the Bitcoin blockchain, the cryptocurrency reward for solving
a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of
inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half,
hence the term “halving”. For Bitcoin the reward was initially set at 50 Bitcoin currency rewards per block. The Bitcoin
blockchain has undergone halving three times since its inception as follows: (1) on November 28, 2012 at block 210,000; (2) on July 9,
2016 at block 420,000; and (3) on May 11, 2020 at block 630,000, when the reward was reduced to its current level of 6.25 Bitcoin per
block. The next halving for the Bitcoin blockchain is anticipated to occur in March 2024 at block 840,000, when the reward will be reduced
to 3.125 Bitcoin per block. This process will reoccur until the total amount of Bitcoin currency rewards issued reaches 21 million and
the theoretical supply of new Bitcoin is exhausted. Many factors influence the price of Bitcoin, and potential increases or decreases
in prices in advance of, or following, a future halving is unknown.
We
have historically mined and held Bitcoin exclusively, which we may sell to fund our operating and capital expenditures. Since
June 30, 2022 the Company is neither receiving meaningful cryptocurrency awards nor generating meaningful revenue from cryptocurrency
mining.
Our
business is heavily dependent on the market price of Bitcoin, which has experienced substantial volatility and has recently dropped to
its lowest price since December 2020. As of December 31, 2022 the market price of Bitcoin was $16,547, which reflects a decrease of approximately
60% since the beginning of 2022, and of approximately 75% from its all-time high of approximately $67,000. In addition, the cost of natural
gas that we use to produce electricity to power our miners has increased substantially. The cost of natural gas in the United States
during 2022 has increased by as much as approximately 260% since the beginning of 2022. These price movements result in decreased cryptocurrency
mining revenue and increased cryptocurrency mining costs, both of which have a material adverse effect on our business and financial
results.
Government
Regulation
Cryptocurrency
is increasingly becoming subject to governmental regulation, both in the U.S. and internationally. State and local regulations also may
apply to our activities and other activities in which we may participate in the future. Numerous regulatory bodies have shown an interest
in regulating blockchain or cryptocurrency activities. For example, on March 9, 2022 President Biden signed an executive order on cryptocurrencies.
While the executive order does not mandate any specific regulations, it instructs various federal agencies to consider potential regulatory
measures, including the evaluation of the creation of a U.S. Central Bank digital currency. Future changes to existing regulations or
entirely new regulations may affect our business in ways it is not presently possible for us to predict with any reasonable degree of
reliability. As the regulatory and legal environment evolves, we may become subject to new laws and regulation which may affect our mining
and other activities. For additional discussion regarding our belief about the potential risks existing and future regulation pose to
our business, see the Section entitled “Risk Factors”.
Basis
of Presentation
The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”).
Note
2. Going Concern Analysis
Historically,
we have relied upon cash from financing activities to fund substantially all of the cash requirements of our activities and have incurred
significant losses and experienced negative cash flow. The Company had net losses from continuing operations of $13,401,076, and $19,202,114,
for the years ended December 2022 and 2021, respectively. We cannot predict if we will be profitable. We may continue to incur losses
for an indeterminate period of time and may be unable to achieve profitability. An extended period of losses and negative cash flow may
prevent us from successfully operating and expanding our business. We may be unable to achieve or sustain profitability on a quarterly
or annual basis. On December 31, 2022, we had cash and cash equivalents of $246,358, a working capital deficit of approximately $8.1
million, and an accumulated deficit of approximately $61 million.
We
have evaluated the significance of the uncertainty regarding the Company’s financial condition in relation to our ability to meet
our obligations, which has raised substantial doubts about the Company’s ability to continue as a going concern. While it is very
difficult to estimate our future liquidity requirements the Company believes that if it is unable close the Merger, or obtain debt and/or
equity financing, existing cash resources will be depleted in early 2023. The Company may be able to generate cash through the sale of
fixed assets, specifically cryptocurrency miners. However, the total cash generated would be significantly less than the total of the
Company’s liabilities. There are no assurances that the Merger will close, that debt and/or equity financing can be obtained, or
that the sale of fixed assets, specifically cryptocurrency miners can be achieved.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The consolidated
financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of
assets, or the amounts and classification of liabilities that may result from the matters discussed herein.
The
Company’s ability to continue as a going concern is dependent upon the Company’s ability to close the merger with Prairie,
or obtain debt and/or equity financing, and there are no assurances that either can occur.
Note
3. Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying financial statements are consolidated and include the accounts of the Company and its wholly-owned subsidiaries. Intercompany
balances and transactions have been eliminated in consolidation. The following table lists the Company’s wholly-owned subsidiaries
as of December 31, 2022:
Schedule
of Company’s Wholly-owned Subsidiaries
Name of consolidated subsidiary or entity | |
State or other jurisdiction
of incorporation or organization | |
Date of incorporation or formation (date of acquisition,
if applicable) | |
Attributable interest | |
Creek Road Miners Corp. (fka Kick the Can Corp.) | |
Nevada, U.S.A. | |
September 20, 2010 | |
| 100 | % |
Wizard Special Events, LLC | |
California, U.S.A. | |
June 5, 2018 | |
| 100 | % |
Creek Road Merger Sub, LLC | |
Delaware, U.S.A. | |
October 4, 2022 | |
| 100 | % |
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
These
estimates and assumptions include estimates for reserves of uncollectible accounts, accruals for potential liabilities, assumptions made
in valuing equity instruments issued for services or acquisitions, and realization of deferred tax assets.
Reclassification
Certain
prior period amounts have been reclassified to conform to current period presentation. Such reclassification did not affect net assets,
net loss or cash flows as previously presented.
Cash
and cash equivalents
For
purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid debt instruments purchased with an
original maturity of three months or less. In all periods presented, cash equivalents consist primarily of money market funds.
Fair
value of financial instruments
Under
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value
Measurements and Disclosures, fair value is defined as the price at which an asset could be exchanged or a liability transferred
in a transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where
available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable
prices or parameters are not available, valuation models are applied. A fair value hierarchy prioritizes the inputs used in measuring
fair value into three broad levels as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.
Level
3 – Unobservable inputs based on the Company’s assumptions.
The
Company is required to use observable market data if such data is available without undue cost and effort. The Company has no fair value
items required to be disclosed as of December 31, 2022 or 2021 under these requirements. The carrying amounts of financial assets and
liabilities, such as cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values because of the
short maturity of these instruments.
Transactions
involving related parties typically cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions
of competitive, free market dealings may not exist. However, in the case of the secured convertible debentures due to related parties,
the Company obtained a fairness opinion from an independent third party which supports that the transaction was carried out at an arm’s
length basis.
Concentration
of Credit Risk
Financial
instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents. The Company
places its cash with high quality financial institutions and at times may exceed the FDIC $250,000 insurance limit. The Company does
not anticipate incurring any losses related to these credit risks.
Cryptocurrency
Cryptocurrency
(Bitcoin) is included in current assets in the accompanying consolidated balance sheets. The classification of cryptocurrencies as a
current asset has been made after the Company’s consideration of the significant consistent daily trading volume on readily available
cryptocurrency exchanges and the absence of limitations or restrictions on Company’s ability to sell Bitcoin. Cryptocurrencies
awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy
disclosed below. Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with
an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances
occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount
exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured.
In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely
than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative
impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the
extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses
is not permitted. Cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the
accompanying consolidated statements of cash flows.
Impairment
of Long-Lived Assets
Long-lived
assets are comprised of intangible assets and property and equipment. Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash
flows produced by the asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment
exists, pursuant to the provisions of FASB ASC 360-10 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of”. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets,
if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including
a discounted value of estimated future cash flows and fundamental analysis. The Company reports an asset to be disposed of at the lower
of its carrying value or its estimated net realizable value.
Property
and equipment
Property
and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of 3 to 9 years.
Leasehold improvements are amortized over the shorter of the useful lives of the related assets, or the lease term. Expenditures for
maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains and losses on disposals
are included in the consolidated statements of operations.
Management
assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from
the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment
loss is recognized to write down the asset to its estimated fair value.
Leases
The
Company accounts for leases in accordance with the provisions of ASC 842, Leases. This standard requires lessees to recognize on the
balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation
of expenses and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or operating lease.
We
determine if an arrangement contains a lease at inception. Right of use (“ROU”) assets represent our right to use an underlying
asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and
liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
Our
leases consist of leaseholds on office space. We utilized a portfolio approach in determining our discount rate. The portfolio approach
takes into consideration the range of the term, the range of the lease payments, the category of the underlying asset and our estimated
incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value
of lease payments. We also give consideration to our recent debt issuances as well as publicly available data for instruments with similar
characteristics when calculating our incremental borrowing rates.
We
recognize lease expense for these leases on a straight-line basis over the lease term. We recognize variable lease payments in the period
in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured
using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred.
Revenue
Recognition
The
Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers. The underlying principle of ASC 606 is
to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected.
Revenues
are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration
that we expect to receive in exchange for those goods or services. The Company applies the following five steps in order to determine
the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements:
|
● |
identify
the contract with a customer; |
|
● |
identify
the performance obligations in the contract; |
|
● |
determine
the transaction price; |
|
● |
allocate
the transaction price to performance obligations in the contract; and |
|
● |
recognize
revenue as the performance obligation is satisfied. |
The
Company has entered into digital asset mining pools by executing contracts with the mining pool operators to provide computing power
to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation
only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company
is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction
fees to the mining pool operator which are recorded as a component of cost of revenues) for successfully adding a block to the blockchain.
The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator
to the total computing power contributed by all mining pool participants in solving the current algorithm.
Providing
computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. The provision
of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators. The
transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date
received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from
the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur,
the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm)
and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant
financing component in these transactions.
Fair
value of the cryptocurrency award received is determined using the market rate of the related cryptocurrency at the time of receipt.
There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies
recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment.
In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect
on the Company’s consolidated financial position and results from operations.
Cryptocurrency
Mining Costs
The
Company’s cryptocurrency mining costs consist primarily of direct costs of earning Bitcoin related to mining operations,
including mining pool fees, fuel and natural gas costs, turbine rental costs, and mobile data center rental costs, but exclude
depreciation and amortization, which are separately stated in the Company’s consolidated statements of operations.
Reverse
Stock Split
We
implemented a 1-for-20 reverse stock split of our outstanding shares of common stock that was effective on January 23, 2020. Unless otherwise
noted, all share and related option, warrant, and convertible security information presented has been retroactively adjusted to reflect
the reduced number of shares, and the increase in the share price which resulted from this action.
Stock-Based
Compensation
The
Company periodically issues stock options, warrants and restricted stock to employees and non-employees for services, in capital raising
transactions, and for financing costs. The Company accounts for share-based payments under the guidance as set forth in the Share-Based
Payment Topic 718 of the FASB Accounting Standards Codification, which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options, based on
estimated fair values. The Company estimates the fair value of stock option and warrant awards to employees and directors on the date
of grant using an option-pricing model, and the value of the portion of the award that is ultimately expected to vest is recognized as
expense over the required service period in our Statements of Operations. We estimate the fair value of restricted stock awards to employees
and directors using the market price of our common stock on the date of grant, and the value of the portion of the award that is ultimately
expected to vest is recognized as expense over the required service period in our Statements of Operations.
Income
taxes
The
Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Discontinued
Operations
On
August 6, 2021, the Company entered into the Informa Agreement with Informa. Pursuant to the Informa Agreement, Creek Road Miners Corp.
(fka Kick the Can Corp.) sold, transferred, and assigned certain assets, properties, and rights to Informa related to the business of
operating and producing live pop culture events. The Company released deferred revenue and other
liabilities totaling $722,429 and recognized other income of this amount.
On
September 15, 2021, the Company sold our wholly owned subsidiary which contained our Jevo assets and all rights to our Jevo operations
for $1,500,000 and recognized a gain on the transaction of approximately $1,130,740.
In
addition, the Company operated an eCommerce site selling pop culture memorabilia that was discontinued on June 30, 2022.
The
related assets and liabilities associated with the discontinued operations in our consolidated balance sheets for the years ending December
31, 2022 and 2021, are classified as discontinued operations. Additionally, the financial results associated with discontinued operations
in our consolidated statement of operations for the years ending December 31, 2022 and 2021, are classified as discontinued operations.
Earnings
(Loss) Per Common Share
Basic
earnings (loss) per share is computed by dividing earnings (loss) attributable to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share is computed by dividing earnings (loss) attributable to common
stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have
been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. The dilutive effect of potentially
dilutive securities is reflected in diluted net income per share if the exercise prices were lower than the average fair market value
of common shares during the reporting period. Potential common shares are excluded from the computation when their effect is antidilutive.
Basic and diluted earnings (loss) attributable to common stockholders is the same for the years ended December 31, 2022 and 2021, because
the Company has only incurred losses and all potentially dilutive securities are anti-dilutive. Potentially dilutive securities that
were not included in the computation of diluted earnings (loss) attributable to common stockholders at December 31, 2022 because their
inclusion would be anti-dilutive are as follows:
Schedule
of Anti-dilutive Securities Excluded from Earnings Per Share
Potentially Dilutive Security | |
Quantity | | |
Stated Value Per Share (1) | | |
Total Value or Stated Value | | |
Assumed Conversion Price (1) | | |
Resulting Common Shares | |
Common stock options | |
| 259,250 | | |
$ | — | | |
$ | — | | |
| — | | |
| 259,250 | |
Common stock warrants | |
| 21,984,266 | | |
| — | | |
| — | | |
| — | | |
| 21,984,266 | |
Series A preferred stock | |
| 256,117 | | |
| 10 | | |
| 2,561,170 | | |
| 0.175 | | |
| 14,635,257 | |
Series B preferred stock | |
| 1,439 | | |
| 1,080 | | |
| 1,554,120 | | |
| 0.500 | | |
| 3,108,240 | |
Series C preferred stock | |
| 7,630 | | |
| 1,111 | | |
| 8,476,930 | | |
| 0.500 | | |
| 16,953,860 | |
Series B preferred stock warrants | |
| 10,000 | | |
| 1,080 | | |
| 10,800,000 | | |
| 0.500 | | |
| 21,600,000 | |
Secured convertible debentures – related parties | |
| — | | |
| — | | |
| 4,993,700 | | |
| 0.175 | | |
| 28,535,429 | |
Convertible notes payable | |
| — | | |
| — | | |
| 1,400,000 | | |
| 0.500 | | |
| 2,800,000 | |
Total | |
| | | |
| | | |
| | | |
| | | |
| 109,876,302 | |
(1) |
As of December 31, 2022 |
Related
Parties
The
Company follows ASC 850-10, Related Parties, for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20, the related parties include: (a) affiliates of the Company (“Affiliate” means, with respect
to any specified person, any other person that, directly or indirectly through one or more intermediaries, controls, is controlled by
or is under common control with such person, as such terms are used in and construed under Rule 405 under the Securities Act); (b) entities
for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value
Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit
of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners
of the Company; (e) management of the Company; (f) other parties with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from
fully pursuing its own separate interests; and (g) other parties that can significantly influence the management or operating policies
of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other
to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Recently
Issued Accounting Pronouncements
Recent
accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future consolidated financial statements.
Note
4. Deposits on Mining Equipment
Deposits
on mining equipment, consisted of the following:
Schedule
of Mining Equipment
| |
Cryptocurrency Miners | | |
Mobile Data Centers | | |
Total | |
Balance December 31, 2020 | |
$ | — | | |
$ | — | | |
$ | — | |
Deposits on equipment during the period | |
| 7,089,000 | | |
| 524,230 | | |
| 7,613,230 | |
Equipment delivered during the period | |
| — | | |
| — | | |
| — | |
Balance December 31, 2021 | |
$ | 7,089,000 | | |
$ | 524,230 | | |
$ | 7,613,230 | |
Balance beginning | |
$ | 7,089,000 | | |
$ | 524,230 | | |
$ | 7,613,230 | |
Deposits on equipment during the period | |
| 1,602,300 | | |
| 530,430 | | |
| 2,132,730 | |
Equipment delivered during the period | |
| (4,722,300 | ) | |
| (349,980 | ) | |
| (5,072,280 | ) |
Balance December 31, 2022 | |
$ | 3,969,000 | | |
$ | 704,680 | | |
$ | 4,673,680 | |
Balance ending | |
$ | 3,969,000 | | |
$ | 704,680 | | |
$ | 4,673,680 | |
All
of our miners were manufactured by Bitmain, and incorporate application-specific integrated circuit (“ASIC”) chips specialized
to solve blocks on the Bitcoin blockchains using the 256-bit secure hashing algorithm (“SHA-256”) in return for Bitcoin cryptocurrency
rewards. As of December 31, 2022, we had 510 Bitmain S19J Pro miners with 51.0 Ph/s of hashing capacity and 270 Bitmain S19 miners with
24.3 Ph/s of hashing capacity, none of which were in service.
On
December 17, 2021 the Company entered into a Non-Fixed Price Sales and Purchase Agreement (the “Bitmain Agreement”) with
Bitmain Technologies Limited (“Bitmain”) for 600 Bitmain S19XP miners with a reference price of approximately $11,250 per
miner. The miners have a total of 84 Ph/s of hashing capacity and an initial estimated purchase commitment of $6,762,000 (the “total
reference price”), subject to price adjustments and related offsets, including potential adjustments related to the market price
of miners. As of December 31, 2022, the Company has made payments of $3,969,000 (classified as deposits on mining equipment) to Bitmain
pursuant to the Bitmain Agreement, and the remaining amount due under the Bitmain Agreement is $47,600 and presented in the table below:
Schedule
of Estimated Market Price of Miners
| |
Market Price per Miner | | |
Total Amount | |
July 2022 batch (100 miners) | |
$ | 7,756 | | |
$ | 775,600 | |
August 2022 batch (100 miners) | |
| 7,140 | | |
| 714,000 | |
September 2022 batch (100 miners) | |
| 7,140 | | |
| 714,000 | |
October 2022 batch (100 miners) | |
| 6,510 | | |
| 651,000 | |
November 2022 batch (100 miners) | |
| 5,810 | | |
| 581,000 | |
December 2022 batch (100 miners) | |
| 5,810 | | |
| 581,000 | |
Estimated total amount due | |
| | | |
| 4,016,600 | |
Less: Payments made | |
| | | |
| 3,969,000 | |
Remaining amount due | |
| | | |
$ | 47,600 | |
As
of December 31, 2022, all 600 miners purchased from Bitmain have not been delivered to the Company, and will remain undelivered until
all fees are paid to ship the miners from the Bitmain facility to the Company.
Note
5. Cryptocurrency
The
Company measures its operations by the number and U.S. Dollar (US$) value of the cryptocurrency rewards it earns from its cryptocurrency
mining activities. The Company recognized an impairment, or write down, of cryptocurrency (Bitcoin) rewards to the lowest fair market
value of Bitcoin from the time the reward was earned through December 31, 2022. The impairment amounted to $107,174 and $59,752 for the
years ended December 31, 2022 and 2021, respectively. The following table presents additional information regarding our cryptocurrency
mining operations:
Schedule
of Additional Information of Cryptocurrency Mining Operations
| |
Quantity of Bitcoin | | |
US$ Amounts | |
Balance December 31, 2020 | |
| — | | |
$ | — | |
Revenue recognized from cryptocurrency mined | |
| 6.7 | | |
| 369,804 | |
Mining pool operating fees | |
| (0.1 | ) | |
| (7,398 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (59,752 | ) |
Balance December 31, 2021 | |
| 6.6 | | |
$ | 302,654 | |
Balance beginning | |
| 6.6 | | |
$ | 302,654 | |
Revenue recognized from cryptocurrency mined | |
| 13.2 | | |
| 517,602 | |
Mining pool operating fees | |
| (0.3 | ) | |
| (10,452 | ) |
Proceeds from the sale of cryptocurrency | |
| (19.5 | ) | |
| (575,408 | ) |
Realized loss on the sale of cryptocurrency | |
| — | | |
| (127,222 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (107,174 | ) |
Balance December 31, 2022 (1) | |
| — | | |
$ | — | |
Balance ending | |
| — | | |
$ | — | |
| (1) | Since
June 30, 2022 the Company is neither receiving meaningful cryptocurrency awards nor generating
meaningful revenue from cryptocurrency mining. |
Note
6. Property and Equipment
Property
and equipment, excluding those associated with discontinued operations, stated at cost, less accumulated depreciation and amortization,
consisted of the following:
Schedule
of Property and Equipment
| |
2022 | | |
2021 | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Cryptocurrency miners | |
$ | 2,152,970 | | |
$ | 1,784,062 | |
Mobile data centers | |
| 219,372 | | |
| 518,663 | |
Computer equipment | |
| 6,881 | | |
| 12,771 | |
Total | |
| 2,379,223 | | |
| 2,315,496 | |
Less accumulated depreciation | |
| (747,216 | ) | |
| (89,136 | ) |
Net, Property and equipment | |
$ | 1,632,007 | | |
$ | 2,226,360 | |
Depreciation
expense, excluding that associated with discontinued operations, for the years ended December 31, 2022 and 2021 amounted to $658,080
and $112,512, respectively. On December 31, 2022 the Company recorded an impairment on fixed assets, specifically cryptocurrency miners
and mobile data centers, of $5,231,752 due to their significant drop in value.
All
of our miners were manufactured by Bitmain, and incorporate application-specific integrated circuit (“ASIC”) chips specialized
to solve blocks on the Bitcoin blockchains using the 256-bit secure hashing algorithm (“SHA-256”) in return for Bitcoin cryptocurrency
rewards. As of December 31, 2022, we had 510 Bitmain S19J Pro miners with 51.0 Ph/s of hashing capacity and 270 Bitmain S19 miners with
24.3 Ph/s of hashing capacity, none of which were in service.
Note
7. Investment
On
May 28, 2022, the Company entered into a Binding Memorandum of Understanding for a Proposed Transaction with Highwire to acquire certain
energy assets including natural gas production opportunities in South Dakota, North Dakota, and Wyoming as well as an opportunity for
fixed-price electricity generation in Wyoming. Under the terms of the agreement and subject to certain conditions, the Company has the
following obligations to Highwire (i) $125,000 upon execution, (ii) $100,000 in common stock, (iii) $125,000 within 72 hours after Bitcoin
mining operations commence, (iv) $110,000 to release Highwire from its bonding obligations, (v) an amount not to exceed $450,000 for
the construction of a road on the South Dakota location, (vi) $20,000 for the installation of a mobile data center on the North Dakota
property, (vii) the operating costs of each property, (viii) 15% of Bitcoin mining gross profit on the properties, and up to $400,000
if the Company elects to proceed with operations in Wyoming.
The
Company paid Highwire $125,000 upon execution and issued $100,000 worth of common stock, which amounted to 169,205 shares of common stock,
both of which were classified as an investment asset. In addition, the Company paid Highwire $110,000 to release its bonding obligations,
which is classified as a non-current asset.
On
December 30, 2022 the Company sold its investment in Highwire and recorded the transaction as follows:
Schedule
of Sale of Investment
Description | |
Amount | |
Basis of Investment | |
$ | 225,000 | |
Less: | |
| | |
Cash receivable at closing | |
| 90,000 | |
Offset of account payable to seller | |
| 115,896 | |
Total | |
| 205,896 | |
Loss from sale | |
$ | 19,104 | |
Note
8. Amounts Due to Related Parties
Amounts
due to related parties as of December 31, 2022 consisted of the following:
Schedule
of Due to Related Parties
| |
Bristol Capital, LLC | | |
Bristol Investment Fund, Ltd. | | |
Barlock 2019 Fund, LP | | |
Total | |
Accrued Interest and expenses | |
$ | 318,750 | | |
$ | 1,825,195 | | |
$ | 912,044 | | |
$ | 3,055,989 | |
Current secured convertible debentures | |
| — | | |
| 2,496,850 | | |
| 2,496,850 | | |
| 4,993,700 | |
Total | |
$ | 318,750 | | |
$ | 4,322,045 | | |
$ | 3,408,894 | | |
$ | 8,049,689 | |
Amounts
due to related parties as of December 31, 2021 consisted of the following:
| |
Bristol Capital, LLC | | |
Bristol Investment Fund, Ltd. | | |
Barlock 2019 Fund, LP | | |
Total | |
Accrued Interest and expenses | |
$ | 93,750 | | |
$ | 1,525,479 | | |
$ | 612,329 | | |
$ | 2,231,558 | |
Current secured convertible debenture | |
| — | | |
| 2,500,000 | | |
| — | | |
| 2,500,000 | |
Non-current secured convertible debenture | |
| — | | |
| — | | |
| 2,500,000 | | |
| 2,500,000 | |
Total | |
$ | 93,750 | | |
$ | 4,025,479 | | |
$ | 3,112,329 | | |
$ | 7,231,558 | |
As
of December 31, 2022, the Convertible Debentures with an aggregate principal amount of $4,993,700, comprised of a Convertible Debenture
with a principal amount of $2,496,850 held by Bristol Investment Fund (the “Bristol Convertible Debenture”) and the Barlock
Convertible Debenture with a principal amount of $2,496,850, were convertible into an aggregate of 28,535,429 shares of common stock
(exclusive of any accrued and unpaid interest), using a conversion price of $0.175.
Note
9. Related Party Transactions
The
Company has entered into transactions with the following related parties:
Related
Party: Bristol Capital, LLC
Bristol
Capital, LLC (“Bristol Capital”), is managed by Paul L. Kessler. Mr. Kessler served as Executive Chairman of the Company
from December 29, 2016, through November 24, 2020, when Mr. Kessler resigned his position, but
continued to serve as member of the Board of Directors. On December 1, 2021 Mr. Kessler was again appointed Executive Chairman
of the Company.
Consulting
Agreement
On
December 29, 2016, the Company entered into a Consulting Services Agreement with Bristol Capital (the “Consulting Agreement”).
Pursuant to the Consulting Agreement, Mr. Kessler agreed to serve as Executive Chairman of the Company. The initial term of the Consulting
Agreement is from December 29, 2016 through March 28, 2017. The term of the Consulting Agreement will be automatically extended for additional
terms of 90-day periods, unless either the Company or Bristol Capital gives prior written notice of non-renewal to the other party no
later than thirty (30) days prior to the expiration of the then current term. Upon the execution of the agreement the Company granted
Bristol Capital options to purchase up to an aggregate of 30,000 shares of the Company’s common stock at an exercise price of $0.25
per share, as amended.
During
the term, the Company will pay Bristol Capital, as amended, a monthly fee $18,750
payable in cash or preferred stock, at the Company’s
election. In addition, Bristol Capital may receive an annual bonus in an amount and under terms determined by the Compensation Committee
of the Board and approved by the Board in its sole and absolute discretion. The Company shall also, in association with the Uplisting,
issue to Bristol Capital (i) shares of common stock equal to 5%
of the fully diluted shares of common stock of the Company, calculated with the inclusion of Bristol Capital’s equity stock holdings
and shares issuable upon conversion of convertible instruments, preferred stock, options, and warrants; and (ii) a onetime non-accountable
expense reimbursement of $200,000.
On
November 22, 2018, the Company agreed to issue 202,022 shares of preferred stock for settlement of $496,875 due under the consulting
agreement as of October 31, 2018.
On
August 3, 2020, the Company cancelled the 202,022 shares of preferred stock previously determined to be issued, and issued 49,688 shares
of Series A preferred stock for the settlement of the previous outstanding amount due. In addition, on August 3, 2020, the Company issued
38,438 shares of Series A preferred stock for the settlement of $384,375 due under the consulting agreement as of July 31, 2020.
On
March 1, 2021, the Company issued 22,500 shares of Series A preferred stock to Bristol Capital for the settlement of $225,000 due under
the consulting agreement as of July 31, 2021.
During
the years ended December 31, 2022 and 2021, the Company incurred expenses of approximately $225,000, for each period for consulting services
provided by Bristol Capital. As of December 31, 2022, and 2021, the amount accrued to Bristol Capital for consulting services was $318,750
and $93,750, respectively.
Non-Accountable
Expense Reimbursement
On
September 7, 2021, Bristol Capital received a one-time non-accountable expense reimbursement of $200,000 in consideration for significant
efforts and diligence in negotiating and structuring investment transactions.
Reimbursement
of Legal Fees
In
January 2022, Bristol Capital was reimbursed for $12,040 in legal fees.
Related
Party: Bristol Capital Advisors, LLC
Bristol
Capital Advisors, LLC (“Bristol Capital Advisors”), is managed by Paul L. Kessler.
Operating
Sublease
On
June 16, 2016, the Company entered into a Standard Multi-Tenant Sublease with Bristol Capital Advisors (the “Sublease”).
The leased premises are owned by an unrelated third party and Bristol Capital Advisors passes the lease costs down to the Company. The
term of the Sublease is for 5 years and 3 months beginning on July 1, 2016, with monthly payments of approximately $8,000. During the
year ended December 31, 2022 and 2021, the Company paid lease obligations of $0 and $83,054, respectively, under the Sublease. On September
30, 2021, the lease term ended, and the Company vacated the premises.
Related
Party: Bristol Investment Fund, Ltd.
Bristol
Investment Fund, Ltd. (“Bristol Investment Fund”) is managed by Bristol Capital Advisors, which in turn is managed by Paul
L. Kessler.
Securities
Purchase Agreement – December 2016
On
December 1, 2016, the Company entered into the Purchase Agreement with Bristol Investment Fund, pursuant to which the Company sold to
Bristol Investment Fund, for a cash purchase price of $2,500,000, securities comprising of: (i) the Bristol Convertible Debenture, (ii)
Series A common stock purchase warrants, and (iii) Series B common stock purchase warrants. Pursuant to the Purchase Agreement, the Company
paid $25,000 to Bristol Investment Fund and issued 25,000 shares of common stock with a grant date fair value of $85,000 to Bristol Investment
Fund to cover legal fees. The Company recorded as a debt discount of $25,791 related to the cash paid and the relative fair value of
the shares issued for legal fees.
i)
Secured Convertible Debenture
On
December 1, 2016, the Company issued the Bristol Convertible Debenture with an initial principal balance of $2,500,000, and a maturity
date of December 30, 2018. The Bristol Convertible Debenture will accrue interest on the aggregate unconverted and then outstanding principal
amount at the rate of 12% per annum. Interest is payable quarterly on (i) January 1, April 1, July 1 and October 1, beginning on January
1, 2017, (ii) on each date the purchaser converts, in whole or in part, the Bristol Convertible Debenture into common stock (as to that
principal amount then being converted), and (iii) on the day that is 20 days following the Company’s notice to redeem some or all
of the of the outstanding principal of the secured convertible debenture (only as to that principal amount then being redeemed) and on
the maturity date. Interest may be paid in cash, common stock, or a combination thereof at the sole discretion of the Company.
The
Bristol Convertible Debenture is convertible into shares of the Company’s common stock at any time at the option of the holder.
The initial conversion price was $3.00 (as converted) per share, subject to adjustment. In the event of default occurs, the conversion
price shall be the lesser of (i) the initial conversion price of $3.00 and (ii) 50% of the average of the 3 lowest trading prices during
the 20 trading days immediately prior to the applicable conversion date.
The
Bristol Convertible Debenture contains anti-dilution provisions where, if the Company, at any time while the Bristol Convertible Debenture
is outstanding, sells or grants any option to purchase, right to reprice, or otherwise dispose of or issue any common stock or common
stock equivalents, at an effective price per share less that is lower than the conversion price then in effect, the conversion price
shall be reduced to the lower effective price per share.
On
December 19, 2019, the maturity date of the Bristol Convertible Debenture was amended to December 30, 2021.
On
May 1, 2020, the maturity date of the Bristol Convertible Debenture was amended to December 31, 2022.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 decreased the conversion price to $0.25. As of December 31, 2020, the Bristol Convertible Debenture held by Bristol Investment
Fund was convertible into 10,000,000 shares of common stock.
On
October 31, 2021, in consideration for the release of senior security interest in certain of the assets, properties, and rights of discontinued
operations that were sold during the year, the Bristol Convertible Debenture was amended to reduce the conversion price to $0.175.
During
March 2022, Bristol Convertible Debenture principal in the amount of $3,150 was converted into 18,000 shares of common stock using a
conversion price of $0.175.
On
December 31, 2022 the maturity date of the Bristol Convertible Debenture was amended to May 31, 2023.
As
of December 31, 2022 and 2021, the Bristol Convertible Debenture with a principal amount of $2,496,850 and $2,500,000, respectively,
held by Bristol Investment Fund was convertible into 14,267,714 and 14,285,714 shares of common stock, respectively, using a conversion
price of $0.175.
As
of December 31, 2022 and 2021, the amount of accrued interest payable to Bristol Investment Fund under the Bristol Convertible Debenture
was $1,825,195, and $1,525,479, respectively.
(ii)
Series A Common Stock Purchase Warrants
On
December 1, 2016, the Company issued series A common stock purchase warrants to acquire up to 833,333 shares of common stock at exercise
price of $3.00, and expiring on December 1, 2021. The warrants contain anti-dilution provisions where, if the Company, at any time while
the warrant is outstanding, sells or grants any option to purchase, right to reprice, or otherwise dispose of or issue any common stock
or common stock equivalents, at an effective price per share less than the exercise price then in effect, the exercise price shall be
reduced, and the number of warrant shares shall be increased such that the aggregate exercise price payable hereunder, shall be equal
to the aggregate exercise price prior to such adjustment.
On
December 19, 2019, as a result of the anti-dilution provisions, the issuance of the Barlock Convertible Debenture with a conversion price
of $2.50 increased the number of shares of common stock issuable upon exercise of the series A common stock purchase warrants to 1,000,000,
and decreased the exercise price to $2.50.
On
December 19, 2019, Bristol Investment Fund assigned 300,000 series A common stock purchase warrants to Barlock Capital Management, LLC,
and the expiration date of the warrants was extended to December 1, 2024. After the assignment, Bristol Investment Fund held series A
common stock purchase warrants to acquire 700,000 shares of common stock at an exercise price to $2.50.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 increased the number of shares of common stock issuable upon exercise of the series A common stock purchase warrants to 7,000,000,
and decreased the exercise price to $0.25. As of December 31, 2020, Bristol Investment Fund held series A common stock purchase warrants
to acquire 7,000,000 shares of common stock at an exercise price to $0.25.
On
October 31, 2021, as a result of the anti-dilution provisions, the effect of reducing the conversion price of the Convertible Debentures
to $0.175 increased the common stock issuable upon the exercise of the series A common stock purchase warrants to 10,000,000, and decreased
the exercise price to $0.175.
On
September 9, 2022, Bristol Investment Fund assigned 20% of its series A common stock purchase warrants shares to Leviston Resources,
LLC.
As
of December 31, 2022, Bristol Investment Fund held series A common stock purchase warrants to acquire 10,000,000 shares of common stock
at an exercise price of $0.175.
In
addition, the warrants may be exercised, in whole or in part, at any time until they expire. If at any time after the 6-month anniversary
of the closing date there is no effective registration statement, or no current prospectus available for the resale of the warrant shares,
then the warrants may be exercised, in whole or in part, on a cashless basis at any time until they expire.
(iii)
Series B Common Stock Purchase Warrants
On
December 1, 2016, the Company issued series B common stock purchase warrants to acquire up to 833,333 shares of common stock at an initial
exercise price of $0.002, and expiring on December 1, 2021. The series B common stock purchase warrants were exercised immediately on
the issuance date, and the Company received gross proceeds of $1,667.
Upon
issuance of the Bristol Convertible Debenture, the Company valued the warrants using the Black-Scholes Option Pricing model and accounted
for it using the relative fair value of $1,448,293 as debt discount on the consolidated balance sheet. Debt discount is amortized over
the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method which approximates the interest
method. The amortization of debt discount is included as a component of interest expense on the consolidated statement of operations.
There was unamortized debt discount of $0 as of December 31, 2022 and 2021.
Related
Party: Barlock 2019 Fund, LP
Barlock
is managed by Scott D. Kaufman, who has served as Chief Executive Officer of the Company from November 24, 2020, through May 11, 2022,
and as co-Chief Executive Officer from May 12, 2022 through August 8, 2022, and a former Director from November 4, 2019, through August
8, 2022, and former Chairman of the Board of Directors from November 24, 2020, through December 1, 2021.
Securities
Purchase Agreement – December 2019
On
December 19, 2019, the Company entered into the purchase agreement with Barlock, pursuant to which the Company sold to Barlock, for a
cash purchase price of $2,500,000, securities comprising of: (i) the Barlock Convertible Debenture, and (ii) Series A common stock purchase
warrants assigned from Bristol Investment Fund. Pursuant to the purchase agreement, the Company paid $25,400 to Barlock for legal fees
which was recorded as a debt discount.
(ii) Secured Convertible Debenture
On
December 19, 2019, the Company entered issued a Barlock Convertible Debenture with an initial principal balance of $2,500,000, and a
maturity date of December 30, 2021. The Barlock Convertible Debenture will accrue interest on the aggregate unconverted and then outstanding
principal amount at the rate of 12% per annum. Interest is payable quarterly on (i) January 1, April 1, July 1 and October 1, beginning
on January 1, 2020, (ii) on each date the purchaser converts, in whole or in part, the Barlock Convertible Debenture into common stock
(as to that principal amount then being converted), and (iii) on the day that is 20 days following the Company’s notice to redeem
some or all of the of the outstanding principal of the Barlock Convertible Debenture (only as to that principal amount then being redeemed)
and on the maturity date. Interest may be paid in cash, common stock, or a combination thereof at the sole discretion of the Company.
The
Barlock Convertible Debenture is convertible into shares of the Company’s common stock at any time at the option of the holder.
The initial conversion price was $2.50 (as converted) per share, subject to adjustment. In the event of default occurs, the conversion
price shall be the lesser of (i) the initial conversion price of $2.50 and (ii) 50% of the average of the 3 lowest trading prices during
the 20 trading days immediately prior to the applicable conversion date.
The
Barlock Convertible Debenture contains anti-dilution provisions where, if the Company, at any time while the Barlock Convertible Debenture
is outstanding, sells or grants any option to purchase, right to reprice, or otherwise dispose of or issue any common stock or common
stock equivalents, at an effective price per share less that is lower than the conversion price then in effect, the conversion price
shall be reduced to the lower effective price per share.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 decreased the conversion price to $0.25. As of December 31, 2020, the Barlock Convertible Debenture held by Barlock was convertible
into 10,000,000 shares of common stock.
On
October 31, 2021, in consideration for the release of senior security interest in certain of the assets, properties, and rights of discontinued
operations that were sold during the year, the Barlock Convertible Debenture was amended to reduce the conversion price to $0.175, and
the maturity date was amended to December 31, 2023.
During
March 2022, the principal amount of $3,150 under the Barlock Convertible Debenture was converted into 18,000 shares of common stock at
a conversion price of $0.175.
As
of December 31, 2022 and 2021, the Barlock Convertible Debenture with a principal amount of $2,496,850 and $2,500,000, respectively,
held by Barlock was convertible into 14,267,714 and 14,285,714 shares of common stock, respectively, at a conversion price of $0.175.
As
of December 31, 2022 and 2021, the amount of accrued interest payable to Barlock under the Barlock Convertible Debenture was $912,044,
and $612,239, respectively.
(ii)
Series A Common Stock Purchase Warrants
On
December 19, 2019, Bristol Investment Fund assigned to Barlock Capital Management, LLC series A common stock purchase warrants to acquire
up to 300,000 shares of common stock at exercise price of $2.50, and expiring on December 1, 2024. The warrants contain anti-dilution
provisions where, if the Company, at any time while the warrant is outstanding, sells or grants any option to purchase, right to reprice,
or otherwise dispose of or issue any common stock or common stock equivalents, at an effective price per share less than the exercise
price then in effect, the exercise price shall be reduced, and the number of warrant shares shall be increased such that the aggregate
exercise price payable hereunder, shall be equal to the aggregate exercise price prior to such adjustment.
On
August 3, 2020, as a result of the anti-dilution provisions, the effect of repricing stock options held by directors and employees to
$0.25 increased the number of shares of common stock issuable upon exercise of the series A common stock purchase warrants to 3,000,000,
and decreased the exercise price to $0.25. As of December 31, 2020, Barlock Capital Management, LLC held series A common stock purchase
warrants to acquire 3,000,000 shares of common stock at an exercise price to $0.25.
On
October 31, 2021, as a result of the anti-dilution provisions, the effect of reducing the conversion price of the secured convertible
debenture to $0.175 increased the number of shares of common stock issuable upon exercise of the series A common stock purchase warrants
to 4,285,714, and decreased the exercise price to $0.175.
As
of December 31, 2022, Barlock Capital Management, LLC held series A common stock purchase warrants to acquire 4,285,714 shares of common
stock at an exercise price to $0.175.
In
addition, the warrants may be exercised, in whole or in part, at any time until they expire. If at any time after the six-month anniversary
of the closing date there is no effective registration statement, or no current prospectus available for the resale of the warrant shares,
then the warrants may be exercised, in whole or in part, on a cashless basis at any time until they expire. Shares of common stock issuable
upon exercise of warrants are subject to a 4.99% beneficial ownership limitation, which may increase to 9.99% upon notice to the Company.
Upon
issuance of the secured convertible debenture, the Company valued the warrants using the Black-Scholes Option Pricing model and accounted
for it using the relative fair value of $545,336 as debt discount on the consolidated balance sheet. Debt discount is amortized over
the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method which approximates the interest
method. The amortization of debt discount is included as a component of interest expense on the consolidated statement of operations.
There was unamortized debt discount of $0, as of December 31, 2022 and 2021.
Related
Party: Barlock Capital Management, LLC
Barlock
Capital Management, LLC, is managed by Scott D. Kaufman, who served as Chief Executive Officer of the Company from November 24, 2020,
through May 11, 2022, and as co-Chief Executive Officer from May 12, 2022 through August 8, 2022, and a former Director from November
4, 2019, through August 8, 2022, and former Chairman of the Board of Directors from November 24, 2020, through December 1, 2021. From
September 2021 through December 2021, the Company rented executive office space located at 2700 Homestead Road, Park City, UT 84098,
for approximately $3,000 per month from Barlock Capital Management, LLC. The amount of rent paid to Barlock Capital Management, LLC for
the years ended December 31, 2022 and 2021, amounted to $0 and $9,410, respectively.
In
addition, the Company paid management fees to Barlock Capital Management, LLC in the amount of $0 and $81,000, for the years ended December
31, 2022 and 2021, respectively.
Related
Party: American Natural Energy Corporation
Scott
D. Kaufman is a director and shareholder of American Natural Energy Corporation (“ANEC”). In addition, Richard G. Boyce is
a former director of the Company who resigned from the Board on July 22, 2022, is also a director of ANEC. On October 22, 2021, the Company
entered into an agreement with ANEC, where ANEC would: (i) allow the Company to moor a barge on the ANEC operations site with the Company’s
mobile data center that houses cryptocurrency miners and a mobile turbine, and, (ii) supply natural gas to power a mobile turbine that
produces electricity that, in turn, is used to power the miners. ANEC charges the Company for the amount of natural gas used based on
the daily spot price of an unaffiliated third party, and a daily fee of $1,500 during the initial 90-day term, and $2,000 thereafter,
for the use of their operations site to moor the barge. The agreement terminated on May 24, 2022. The total amount paid to ANEC under
the agreement for the year ended December 31, 2022 amounted to approximately $400,000.
In
addition, in January 2022, the Company began renting executive office space located at 2700 Homestead Road, Park City, UT 84098, for
approximately $3,000 per month from ANEC. The amount of rent paid to ANEC for the year ended December 31, 2022 amounted to approximately
$9,000.
Related
Party: Scott D. Kaufman, former Chief Executive Officer
On
September 7, 2021, Scott D. Kaufman received a one-time non-accountable expense reimbursement of $200,000 in consideration for significant
efforts and diligence in negotiating and structuring investment transactions.
Related
Party: K2PC Consulting, LLC
K2PC
Consulting, LLC is managed by the spouse of Scott D. Kaufman. The company paid marketing fees to K2PC Consulting, LLC in the amount of
$7,850 and $24,500, for the years ended December 31, 2022 and 2021, respectively.
Related
Party: John D. Maatta, Director and Chief Executive Officer
John
D. Maatta is a current director, and served as Chief Executive Officer of the Company until November 24, 2020, as co-Chief Executive
Officer from May 12, 2022 through July 8, 2022, and again as Chief Executive Officer beginning on July 9, 2022. On November 22, 2018,
the Company agreed to issue 86,466 shares of preferred stock for settlement of the outstanding compensation due to Mr. Maatta of $212,707,
for the period June 17, 2017 through November 15, 2018.
On
August 3, 2020, the Company cancelled the 86,466 shares of preferred stock previously determined to be issued, and issued 21,271 shares
of Series A preferred stock for the settlement of the previous outstanding amount due. In addition, on August 3, 2020, the Company issued
29,496 shares of Series A preferred stock for the settlement of $294,965 in additional outstanding compensation due to Mr. Maatta, and
35,100 shares of Series A preferred stock for the settlement of $351,000 in loans to the Company made by Mr. Matta. The non-interest-bearing
loans were made as follows: during the year ended December 31, 2019, Mr. Maatta loaned $100,000 to the Company, during the year ended
December 31, 2020, Mr. Matta loaned an additional $125,000 to the Company, and paid for other amounts on behalf of the Company amounting
to $126,000. The outstanding balance of the loan payable to Mr. Maatta as of December 31, 2022 and 2021, was $0, for both periods.
On
March 1, 2021, 8,500 shares of Series A preferred stock were issued to Mr. Maatta in satisfaction of an aggregate of $85,546 due to Mr.
Maatta under his separation agreement.
Related
Party: CONtv
CONtv
is a joint venture with third parties and Bristol Capital, LLC. The Company holds a limited and passive interest of 10% in CONtv. As
of December 31, 2022 and 2021, the investment in CONtv and the amount due to CONtv was $0, for both periods.
Note
10. Convertible Notes Payable
Creecal
Holdings LLC (Assigned from Leviston Resources LLC)
In
connection with a loan in the principal amount of $500,000
received on May 18, 2022 pursuant to an oral agreement between the Company’s then-CEO and Leviston Resources LLC on September
9, 2022 the Company documented such loan with the issuance of a convertible note assigned to Creecal Holdings LLC, dated as of
September 8, 2022 in the principal amount of $500,000
(the “Creecal Note”). The Creecal Note is due on March 8, 2023 and shall accrue
interest at 4%
per annum. The due date of the note was extended to the earlier of May 31, 2023 or the closing of the Merger. Any principal or
interest which is not paid when due shall bear interest at the rate of 22%
per annum from the due date thereof until the same is paid.
The
Creecal Note is convertible at the holder’s option at the conversion price of the Company’s Series C preferred stock then
in effect (the “Creecal Note Conversion Price”), provided that so long as an event of default has not occurred under the
Note and the Company’s Series B preferred stock remains outstanding, the Creecal Note Conversion Price shall not be lower than
the conversion price of the Series B preferred stock. Unless the holder opts to convert the Creecal Note contemporaneously with the
Merger, the Creecal Note
will be immediately due and paid at the closing of the Merger. In the event the Merger is abandoned or cancelled the Creecal Note will
be due 30 days after such event.
Alpha
Capital Anstalt
On
August 24, 2022, the Company entered into an Agreement (the “Settlement”) with Alpha Capital Anstalt (“Alpha”).
The Settlement relates to a dispute with the Company’s then-CEO in connection with Alpha’s partial exercise on March 20,
2022 of warrants to purchase 600,000 shares of the Company’s common stock, par value $0.0001 (the “Warrant Shares”),
at an aggregate conversion price of $900,000.
Pursuant
to the Settlement, Alpha agreed to exchange the 600,000 Warrant Shares for a convertible promissory note in the principal amount of $900,000
due August 25, 2023 (the “Alpha Note”). Upon the occurrence and during the continuation of any event of default under the
Alpha Note, interest shall accrue at a default interest rate of 22% per annum. As of December 31, 2022 Alpha had returned 600,000 shares
of common stock in connection with the Settlement.
The
Alpha Note is convertible at Alpha’s option at the conversion price of the Company’s Series C preferred stock then in effect
(the “Alpha Note Conversion Price”). Upon notice that the Merger is imminent, Alpha will convert the Alpha Note at a 10%
discount of the amounts owed thereunder into shares of common stock at the lower of: (i) the Alpha Note Conversion Price; or (ii) the
lowest per share valuation attributed to the common stock in the Merger and any capital raise completed by the Company in connection
with the Merger.
Note
11. Lease Obligations
Office
Lease Obligation
On
June 16, 2016, the Company entered into a Standard Multi-Tenant Sublease with Bristol Capital Advisors, a related party. The leased premises
are owned by an unrelated third party and Bristol Capital Advisors passes the lease costs down to the Company. The term of the Sublease
is for 5 years and 3 months beginning on July 1, 2016, with monthly payments of approximately $8,000.
The
Company classified the lease as an operating lease and determined that the value of the lease assets and liability on January 1, 2019,
the date the Company adopted ASC 842 using the modified retrospective approach, was $252,980 using a discount rate of 12%. During the
years ended December 31, 2022 and 2021, the Company made payments towards the lease liability of $0 and $83,054, respectively. As of
December 31, 2022 and 2021, the ROU assets amounted to $0, for both years. As of December 31, 2022 and 2021, lease liability amounted
to $0, for both years. During the years ended December 31, 2022 and 2021, the Company reflected amortization of right of use asset related
to this lease of $0 and $85,035, respectively. The lease termed ended in September 2021.
Warehouse
Lease Obligation
On
April 18, 2020 the Company entered into a commercial lease for 3,200 square feet warehouse space at 16142 Wyandotte Street, Van Nuys,
California 91405. The monthly lease payment is approximately $3,900, with an approximate 2% escalation in rent per year. The term of
the lease is for five years, expiring on May 1, 2025. On April 8, 2022, the Company paid approximately $20,000 for the right to advance
the termination of the lease to April 30, 2022.
The
Company classified the lease as an operating lease and determined that the value of the lease assets and liability at the inception of
the lease was $173,938 using a discount rate of 12%. During the years ended December 31, 2022 and 2021, the Company made payments towards
the lease liability of $31,920, and $47,424, respectively. As of December 31, 2022 and 2021, the ROU assets amounted to $0 and $127,335,
respectively. As of December 31, 2022 and 2021, lease liability amounted to $0 and $135,094, respectively. During the years ended December
31, 2022 and 2021, the Company reflected amortization of right of use asset related to this lease of $7,759 and $72,331, respectively.
The
following table presents lease expense for the following years:
Schedule of Components of Lease Expenses
| |
2022 | | |
2021 | |
| |
For the Years Ended December 31, | |
| |
2022 | | |
2021 | |
Operating lease | |
$ | 32,604 | | |
$ | 89,956 | |
Note
12. SBA/PPP Notes Payable
Small
Business Administration Paycheck Protection Program Loans
On
March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and included a provision
for the Small Business Administration (“SBA”) to implement its Paycheck Protection Program (“PPP”). The PPP provides
small businesses with funds to pay payroll costs, including some benefits over a covered period of up to 24 weeks. Funds received under
the PPP may also be used to pay interest on mortgages, rent, and utilities. Subject to certain criteria being met, all or a portion of
the loan may be forgiven. The loans bear interest at an annual rate of one percent (1%), are due two (2) years from the date of issuance,
and all payments are deferred for the first six (6) months of the loan. Any unforgiven balance of loan principal and accrued interest
at the end of the six (6) month loan deferral period is amortized in equal monthly installments over the remaining 18-months of the loan
term.
SBA
Guaranteed PPP Loan
On
April 30, 2020, the Company entered into an SBA guaranteed PPP loan. The Company received aggregate proceeds of $197,600 under the loan.
The loan accrues interest at a rate of 1.00%. On December 11, 2021, the SBA forgave $183,567 of loan principal. As of December 31, 2022
and 2021, the outstanding balance under the loan was $0 and $14,033, respectively.
SBA
Loan
On
May 31, 2020, the Company entered into a loan agreement with the SBA. The Company received aggregate proceeds of $149,900 under the loan.
The loan accrues interest at a rate of 3.75%, and will mature in June 2050. As of December 31, 2022 and 2021, the outstanding balance
under the loan was $149,900, for both periods.
Second
Draw SBA Guaranteed PPP Loan
On
February 24, 2021, the Company entered into a Second Draw SBA guaranteed PPP loan. The Company received aggregate proceeds of $197,662
under the loan. The loan accrues interest at a rate of 1.00%, and will mature in February 2026. On March 10, 2022, the SBA forgave $197,662
of loan principal. As of December 31, 2022 and 2021, the outstanding balance under the loan was $0 and $197,662, respectively.
The
following table summarizes PPP/SBA loans payable:
Schedule
of Loans Payable
| |
December 31, 2022 | | |
December 31, 2021 | |
| |
As of | |
| |
December 31, 2022 | | |
December 31, 2021 | |
SBA Guaranteed PPP Loan | |
$ | — | | |
$ | 14,033 | |
SBA Loan | |
| 149,900 | | |
| 149,900 | |
Second Draw SBA Guaranteed PPP Loan | |
| — | | |
| 197,662 | |
Total | |
$ | 149,900 | | |
$ | 361,595 | |
Note 13. Contingencies and Commitments
Russia
– Ukraine Conflict
The
Russia – Ukraine conflict is a global concern. The Company does not have any direct exposure to Russia or Ukraine through its operations,
employee base, investments or sanctions. The Company does not receive goods or services sourced from those countries, does not anticipate
any disruption in its supply chain and has no business relationships, connections to or assets in Russia, Belarus or Ukraine. No impairments
to assets have been made due to the conflict. We are unable at this time to know the full ramifications of the Russia – Ukraine
conflict and its effects on our business.
Note
14. Common Stock Options
On
May 9, 2011, the Company adopted the 2016 Incentive Stock Award Plan (the “2011 Plan”), on August 12, 2016, the Company adopted
the 2016 Incentive Stock Award Plan (the “2016 Plan”), on August 3, 2020, the Company adopted the 2020 Stock Plan (the “2020
Plan”), and on December 1, 2021, the Company adopted the 2021 Incentive Stock Award Plan (the “2021 Plan”), collectively
(the “Plans”). The purpose of the Plans is to grant options to purchase our common stock, and other incentive awards, to
our employees, directors and key consultants.
The
maximum number of shares of common stock that may be issued pursuant to awards granted under the 2020 Plan was 500,000. On December 1,
2021, all prior stock award plans were retired, and the 2021 Plan was adopted. The maximum number of shares of common stock that may
be issued pursuant to awards granted under the 2021 Plan is 10,000,000. The shares of our common stock underlying cancelled and forfeited
awards issued under the 2021 Plan may again become available for grant under the 2021 Plan. As of December 31, 2022, there were 10,000,000
shares available for grant under the 2021 Plan, and no shares were available for grant under the 2020 Plan, 2016 Plan, or 2011 Plan.
On
August 21, 2020 the Board approved the repricing of the exercise price of outstanding stock options that had been issued to directors
and employees to $0.25 per share.
Stock-based
compensation cost is measured at the grant date, based on the fair value of the awards that are ultimately expected to vest, and recognized
on a straight-line basis over the requisite service period, which is generally the vesting period.
The
following table summarizes stock option activity during the years ended December 31, 2022 and 2021:
Schedule
of Stock Option Activity
| |
| | |
Weighted | |
| |
| | |
Average | |
| |
| | |
Exercise | |
| |
Options | | |
Price | |
Outstanding at December 31, 2020 | |
| 789,250 | | |
$ | 0.32 | |
Granted | |
| 7,300,000 | | |
| 2.55 | |
Exercised | |
| (317,500 | ) | |
| 0.29 | |
Forfeited/Cancelled | |
| (120,000 | ) | |
| 0.30 | |
Outstanding at December 31, 2021 | |
| 7,651,750 | | |
$ | 2.45 | |
Granted | |
| — | | |
| — | |
Exercised | |
| (217,500 | ) | |
| 0.42 | |
Forfeited/Cancelled | |
| (7,175,000 | ) | |
| 2.59 | |
Outstanding at December 31, 2022 | |
| 259,250 | | |
$ | 0.25 | |
| |
| | | |
| | |
Exercisable at December 31, 2020 | |
| 451,448 | | |
$ | 0.32 | |
Exercisable at December 31, 2021 | |
| 4,151,750 | | |
$ | 2.28 | |
Exercisable at December 31, 2022 | |
| 259,250 | | |
$ | 0.25 | |
The
following table presents the assumptions used to estimate the fair values based upon a Black-Scholes option pricing model of the stock
options granted during the years ended December 31, 2022 and 2021:
Schedule
of Assumptions Used to Estimate Fair Value of Options
| |
Assumptions | |
Expected dividend yield | |
| 0 | % |
Risk-free interest rate | |
| 0.12 - 0.82 | % |
Expected life (in years) | |
| 2.5 – 3.0 | |
Expected volatility | |
| 297 - 545 | % |
The
weighted average remaining contractual life of all options outstanding, vested and exercisable as of December 31, 2022 was 2.1 years.
Furthermore, the aggregate intrinsic value of options outstanding as of December 31, 2022 and 2021, was $0 and $3,641,063, respectively,
and in each case based on the fair value of the Company’s common stock on December 31, 2022 and 2021, respectively.
During
the year ended December 31, 2022, the Company issued 185,216 net shares of common stock upon the cashless exercise of options underlying
217,500 shares of common stock, and option holders cancelled options to purchase 7,175,000 shares of common stock.
During
the year ended December 31, 2021, the Company granted to Directors and employees options to purchase a total of 7,300,000 shares of the
Company’s common stock with a fair value of $17,850,000, which will be amortized over the vesting period. The total fair value
of options that vested during the year ended December 31, 2021 was $9,726,950 and was included in stock based compensation expense in
the accompanying statement of operations. As of December 31, 2021, the amount of unvested compensation related to the unvested options
was $8,925,000 which will be recorded as an expense in future periods as the options vest. During the year ended December 31, 2021, the
Company issued 302,644 net shares of common stock upon the exercise of options underlying 317,500 shares of common stock, resulting in
net cash proceeds of $50,625.
On
December 1, 2021, the Company granted certain of its Directors and employees options to purchase a total of 7,000,000 shares of the Company’s
common stock with an exercise price of $2.65 per share, a term of 5 years, and a shall vest upon a VWAP of the Company’s common
stock reaching the following targets: at such time as there is a VWAP equal to $2.50 of the Company’s common stock when computed
over 30 consecutive trading days, 25% of each Executive’s Options shall vest; at such time as there is a VWAP equal to $3.00 of
the Company’s common stock when computed over 30 consecutive trading days, 25% of each Executive’s Options shall vest; at
such time as there is a VWAP equal to $3.50 of the Company’s common stock when computed over 30 consecutive trading days, 25% of
each Executive’s Options shall vest; and at such time as there is a VWAP equal to $4.00 of the Company’s common stock when
computed over 30 consecutive trading days, 25% of each Executive’s Options shall vest.
Additional
information regarding stock options outstanding and exercisable as of December 31, 2022 is as follows:
Schedule
of Stock Option Outstanding and Exercisable
Option | | |
| | |
Remaining | | |
| |
Exercise | | |
Options | | |
Contractual | | |
Options | |
| Price | | |
| Outstanding | | |
| Life (in years) | | |
| Exercisable | |
$ | 0.25 | | |
| 259,250 | | |
| 2.1 | | |
| 259,250 | |
Note 15. Common Stock Warrants
During
the year ended December 31, 2022, the Company granted warrants to purchase a total of 900,000 shares of the Company’s common stock
to a consultant. In addition, the Company granted fully vested warrants to purchase 600,000 shares of the Company’s common stock
to shareholder as replacement for warrants. Using the Black-Scholes model the warrants to purchase 600,000 shares of the Company’s
common stock had a grant date fair value of $1,608,000 which was expensed on the grant date. The total fair value of options that vested
during the year ended December 31, 2022, was $2,080,501 and is included in stock based compensation expense in the accompanying statement
of operations. As of December 31, 2022, the amount of unvested compensation related to the unvested options was $0.
On
January 1, 2022, the Company granted warrants to purchase shares of the Company’s common stock to a consultant in connection with
the issuance of Series C preferred stock as follows: a warrant to purchase 400,000 shares with an exercise price of $1.50 per share,
and a term of 5 years; a warrant to purchase 250,000 shares with an exercise price of $2.50 per share, and term of 5 years; and a warrant
to purchase 250,000 shares with an exercise price of $2.75 per share, and term of 5 years.
On
March 29, 2022, the Company offered 16 warrant holders replacement warrants with an exercise price of $1.50 per common share, in exchange
for any warrants exercised at this time at the exercise price of $1.50 per common share. The issuance of replacement warrants has the
effect of resetting the conversion price of all outstanding shares of Series C preferred stock to $1.50 per common share and resetting
the exercise price of all outstanding warrants to $1.50 per common share in instances where those conversion and exercise prices are
above $1.50.
In
late-August and early-September 2022, the Company and holders of Series B and Series C preferred stock entered into Support Agreements
(the “Support Agreements”) relating to the Merger. Pursuant to the Support Agreements, the holders of Series B and Series
C preferred stock agreed to use its reasonable best efforts to cooperate with the Company in connection with the Merger. The Support
Agreement amends the exercise price of all outstanding
warrants held by Series B and Series C Preferred Stockholders to $0.50 per common share.
On
March 30, 2022, warrants to purchase 600,000 shares of the Company’s common stock were exercised by one warrant holder resulting
in $900,000 in cash proceeds being received by the Company. The Company issued replacement warrants to purchase 600,000 shares of the
Company’s common stock to such warrant holder.
During
the three months ended September 30, 2022, warrants to purchase 166,660 shares of the Company’s common stock were exercised by
two warrant holders resulting in $83,330 in cash proceeds being received by the Company, in addition, warrants holders cancelled warrants
to purchase 1,210,000 shares of common stock.
During
the three months ended December 31, 2022, warrants to purchase 1,120,000 shares of the Company’s common stock were cancelled by
the warrant holders.
On
March 1, 2021, the Company granted warrants to purchase shares the Company’s common stock to certain consultants as follows: two
warrants to purchase 100,000 shares with an exercise price of $0.50 per share, a term of 5 years, and a vesting period of 2 years; and
two warrants to purchase 100,000 shares with an exercise price of $1.00 per share, a term of 5 years, and a vesting period of 2 years.
Prior to December 31, 2021, warrants to purchase 350,000 shares of the Company’s common stock were forfeited or cancelled leaving
outstanding warrants to purchase 50,000 shares of the Company’s common stock at $0.50 per share.
On
March 24, 2021, the Company granted warrants to purchase shares the Company’s common stock to a consultant as follows: a warrant
to purchase 300,000 shares with an exercise price of $1.00 per share, and a term of 5 years; and, in connection with the issuance of
Series B preferred stock, a warrant to purchase 180,000 shares with an exercise price of $1.5278 per share, and term of 5 years.
From
August 2021 through October 2021, in connection with the issuance of common stock, the Company issued warrants to acquire 2,933,340 shares
of common stock at an exercise price of $1.50 per share, which became exercisable immediately upon issuance and with a term of 5 years.
The warrants contain anti-dilution provisions where, if the Company, at any time while the warrant is outstanding, sells or grants any
option to purchase, right to reprice, or otherwise dispose of or issue any common stock or common stock equivalents, at an effective
price per share less than the exercise price then in effect, the exercise price shall be reduced, and the number of warrant shares shall
be increased such that the aggregate exercise price payable hereunder, shall be equal to the aggregate exercise price prior to such adjustment.
If at any time after the 6-month anniversary of the closing date there is no effective registration statement, or no current prospectus
available for the resale of the warrant shares, then the warrants may be exercised, in whole or in part, on a cashless basis at any time
until they expire. Shares of common stock issuable upon exercise of warrants are subject to a 4.99% beneficial ownership limitation,
which may increase to 9.99% upon notice to the Company.
On
October 12, 2021, the Company granted certain directors warrants to purchase a total of 60,000 shares of the Company’s common stock
with an exercise price of $1.50 per share, and a term of 3 years.
On
October 20, 2021, the Company granted a director a warrant to purchase 400,000 shares of the Company’s common stock with an exercise
price of $1.50 per share, a term of 3 years, and vesting as follows: 20% upon execution of the Services Agreement; 20% on January 20,
2022; 20% on April 20, 2022; 20% on July 20, 2022; and 20% on October 20, 2022.
On
October 31, 2021, the Company granted a consultant warrants to purchase 750,000 shares of the Company’s common stock with an exercise
price of $1.50 per share, a term of 3 years, and vesting as follows: 40% upon execution of the Services Agreement; 20% on April 1, 2022;
20% on August 1, 2022; and 20% on December 1, 2022.
During
December 2021, in connection with the issuance of Series C preferred stock, the Company issued (i) warrants to acquire 1,750,936 shares
of Common Stock at an exercise price of $2.50 per share, which became exercisable immediately upon issuance and with a term of 5 years;
and (ii) warrants to acquire 1,750,936 shares of Common Stock at an exercise price of $2.75 per share, which became exercisable immediately
upon issuance and with a term of 5 years. The warrants contain anti-dilution provisions where, if the Company, at any time while the
warrant is outstanding, sells or grants any option to purchase, right to reprice, or otherwise dispose of or issue any common stock or
common stock equivalents, at an effective price per share less than the exercise price then in effect, the exercise price shall be reduced,
and the number of warrant shares shall be increased such that the aggregate exercise price payable hereunder, shall be equal to the aggregate
exercise price prior to such adjustment. If at any time after the 6-month anniversary of the closing date there is no effective registration
statement, or no current prospectus available for the resale of the warrant shares, then the warrants may be exercised, in whole or in
part, on a cashless basis at any time until they expire. The warrants are callable by the Company if the VWAP as calculated over 20 consecutive
trading days exceeds 200% of the then exercise price, and the average daily dollar volume for such measurement period exceeds 100,000
shares per trading day. Shares of common stock issuable upon exercise of warrants are subject to a 4.99% beneficial ownership limitation,
which may increase to 9.99% upon notice to the Company.
The
following table summarizes common stock warrant activity during the years ended December 31, 2022 and 2021:
Schedule of Stock Warrants Activity
| |
Common Stock Warrants | | |
Weighted Average Exercise Price | |
Outstanding at December 31, 2020 | |
| 10,300,000 | | |
$ | 0.26 | |
Results of anti-dilution provisions (1) | |
| 4,285,714 | | |
| - | (1) |
Granted | |
| 8,525,212 | | |
| 1.91 | |
Exercised | |
| — | | |
| — | |
Forfeited/Cancelled | |
| (650,000 | ) | |
| 1.81 | |
Outstanding at December 31, 2021 | |
| 22,460,926 | | |
$ | 0.82 | |
Results of anti-dilution provisions | |
| — | | |
| — | |
Granted | |
| 1,500,000 | | |
| 1.48 | |
Exercised | |
| (766,660 | ) | |
| 1.28 | |
Forfeited/Cancelled | |
| (1,210,000 | ) | |
| 1.50 | |
Outstanding at December 31, 2022 | |
| 21,984,266 | | |
$ | 0.37 | (2) |
Exercisable at December 31, 2020 | |
| 10,300,000 | | |
$ | 0.26 | |
Exercisable at December 31, 2021 | |
| 22,460,926 | | |
$ | 0.80 | |
Exercisable at December 31, 2022 | |
| 21,984,266 | | |
$ | 0.37 | (2) |
(1) |
On October 31, 2021,
as a result of the anti-dilution provisions, the effect of reducing the conversion price of the secured convertible debenture to $0.175 increased the common stock issuable upon the exercise of the series A common stock purchase warrants held cumulatively by related parties
Bristol Investment Fund and Barlock Capital Management, LLC, from 10,000,000 to 14,285,714, and decreased the exercise price to $0.175. |
(2) | On
March 29, 2022, the Company offered 16 warrant holders replacement warrants with an exercise
price of $1.50
per common
share, in exchange for any warrants exercised at this time at the exercise price of $1.50
per
common share. The issuance of replacement warrants has the effect of resetting the conversion
price of all outstanding shares of Series C preferred stock to $1.50
per
common share and resetting the exercise price of all outstanding warrants to $1.50
per
common share in instances where those conversion and exercise prices are above $1.50.
Additionally, in late-August and early-September 2022,
the Company and holders of Series B and Series C preferred stock entered into the Support
Agreements. Pursuant to the Support Agreements, the holders of Series B and Series C preferred
stock agreed to use its reasonable best efforts to cooperate with the Company in connection
with the Merger. The Support Agreements amend the exercise price of all outstanding
warrants held by Series B and Series C Preferred Stockholders
to $0.50
per
common share. |
The
following table presents the assumptions used to estimate the fair values based upon a Black-Scholes calculation for the common stock
warrants granted during the year ended December 31, 2021 and 2022:
Schedule
of Assumptions Used to Estimate Fair Value of Warrants
| |
Assumptions | |
Expected dividend yield | |
| 0 | % |
Risk-free interest rate | |
| 0.32 – 2.09 | % |
Expected life (in years) | |
| 2 -3 | |
Expected volatility | |
| 291 -297 | % |
The
weighted average remaining contractual life of all common stock warrants outstanding as of December 31, 2022 was 2.56 years. Furthermore,
the aggregate intrinsic value of common stock warrants outstanding as of December 31, 2022 was $0, based on the fair value of the Company’s
common stock on December 31, 2022.
Additional
information regarding common stock warrants outstanding and exercisable as of December 31, 2022 is as follows:
Schedule
of Stock Warrants Outstanding and Exercisable
Warrant | | |
| | |
Remaining | | |
| |
Exercise | | |
Warrants | | |
Contractual | | |
Warrants | |
Price | | |
Outstanding | | |
Life (in years) | | |
Exercisable | |
$ | 0.175 | | |
| 14,285,714 | | |
| 1.9 | | |
| 14,285,714 | |
| 0.50 | | |
| 6,318,552 | | |
| 3.9 | | |
| 6,318,552 | |
| 1.00 | | |
| 300,000 | | |
| 1.2 | | |
| 300,000 | |
| 1.50 | | |
| 400,000 | | |
| 4.0 | | |
| 400,000 | |
| 1.53 | | |
| 180,000 | | |
| 1.7 | | |
| 180,000 | |
| 2.50 | | |
| 250,000 | | |
| 4.0 | | |
| 250,000 | |
| 2.75 | | |
| 250,000 | | |
| 4.0 | | |
| 250,000 | |
| Total | | |
| 21,948,266 | | |
| | | |
| 21,948,266 | |
Note 16. Series B Preferred Stock Warrants
From
March 2021 through December 2021, in connection with the issuance of Series B preferred stock, the Company issued (i) a warrant to acquire
5,000 shares of the Series B preferred stock at an exercise price of $1,000 per share of Series B preferred stock, which became exercisable
immediately upon issuance and which expires on March 26, 2023; and (ii) a warrant to acquire 5,000 shares of the Series B preferred stock
at an exercise price of $1,000 per share of Series B preferred stock, which became exercisable immediately upon issuance and which expires
on March 26, 2024. If at any time after the 60-day anniversary of the closing date there is no effective registration statement, or no
current prospectus available for the resale of the warrant shares, then the warrants may be exercised, in whole or in part, on a cashless
basis at any time until they expire. The Company can force the exercise of the warrants if the VWAP exceeds $3.75 per share per share
for 20 consecutive trading days and the daily average trading volume of the Common Stock exceeds $100,000 in aggregate value for such
period. The Warrant holder may not be forced to exercise the warrant if such exercise would cause the holder’s beneficial ownership
to exceed 4.9%.
In
late-August and early-September 2022, the Company and holders of Series B and Series C preferred stock entered into the Support Agreements.
Pursuant to the Support Agreements, the holders of Series B and Series C preferred stock agreed to use its reasonable best efforts to
cooperate with the Company in connection with the Merger. The Support Agreements amend the exercise
price of all outstanding warrants held by Series B and Series C Preferred Stockholders to
$0.50 per common share.
The
Series B preferred stock issuable upon exercise of the Series B preferred stock warrants are automatically convertible into shares of
common stock at the Series B conversion price. Each share of our Series B preferred stock is convertible into a number of shares of our
common stock determined by dividing the aggregate stated value for the Series B preferred stock being converted ($1,080 per share, as
amended, subject to adjustment as set forth in the currently effective Series B Certificate of Designation) by the then-applicable conversion
price (initially $1.50 per share), subject to adjustment as set forth in the currently effective Series B Certificate of Designation.
As of December 31, 2022, in connection with the issuance of Series B preferred stock, there were outstanding warrants to acquire 10,000
shares of Series B preferred stock at an exercise price of $1,000, resulting in Series B preferred stock with a stated value of $10,800,000,
and convertible into 21,600,000 shares of common stock, using a conversion price of $0.50.
The
following table summarizes Series B preferred stock warrant activity during the year ended December 31, 2022:
Schedule of Stock Warrants Activity
| |
Series B Preferred Stock Warrants | | |
Weighted Average Exercise Price | |
Outstanding at December 31, 2021 | |
| — | | |
$ | — | |
Granted | |
| 10,000 | | |
| 1,000 | |
Exercised | |
| — | | |
| — | |
Forfeited/Cancelled | |
| — | | |
| — | |
Outstanding at December 31, 2022 | |
| 10,000 | | |
$ | 1,000 | |
| |
| | | |
| | |
Exercisable at December 31, 2022 | |
| 10,000 | | |
$ | 1,000 | |
The
weighted average remaining contractual life of all Series B preferred stock warrants outstanding as of December 31, 2022 was 0.7 years.
Note 17. Common Stock
Holders
of our common stock are entitled to one vote per share. Our Certificate of Incorporation does not provide for cumulative voting. Holders
of our common stock are entitled to receive ratably such dividends, if any, as may be declared by our Board out of legally available
funds. However, the current policy of our Board is to retain earnings, if any, for our operations and expansion. Upon liquidation, dissolution
or winding-up, the holders of our common stock are entitled to share ratably in all of our assets which are legally available for distribution,
after payment of or provision for all liabilities. The holders of our common stock have no preemptive, subscription, redemption or conversion
rights. The rights, preferences and privileges of holders of our common stock are subject to and may be adversely affected by the rights
of the holders of shares of any series of preferred stock that we may designate and issue.
We
implemented a 1-for-20 reverse stock split of our outstanding shares of common stock that was effective on January 23, 2020. Unless otherwise
noted, all share and related option, warrant, and convertible security information presented has been retroactively adjusted to reflect
the reduced number of shares, and the increase in the share price which resulted from this action.
From
August 2021 through October 2021, we consummated the transactions contemplated by the securities purchase agreement with the investors
party thereto, pursuant to which, we generated net cash proceeds of $3,925,050, and issued in a private placement: (i) 2,933,340 shares
of common stock for $1.50 per share and (ii) warrants to acquire 2,933,340 shares of common stock at an exercise price of $1.50 per share,
which became exercisable immediately upon issuance and with a term of 5 years. The issuance generated net cash proceeds of approximately
$3.9 million.
On
January 25, 2022, the Company granted an officer 30,000 shares of common stock as compensation under his employment agreement for services
provided through December 31, 2021. On December 31, 2022 the shares were rescinded and returned to the Company.
On
May 31, 2022, the Company issued 169,205 shares of common stock to Highwire under the terms of the Binding Memorandum of Understanding
for a Proposed Transaction.
On
August 24, 2022, the Company entered into the Settlement with Alpha. The Settlement relates to a dispute with the Company’s then-CEO
in connection with Alpha’s partial exercise on March 20, 2022 of the Warrant Shares. Pursuant to the Settlement, Alpha agreed to
exchange the Warrant Shares for the Alpha Note. As of December 31, 2022 Alpha had returned 600,000 shares of common stock in connection
with the Settlement.
Note 18. Preferred Stock
Under
the terms of the Certificate of Incorporation, our Board is expressly granted authority to authorize the issuance from time to time of
shares of preferred stock in one or more series, for such consideration and for such corporate purposes as our Board may from time to
time determines, and by filing a certificate pursuant to applicable law of the State of Delaware to establish from time to time for each
such series the number of shares to be included in each such series and to fix the designations, powers, rights and preferences of the
shares of each such series, and the qualifications, limitations and restrictions thereof to the fullest extent permitted by the Certificate
of Incorporation and the laws of the State of Delaware, including, without limitation, voting rights (if any), dividend rights, dissolution
rights, conversion rights, exchange rights and redemption rights thereof.
Series A Preferred Stock
Holders
of our Series A preferred stock are entitled to the number of votes per share equal to 2,000 shares of common stock. Holders of our Series
A preferred stock are entitled to receive a cumulative dividend on each share of Series A preferred stock issued and outstanding at the
rate of twelve percent (12%) per annum on the Aggregate Stated Value (as defined in the Certificate of Designation and Restatement of
Rights, Preferences and restrictions of Series A preferred stock, the “Series A Certificate of Designation”) then in effect,
payable quarterly on January 1, April 1, July 1 and October 1. Such dividend is payable in cash but may be paid in shares of common stock
in our sole discretion if the shares of common stock are listed on a national securities exchange. In the event of any liquidation, dissolution
or winding up of our company, whether voluntary or involuntary, holders of our Series A preferred stock are entitled to receive, prior
and in preference to any distribution of any of our assets to the holders of common stock by reason of their ownership thereof, for each
share held, an amount equal to the Stated Value (as defined in the Series A Certificate of Designation), plus unpaid dividends, if any.
The Series A preferred stock is convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares
of common stock as is determined by dividing the Aggregate Stated Value (initially $10.00 per share, subject to adjustment as set forth
in the currently effective Series A Certificate of Designation) by the Conversion Price (as defined in the Series A Certificate of Designation),
in effect on the date the certificate is surrendered for conversion, initially set at $0.25. Each share of Series A preferred stock is
redeemable at the option of the holder for the payment of cash by us to the holder equal to the Aggregate Stated Value of the shares
that the holder elects to redeem. The Series A preferred stock is entitled to certain protective provisions and we may not take certain
actions without the written consent of at least a majority of the Series A preferred stock, including, without limitation, amend, alter
or repeal any provision of the Series A Certificate of Designation to change the rights of the Series A preferred stock, create or authorize
additional class or series of stock senior to the Series A preferred stock or create, authorize the creation of, issue or authorize the
issuance of, any debt security which is convertible into or exchangeable for any equity security, if such equity security ranks senior
to the Series A preferred stock as to dividends or liquidation rights.
On
January 1, 2022, the Company granted an officer 7,722 shares Series A preferred stock for settlement of $77,216 in compensation under
his employment agreement for services provided through March 31, 2022.
On
March 31, 2022, we issued 3,409 shares of our Series A preferred stock to Scott D. Kaufman, our former co-Chief Executive Officer, for
settlement of $34,090 of compensation payable to Mr. Kaufman under his employment agreement from January 1, 2022 through March 31, 2022.
In addition, on March 31, 2022 we issued 4,941 shares of our Series A preferred stock to Paul L. Kessler, our Executive Chairman, for
settlement of $49,410 of compensation payable to Mr. Kessler under his employment agreement from January 1, 2022 through March 31, 2022.
On
June 30, 2022, we issued 5,361 shares of our Series A preferred stock to Scott D. Kaufman, our former co-Chief Executive Officer, for
settlement of $53,610 of compensation payable to Mr. Kaufman under his employment agreement from April 1, 2022 through June 30, 2022.
In addition, on June 30, 2022 we issued 4,941 shares of our Series A preferred stock to Paul L. Kessler, our Executive Chairman, for
settlement of $49,410 of compensation payable to Mr. Kessler under his employment agreement from April 1, 2022 through June 30, 2022.
On
September 30, 2022, we issued: 902 shares of our Series A preferred stock to Scott D. Kaufman, our former co-Chief Executive Officer,
for settlement of $9,020 of compensation payable to Mr. Kaufman under his employment agreement from July 1, 2022 through July 8, 2022;
2,958 shares of our Series A preferred stock to Paul L. Kessler, our Executive Chairman, for settlement of $29,580 of compensation payable
to Mr. Kessler under his employment agreement from July 1, 2022 through September 30, 2022; 8,333 shares of our Series A preferred stock
to John D. Maatta, our Chief Executive Officer, for settlement of $83,333 of compensation payable to Mr. Maatta under his employment
agreement from May 1, 2022 through September 30, 2022; and 3,426 shares of our Series A preferred stock to Scott Sheikh, our Chief Operating
Officer and General Counsel, for settlement of $34,260 of compensation payable to Mr. Sheikh under his employment agreement from July
16, 2022 through September 30, 2022.
On
December 31, 2022, we issued: 3,792 shares of our Series A preferred stock to Paul L. Kessler, our Executive Chairman, for settlement
of $37,920 of compensation payable to Mr. Kessler under his employment agreement from October 1, 2022 through December 31, 2022; 5,000
shares of our Series A preferred stock to John D. Maatta, our Chief Executive Officer, for settlement of $50,000 of compensation payable
to Mr. Maatta under his employment agreement from October 1, 2022 through December 31, 2022; 4,110 shares of our Series A preferred stock
to Scott Sheikh, our Chief Operating Officer and General Counsel, for settlement of $41,110 of compensation payable to Mr. Sheikh under
his employment agreement from October 1, 2022 through December 31, 2022, and 685 shares of our Series A preferred stock to Alan Urban,
our former Chief Financial Officer, for settlement of $6,850 of compensation payable to Mr. Urban under his employment agreement from
October 1, 2022 through December 31, 2022.
During
the year ended December 31, 2022 and 2021, 23,423 and 8,750 shares of Series A preferred stock were converted into 1,338,456 and 500,000
shares of common stock, respectively.
As
of December 31, 2022, there were 256,117 shares of Series A preferred stock outstanding resulting in Series A preferred stock with a
stated value of $2,567,170 and convertible into 14,635,257 shares of common stock, using a conversion price of $0.175.
On
March 1, 2021, we issued shares of our Series A preferred stock as follows: 8,500 shares to Mr. Maatta in satisfaction of an aggregate
of $85,546 due and owing to Mr. Maatta under his Separation Agreement; 22,500 shares to Bristol Capital, LLC in satisfaction of $225,000
due and owing to Bristol Capital, LLC for additional consulting services rendered by Mr. Kessler from July 1, 2020 through April 1, 2021;
and 8,300 shares to Scott D. Kaufman, our Chief Executive Officer, in satisfaction of $83,332 of compensation payable to Mr. Kaufman
under his Employment Agreement from November 24, 2020 through March 31, 2021.
On
June 30, 2021, we issued 6,249 shares of our Series A preferred stock to Scott D. Kaufman, our Chief Executive Officer, for settlement
of $62,490 of compensation payable to Mr. Kaufman under his employment agreement from April 1, 2021 through June 30, 2021.
On
September 30, 2021, we issued 6,249 shares of our Series A preferred stock to Scott D. Kaufman, our Chief Executive Officer, for settlement
of $62,490 of compensation payable to Mr. Kaufman under his employment agreement from July 1, 2021 through September 30, 2021.
On
December 31, 2021, we issued 6,250 shares of our Series A preferred stock to Scott D. Kaufman, our Chief Executive Officer, for settlement
of $62,500 of compensation payable to Mr. Kaufman under his employment agreement from October 1, 2021 through December 31, 2021. In addition,
on December 31, 2021 we issued 673 shares of our Series A preferred stock to Paul L. Kessler, our Executive Chairman, for settlement
of $6,730 of compensation payable to Mr. Kessler under his employment agreement from December 23, 2021 through December 31, 2021.
Series
B Preferred Stock
Holders
of our Series B preferred stock have no voting rights. Holders of our Series B preferred stock are entitled to receive a cumulative dividend
on each share of Series B preferred stock issued and outstanding at the rate of five percent (5%) per annum, in cash or at the holder’s
option, in fully paid and non-assessable shares of Series B preferred stock, at the Dividend Conversion Rate (as defined in the Series
B Certificate of Designation). Such dividends are payable quarterly on January 1, April 1, July 1 and October 1. In the event of any
liquidation, dissolution or winding up of our company, whether voluntary or involuntary, holders of our Series B preferred stock are
entitled to receive, prior and in preference to any distribution of any of our assets to the holders of Common Stock and Common Stock
Equivalents (as defined in the Series B Certificate of Designation, and which includes the Series A preferred stock and the Series C
preferred stock) by reason of their ownership thereof, for each share held an amount equal to the Stated Value (as defined in the Series
B Certificate of Designation), plus unpaid dividends or liquidated damages, if any. The Series B preferred stock is convertible, at the
option of the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the
Stated Value, currently $1,080 as amended, by the Series B Conversion Price, subject to a minimum of $1.00, but not to exceed $1.50,
subject to further adjustment in the event that the Company, subject to certain exemptions, disposes of or issues any Common Stock or
securities convertible into, exercisable, or exchangeable for Common Stock for no consideration or for consideration less than the applicable
Series B Conversion Price in effect immediately prior to such issuance. We are entitled to redeem some or all of the outstanding shares
of Series B preferred stock for cash in an amount equal to the Optional Redemption Amount (as defined in the Series B Certificate of
Designation). The Series B preferred stock is entitled to certain protective provisions and we may not take certain actions without the
written consent of at least fifty one percent (51%) in Stated Value of the outstanding shares of the Series B preferred stock, including,
without limitation, amend, alter or repeal any provision of the Series B Certificate of Incorporation or the Bylaws that materially and
adversely affects the rights of the Series B preferred stock, pay cash dividends or distributions on Junior Securities (as defined in
the Series B Certificate of Designation), or repay, repurchase or offer to repay, or otherwise acquire more than a de minimis number
of shares of Common Stock, Common Stock Equivalents (as defined in the Series B Certificate of Designation) or Junior Securities. Shares
of common stock issuable upon the conversion of Series B preferred stock are subject to a 9.99% beneficial ownership limitation.
From March 2021
through December 2021, we consummated the transactions contemplated by the securities purchase agreement with Leviston Resources LLC,
pursuant to which, we generated net cash proceeds of $4,378,995, and issued in a private placement: (i) 5,000 shares of Series B preferred
stock, convertible by dividing the stated value, currently $1,080, as amended, by the Series B conversion price; and (ii) a warrant to
acquire 5,000 shares of the Series B preferred stock at an exercise price of $1,000 per share of Series B preferred stock, which became
exercisable immediately upon issuance and which expires on March 26, 2023; and (iii) a warrant to acquire 5,000 shares of the Series
B preferred stock at an exercise price of $1,000 per share of Series B preferred stock, which became exercisable immediately upon issuance
and which expires on March 26, 2024. The Series B preferred stock issuable upon exercise of the Series B preferred stock warrants are
automatically convertible into shares of common stock at the Series B conversion price.
In
late-August and early-September 2022, the Company and holders of Series B and Series C preferred stock entered into Support Agreements.
Pursuant to the Support Agreements, the holders of Series B and Series C preferred stock agreed to use its reasonable best efforts to
cooperate with the Company in connection with the Merger. The Support Agreements amend the conversion price of the Series B and Series
C preferred stock to $0.50, amends the exercise price
of all outstanding warrants held by Series B and Series C Preferred Stockholders to $0.50
per common share, and provides for the conversion of the Series B and Series C preferred stock
into shares of the Company’s common stock immediately prior to the closing of the Merger.
During
the years ended December 31, 2022 and 2021, 2,472 and 1,280 shares of Series B preferred stock had been converted into 1,962,448 and
948,646 shares of common stock, respectively.
As
of December 31, 2022, there were 1,439 shares of Series B preferred stock outstanding resulting in Series B preferred stock with a stated
value of $1,554,120, and convertible into 3,108,240 shares of common stock, using a conversion price of $0.50.
Series C Preferred Stock
Holders
of our Series C preferred stock have no voting rights. Holders of our Series C preferred stock are entitled to receive dividends on Series
C preferred stock equal (on an as-if-converted-to-Common-Stock basis) to any dividends paid on common stock. In the event of any liquidation,
dissolution or winding up of our company, whether voluntary or involuntary, holders of our Series C preferred stock are entitled to receive,
prior and in preference to any distribution of any of our assets to the holders of common stock and Common Stock Equivalents (as defined
in the Certificate of Designation) by reason of their ownership thereof, for each share held an amount equal to the Stated Value (as
defined in the Certificate of Designation), plus fees, if any. The Series C preferred stock is convertible, at the option of the holder
thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing the Stated Value, currently
$1,111, by the Series C Conversion Price, subject to further adjustment in the event that the Company, subject to certain exemptions,
disposes of or issues any common stock or securities convertible into, exercisable, or exchangeable for Common Stock for no consideration
or for consideration less than the applicable Series C Conversion Price in effect immediately prior to such issuance. We are entitled
to redeem some or all of the outstanding shares of Series C preferred stock for cash in an amount equal to the Optional Redemption Amount
(as defined in the Certificate of Designation). The Series C preferred stock is entitled to certain protective provisions and, without
the written consent of at least 50.1% in Stated Value of the outstanding shares of the Series C preferred stock, we may not (or permit
any of our subsidiaries to) enter into, create, incur, assume, guarantee or suffer to exist any indebtedness, other than Permitted Indebtedness
(as defined in the Certificate of Designation). Shares of common stock issuable upon the conversion of Series C preferred stock are subject
to a 4.99% beneficial ownership limitation, which may increase to 9.99% upon notice to the Company.
On
March 29, 2022, the Company offered 16 warrant holders replacement warrants with an exercise price of $1.50
per common share, in exchange for any warrants exercised at this time at the exercise price of $
1.50 per common share. The issuance of replacement warrants has the effect of resetting the conversion price of all
outstanding shares of Series C preferred stock to $1.50 per common share and resetting the exercise price of all outstanding
warrants to $1.50 per common share in instances where those conversion and exercise prices are above $1.50.
On
July 7, 2022, 250 shares of Series C preferred stock were converted into 185,167 shares of common stock.
In
late-August and early-September 2022, the Company and holders of Series B and Series C preferred stock entered into Support Agreements.
Pursuant to the Support Agreements, the holders of Series B and Series C preferred stock agreed to use its reasonable best efforts to
cooperate with the Company in connection with the Merger. The Support Agreements amend the conversion price of the Series B and Series
C preferred stock to $0.50, amends the exercise price
of all outstanding warrants held by Series B and Series C Preferred Stockholders to $0.50
per common share, and provides for the conversion of the Series B and Series C preferred stock
into shares of the Company’s common stock immediately prior to the closing of the Merger.
As
of December 31, 2022, there were 7,630 shares of Series C preferred stock outstanding resulting in Series C preferred stock with a stated
value of $8,476,930, and convertible into 16,953,860 shares of common stock, using a conversion price of $0.50.
During
December 2021, we consummated the transactions contemplated by the securities purchase agreement with the investors party thereto, pursuant
to which we generated net cash proceeds of $7,733,601, and issued in the Private Placement: (i) 7,880
shares of Series C preferred stock, convertible by dividing the stated value, currently $1,111, by the Series C Conversion Price;
and (ii) warrants to acquire 1,750,936 shares of Common Stock at an exercise price of $2.50 per share, which became exercisable immediately
upon issuance and with a term of 5 years; and (iii) warrants to acquire 1,750,936 shares of Common Stock at an exercise price of $2.75
per share, which became exercisable immediately upon issuance and with a term of 5 years.
Note 19. Discontinued Operations
On
August 6, 2021, the Company entered into the Informa Agreement with Informa. Pursuant to the Informa Agreement, Creek Road Miners Corp.
(fka Kick the Can Corp.) sold, transferred, and assigned certain assets, properties, and rights to Informa related to the business of
operating and producing live pop culture events. The Company released deferred revenue and other
liabilities totaling $722,429 and recorded a gain from sale of discontinued operations of
this amount.
On
September 15, 2021, the Company sold our wholly owned subsidiary which contained our Jevo assets and all rights to our Jevo operations
for $1,500,000 and recognized a gain from sale of discontinued operations on the transaction of approximately $1,130,740. The gain from
sale of discontinued operations consists of the following:
Schedule
of Gain from Sale of Discontinue Operation
Description | |
Amount | |
Net cash paid on the closing date | |
$ | 1,500,000 | |
Less: | |
| | |
Current assets | |
| 36,060 | |
Inventory | |
| 193,300 | |
Fixed assets, net | |
| 16,700 | |
Intangible assets, net | |
| 123,200 | |
Total | |
| 369,260 | |
Gain from sale | |
$ | 1,130,740 | |
CONtv
is a joint venture with third parties and Bristol Capital, LLC. The Company holds a limited and passive interest of 10% in CONtv. As
of December 31, 2022 and 2021, the investment in CONtv was $0, for both periods. As of December 31, 2022 and 2021, the amount due to
CONtv was $0, respectively, and classified as a discontinued operation.
Prior
to cryptocurrency mining operations that began in October 2021, the Company produced live and virtual pop culture conventions and events,
and sold a gelatin machine and related consumables that were discontinued in 2021 In addition, the Company operated an eCommerce site
selling pop culture memorabilia that was discontinued on June 30, 2022 (collectively known as “legacy operations”).
The
related assets and liabilities associated with the discontinued operations in our consolidated balance sheets for the years ending December
31, 2022 and 2021, are classified as discontinued operations. Additionally, the financial results associated with discontinued operations
in our consolidated statement of operations for the years ending December 31, 2022 and 2021, are classified as discontinued operations.
The
assets and liabilities related to discontinued operations consists of the following:
Schedule
of Discontinued Operation of Balance Sheet and Operation Statement
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Assets | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Prepaid expenses | |
$ | — | | |
$ | — | |
Inventory | |
| — | | |
| — | |
Total current assets | |
| — | | |
| — | |
| |
| | | |
| | |
Other assets: | |
| | | |
| | |
Property and equipment, net | |
| — | | |
| — | |
Intangible assets, net | |
| — | | |
| — | |
Total assets | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 485,712 | | |
$ | 472,029 | |
Deferred revenue | |
| — | | |
| — | |
Due to CONtv | |
| — | | |
| — | |
Total liabilities | |
$ | 485,712 | | |
$ | 472,029 | |
In
addition, revenue and expenses from discontinued operations were as follows:
| |
2022 | | |
2021 | |
| |
Years Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Revenue | |
$ | 43,580 | | |
$ | 829,767 | |
| |
| | | |
| | |
Operating costs and expenses: | |
| | | |
| | |
Cost of revenue | |
| 59,037 | | |
| 776,719 | |
General and administrative | |
| — | | |
| 842,097 | |
Total operating expenses | |
| 59,037 | | |
| 1,618,816 | |
Loss from operations | |
| (15,457 | ) | |
| (789,049 | ) |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Other income | |
| (2,281 | ) | |
| 867,288 | |
Interest income | |
| — | | |
| — | |
Loss on disposal of fixed assets | |
| — | | |
| 1,853,169 | |
Total other income (expense) | |
| (2,281 | ) | |
| 2,720,457 | |
| |
| | | |
| | |
Income (loss) from discontinued operations | |
$ | (17,738 | ) | |
$ | 1,931,108 | |
Note 20. Subsequent Events
Decrease
in Market Price of Bitcoin, and Increase in Cost of Natural Gas
Our
business is heavily dependent on the market price of Bitcoin, which has experienced substantial volatility and has recently dropped to
its lowest price since December 2020. As of December 31, 2022 the market price of Bitcoin was $16,547, which reflects a decrease of approximately
60% since the beginning of 2022, and of approximately 75% from its all-time high of approximately $67,000. In addition, the cost of natural
gas that we use to produce electricity to power our miners has increased substantially. The cost of natural gas in the United States
during 2022 has increased by as much as approximately 260% since the beginning of 2022. These price movements result in decreased cryptocurrency
mining revenue and increased cryptocurrency mining costs, both of which have a material adverse effect on our business and financial
results.
On
March 2, 2023, we entered into a Master Services Agreement and Order Form (the “Master Services Agreement”) with Atlas Power
Hosting, LLC (“Atlas”). Atlas will provide us with cryptocurrency mining services for our miners at its facility in North
Dakota. The Master Services Agreement has a term of two
years unless otherwise
terminated pursuant to its terms. Under the Master Services Agreement, we
will pay Atlas a monthly hosting service fee for the quantity of electricity consumed by our miners, with an initial price per kilowatt-hour
of $0.08. In lieu of
a deposit or prepayment, all cryptocurrency mined by our miners will be transferred to wallets in the control of Atlas. Atlas will then
deduct the hosting service fee from the monthly total mined currency produced by our miners and remit the net mined currency to us.
Prairie
Operating Co., LLC
Financial
Statements
As
of and for the three months ended March 31,
2023
Prairie
Operating Co., LLC
Balance
Sheet
March
31, 2023
(unaudited)
The
accompanying notes are an integral part of these financial statements.
Prairie
Operating Co., LLC
Statement
of Operations
for
the three months ended March 31, 2023
(unaudited)
The
accompanying notes are an integral part of these financial statements.
Prairie
Operating Co., LLC
Statement
of Members’ Deficit
for the three months ended March 31, 2023
(unaudited)
The
accompanying notes are an integral part of these financial statements.
Prairie
Operating Co., LLC
Statement
of Cash Flows
for
the three months ended March 31, 2023
(unaudited)
The
accompanying notes are an integral part of these financial statements.
Prairie
Operating Co., LLC
Notes
to Financial Statements
Note
1 – Organization and Nature of Business
Organization,
Nature of Business and Basis of Presentation
Organization
and General
Prairie
Operating Co., LLC (the “Company”) is a limited liability company formed under the laws of the State of Delaware on June
7, 2022. The Company was formed for the purpose of acquiring and operating oil and gas properties in the United States.
As
of March 31, 2023, the Company had not commenced any operations. All activity for the period from June 7, 2022 (inception) to March 31,
2023, relates to the Company’s formation, the Merger (as defined below) and the Exok Acquisition (see Notes 1 and 5). As of March
31, 2023, the Company did not generate any operating revenues.
Merger
Agreement
On
October 24, 2022, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Prairie Operating
Co., a Delaware corporation (“PrairieCo”), and Creek Road Merger Sub, LLC, a Delaware limited liability company (“Merger
Sub”), pursuant to which Merger Sub merged with and into the Company (the “Merger”), with the Company surviving and
continuing to exist as a Delaware limited liability company and a wholly-owned subsidiary of PrairieCo. The Merger closed on May 3, 2023
(the “Closing Date”). See Note 5 for further discussion.
Acquisition
of Oil and Gas Properties
Concurrently
with entering into the Merger Agreement, the Company entered into a purchase and sale agreement (the “PSA”) with Exok, Inc.
(“Exok”) to acquire certain oil and gas leasehold interests (the “Exok Assets”) covering 23,485 net acres and
37,030 gross acres in Weld County, Colorado in exchange for $28,182,000 payable as (i) $24,000,000 in cash and (ii) $4,182,000 in shares
of common stock of PrairieCo (“Common Stock”) and warrants to purchase shares of Common Stock (the “Exok Acquisition”).
The Exok Acquisition closed on May 3, 2023. See Note 5 for further discussion.
Note
2 – Going Concern
Going
Concern Analysis
Since
its inception, the Company has incurred significant losses. The Company had a net loss of $64,392 for the three months ended March 31,
2023. We cannot predict if we will be profitable. We may continue to incur losses for an indeterminate period of time and may be unable
to achieve profitability. An extended period of losses and negative cash flow may prevent us from successfully operating and expanding
our business. We may be unable to achieve or sustain profitability on an ongoing basis. On March 31, 2023, we had cash of $79,762, a
working capital deficit of $2,418,970, and a members’ deficit of $445,912. Upon closing of the Merger and related transactions
on May 3, 2023, PrairieCo received proceeds from the issuance of preferred stock of $17.3 million. A majority of these proceeds remain
within PrairieCo after the Merger and related transactions for use in its business.
The
assessment of the liquidity and going concern requires the Company to make estimates of future activity and judgments about whether the
Company can meet its obligations and has adequate liquidity to operate. Significant assumptions used in Company’s forecasted model
of liquidity in the next 12 months include PrairieCo’s current cash position, inclusive of the impacts from the Merger and related
transactions discussed above, its ability to obtain funding from PrairieCo, and its ability to manage spending. Based on an assessment
of these factors, management believes that the Company will have adequate liquidity for its operations for at least the next 12 months.
The
financial statements have been prepared assuming that the Company will continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification
of liabilities that may result from the matters discussed herein.
Note
3 – Commitments and Contingencies
Contingencies
and Commitments
The
Company reimbursed members and others for reasonable, documented and customary out-of-pocket expenses incurred in connection with services
provided related to the Company’s formation, the Merger and the Exok Acquisition (see Notes 1 and 5) upon closing. As of March
31, 2023, such expenses were approximately $10,000 and were not included in the financial statements.
Note
4 – Sale of Options
On
August 31, 2022, the Company entered into agreements with its members whereby each member was provided non-compensatory options to purchase
a 40% membership interest in the Company for $1,000,000. The non-compensatory options were sold for $80,000 in total and expire on August
31, 2027. The restricted options only become exercisable in 25% increments upon the achievement of the following production milestones
in barrels of oil equivalent per day (“BOE/D”): 2,500 BOE/D, 5,000 BOE/D, 7,500 BOE/D, and 10,000 BOE/D.
Note
5 – Subsequent Events
Non-Compensatory
Options
On
May 3, 2023, prior to the closing of the Merger, the Company entered into a non-compensatory option purchase agreement with its members,
Bristol Capital LLC (“Bristol”) and a third party investor pursuant to which Bristol and such third party investor purchased
non-compensatory options for $24,000 and $8,000, respectively, from the Company’s members. Following such purchase, each member
of Prairie owns non-compensatory options to purchase a 30% membership interest in the Company, Bristol owns non-compensatory options
to purchase a 30% membership interest in the Company and a third party investors owns non-compensatory options to purchase a 10% membership
interest in the Company.
Amended
and Restated Merger Agreement
On
May 3, 2023, the Company entered into an Amended and Restated Agreement and Plan of Merger (the “AR Merger Agreement”) with
PrairieCo and Merger Sub to, among other things:
(i)
remove the reverse stock split of the shares of Common Stock, at a ratio between 1-23 and 1-30
that was contemplated to occur as part of a series of restructuring transactions prior to the consummation of a contemplated sale of
PrairieCo’s securities to certain investors in a private placement (the “PIPE Transaction”);
(ii)
amend the date by which the AR Merger Agreement may be terminated by either PrairieCo or
the Company if the Merger has not been consummated to on or before September 30, 2023;
(iii)
reflect the terms of the AR PSA (as defined below) and the PIPE Transaction; and
(iv)
provide for the assumption of the Company’s long-term incentive plan by PrairieCo prior to the effective time of the Merger.
Amended
Purchase and Sale Agreement
On
May 3, 2023, the Company entered into an Amended and Restated Purchase and Sale Agreement (the “AR PSA”) with PrairieCo and
Exok to, among other things:
(i)
reflect that the Exok Assets to be purchased by the Company for a total amount of $3,000,000 will
consist of approximately 3,157 net mineral acres in, on and under approximately 4,494 gross acres;
(ii)
amend the effective date of the conveyance of the Exok Assets to be the Closing Date;
(iii)
remove the issuance of $4,182,000 in total equity consideration to Exok, which consisted of (a) 836,4000 shares of Common Stock and (b)
836,400 warrants to purchase 836,400 shares of Common Stock at an exercise price of $6.00 per share; and
(iv)
include an option of PrairieCo to purchase, from the Closing Date until the later of (x) the date that is ninety (90) days following
the Closing Date and (y) August 15, 2023, approximately 20,327 net mineral acres in, on and under approximately 32,695 additional gross
acres from Exok for a purchase price of $22,182,000, payable in (a) $18,000,000 in cash and (b) $4,182,000 in total equity consideration,
consisting of (1) a number of shares of Common Stock equal to the quotient of $4,182,000 divided by the volume weighted average price
for shares of Common Stock for twenty (20) consecutive trading days ending on the date such option is exercised by the Company and (2)
an equal number of warrants to purchase shares of Common Stock.
The
Merger and Exok Acquisition both closed on May 3, 2023. At the effective time of the Merger, membership interests in the Company were
converted into the right to receive each member’s pro rate share of 65,647,676 shares of Common Stock and PrairieCo assumed and
converted non-compensatory options to purchase membership interests of the Company into non-compensatory options to acquire 8,000,000
shares of Common Stock for $0.25 per share, which are only exercisable if specific production hurdles are achieved.
Prairie
Operating Co., LLC
Financial
Statements
As
of December 31, 2022 and for the period from June 7, 2022 (date of inception) through December 31, 2022
Table
of Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Members of
Prairie
Operating Co., LLC
Opinion
on the Financial Statements
We
have audited the accompanying balance sheet of Prairie Operating Co., LLC (the Company) as of December 31, 2022, and the related statements
of operations, members’ deficit, and cash flows for the period from June 7, 2022 (date of inception) to December 31,
2022, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and
its cash flows for the period from June 7, 2022 (date of inception) to December 31, 2022, in conformity with accounting principles generally
accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides
a reasonable basis for our opinion.
/s/
Ham, Langston & Brezina, L.L.P.
We
have served as the Company’s auditor since 2023.
Houston,
TX
June
16, 2023
Prairie
Operating Co., LLC
Balance
Sheet
December 31, 2022
The
accompanying notes are an integral part of these financial statements.
Prairie
Operating Co., LLC
Statement
of Operations
for the period from June 7, 2022 (date of inception) through December 31, 2022
The
accompanying notes are an integral part of these financial statements.
Prairie
Operating Co., LLC
Statement
of Members’ Deficit
for the period from June 7, 2022 (date of inception) through December 31, 2022
The
accompanying notes are an integral part of these financial statements.
Prairie
Operating Co., LLC
Statement
of Cash Flows
for the period from June 7, 2022 (date of inception) through December 31, 2022
The
accompanying notes are an integral part of these financial statements.
Prairie
Operating Co., LLC
Notes
to Financial Statements
Note
1 – Organization and Nature of Business
Organization,
Nature of Business and Basis of Presentation
Organization
and General
Prairie
Operating Co., LLC (the “Company”) is a limited liability company formed under the laws of the State of Delaware on June
7, 2022. The Company was formed for the purpose of acquiring and operating oil and gas properties in the United States.
As
of December 31, 2022, the Company had not commenced any operations. All activity for the period from June 7, 2022 (inception) to December
31, 2022, relates to the Company’s formation, the Merger (as defined below) and the Exok Acquisition (see Notes 1 and 6). As of
December 31, 2022, the Company did not generate any operating revenues. The Company has selected December 31 as its fiscal year end.
Merger
Agreement
On
October 24, 2022, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Prairie Operating
Co., a Delaware corporation (“PrairieCo”), and Creek Road Merger Sub, LLC, a Delaware limited liability company (“Merger
Sub”), pursuant to which Merger Sub merged with and into the Company (the “Merger”), with the Company surviving and
continuing to exist as a Delaware limited liability company and a wholly-owned subsidiary of PrairieCo. The Merger closed on May 3, 2023
(the “Closing Date”). See Note 6 for further discussion.
Acquisition
of Oil and Gas Properties
Concurrently
with entering into the Merger Agreement, the Company entered into a purchase and sale agreement (the “PSA”) with Exok, Inc.
(“Exok”) to acquire certain oil and gas leasehold interests (the “Exok Assets”) covering 23,485 net acres and
37,030 gross acres in Weld County, Colorado in exchange for $28,182,000 payable as (i) $24,000,000 in cash and (ii) $4,182,000 in shares
of common stock of PrairieCo (“Common Stock”) and warrants to purchase shares of Common Stock (the “Exok Acquisition”).
The Exok Acquisition closed on May 3, 2023. See Note 6 for further discussion.
Note
2 – Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
Cash
and cash equivalents
For
purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid debt instruments purchased with an
original maturity of three months or less.
Accounts
Receivable and Allowance for Doubtful Accounts
It
is the Company’s policy to record accounts receivable at the amount management expects to collect from outstanding balances. The
Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts
based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company
determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by
management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded,
which is the face amount of the receivable net of the allowance for doubtful accounts. As of December 31, 2022, there were no accounts
receivable and no allowance for doubtful accounts.
Fair
Value Measurements
ASC
820, Fair Value Measurements and Disclosures, defines fair value as the price at which an asset could be exchanged or a liability
transferred in a transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability.
Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable
prices or parameters are not available, valuation models are applied.
A
fair value hierarchy prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.
Level
3 – Unobservable inputs based on the Company’s assumptions.
The
Company is required to use observable market data if such data is available without undue cost and effort. The carrying amount of the
Company’s cash and cash equivalents approximates fair value as of December 31, 2022.
Transactions
involving related parties typically cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions
of competitive, free market dealings may not exist.
Deferred
Transaction Costs
Deferred
transaction costs are expenses directly related to the Merger and related transactions. These costs primarily consist of legal and accounting
fees that the Company capitalized. On the date of the Merger, deferred transaction costs related to the PIPE Transaction will
be reclassified to equity and the deferred transaction costs related directly to the Merger will be reclassified to the cost
of the net assets acquired in the Merger.
Accrued
Expenses
Accrued
expenses in our balance sheet consist of $2,210,094
in legal costs, $9,552
in accounting costs, and $300
of other costs.
Income
Taxes
The
Company is a limited liability company treated as a partnership for federal and state income tax purposes with all income tax liabilities
and/or benefits of the Company being passed through to the members. As such, no recognition of federal or state income taxes for the
Company have been provided for in the accompanying financial statements. Any uncertain tax position taken by the member is not an uncertain
position of the Company.
Related
Parties
The
Company follows ASC 850-10, Related Parties, for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20, the related parties include: (a) affiliates of the Company (“Affiliate” means, with respect
to any specified person, any other person that, directly or indirectly through one or more intermediaries, controls, is controlled by
or is under common control with such person, as such terms are used in and construed under Rule 405 under the Securities Act of 1933,
as amended); (b) entities for which investments in their equity securities would be required, absent the election of the fair value option
under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity; (c) trusts
for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d)
principal owners of the Company; (e) management of the Company; (f) other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might
be prevented from fully pursuing its own separate interests; and (g) other parties that can significantly influence the management or
operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate
interests.
Recently
Issued Accounting Pronouncements
Recent
accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future consolidated financial statements.
Note
3 – Going Concern
Going
Concern Analysis
Since
its inception, the Company has incurred significant losses. The Company had a net loss of $461,520 for the period from June 7, 2022 (date
of inception) to December 31, 2022. We cannot predict if we will be profitable. We may continue to incur losses for an indeterminate
period of time and may be unable to achieve profitability. An extended period of losses and negative cash flow may prevent us from successfully
operating and expanding our business. We may be unable to achieve or sustain profitability on an ongoing basis. On December 31, 2022,
we had cash of $79,845, a working capital deficit of $2,142,184, and a members’ deficit of $381,520. Upon closing of the Merger
and related transactions on May 3, 2023, PrairieCo received proceeds from the issuance of preferred stock of $17.3 million. A majority
of these proceeds remain within PrairieCo after the Merger and related transactions for use in its business.
The
assessment of the liquidity and going concern requires the Company to make estimates of future activity and judgments about whether the
Company can meet its obligations and has adequate liquidity to operate. Significant assumptions used in Company’s forecasted model
of liquidity in the next 12 months include PrairieCo’s current cash position, inclusive of the impacts from the Merger and related
transactions discussed above, its ability to obtain funding from PrairieCo, and its ability to manage spending. Based on an assessment
of these factors, management believes that the Company will have adequate liquidity for its operations for at least the next 12 months.
The
financial statements have been prepared assuming that the Company will continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification
of liabilities that may result from the matters discussed herein.
Note
4 – Commitments and Contingencies
Contingencies
and Commitments
The
Company reimbursed members and others for reasonable, documented and customary out-of-pocket expenses incurred in connection with services
provided related to the Company’s formation, the Merger and the Exok Acquisition (see Notes 1 and 6) upon closing. As of December
31, 2022, such expenses were approximately $10,000 and were not included in the financial statements.
Note
5 – Sale of Options
On
August 31, 2022, the Company entered into agreements with its members whereby each member was provided non-compensatory options to purchase
a 40% membership interest in the Company for $1,000,000. The non-compensatory options were sold for $80,000 in total and expire on August
31, 2027. The restricted options only become exercisable in 25% increments upon the achievement of the following production milestones
in barrels of oil equivalent per day (“BOE/D”): 2,500 BOE/D, 5,000 BOE/D, 7,500 BOE/D, and 10,000 BOE/D.
Note
6 – Subsequent Events
Non-Compensatory
Options
On
May 3, 2023, prior to the closing of the Merger, the Company entered into a non-compensatory option purchase agreement with its members,
Bristol Capital LLC (“Bristol”) and a third party investor pursuant to which Bristol and such third party investor purchased
non-compensatory options for $24,000 and $8,000, respectively, from the Company’s members. Following such purchase, each member
of Prairie owns non-compensatory options to purchase a 30% membership interest in the Company, Bristol owns non-compensatory options
to purchase a 30% membership interest in the Company and a third party investors owns non-compensatory options to purchase a 10% membership
interest in the Company.
Amended
and Restated Merger Agreement
On
May 3, 2023, the Company entered into an Amended and Restated Agreement and Plan of Merger (the “AR Merger Agreement”) with
PrairieCo and Merger Sub to, among other things:
(i)
remove the reverse stock split of the shares of Common Stock, at a ratio between 1-23 and 1-30
that was contemplated to occur as part of a series of restructuring transactions prior to the consummation of a contemplated sale of
PrairieCo’s securities to certain investors in a private placement (the “PIPE Transaction”);
(ii)
amend the date by which the AR Merger Agreement may be terminated by either PrairieCo or
the Company if the Merger has not been consummated to on or before September 30, 2023;
(iii)
reflect the terms of the AR PSA (as defined below) and the PIPE Transaction; and
(iv)
provide for the assumption of the Company’s long-term incentive plan by PrairieCo prior to the effective time of the Merger.
Amended
Purchase and Sale Agreement
On
May 3, 2023, the Company entered into an Amended and Restated Purchase and Sale Agreement (the “AR PSA”) with PrairieCo and
Exok to, among other things:
(i)
reflect that the Exok Assets to be purchased by the Company for a total amount of $3,000,000 will
consist of approximately 3,157 net mineral acres in, on and under approximately 4,494 gross acres;
(ii)
amend the effective date of the conveyance of the Exok Assets to be the Closing Date;
(iii)
remove the issuance of $4,182,000 in total equity consideration to Exok, which consisted of (a) 836,4000 shares of Common Stock and (b)
836,400 warrants to purchase 836,400 shares of Common Stock at an exercise price of $6.00 per share; and
(iv)
include an option of PrairieCo to purchase, from the Closing Date until the later of (x) the date that is ninety (90) days following
the Closing Date and (y) August 15, 2023, approximately 20,327 net mineral acres in, on and under approximately 32,695 additional gross
acres from Exok for a purchase price of $22,182,000, payable in (a) $18,000,000 in cash and (b) $4,182,000 in total equity consideration,
consisting of (1) a number of shares of Common Stock equal to the quotient of $4,182,000 divided by the volume weighted average price
for shares of Common Stock for twenty (20) consecutive trading days ending on the date such option is exercised by the Company and (2)
an equal number of warrants to purchase shares of Common Stock.
The
Merger and Exok Acquisition both closed on May 3, 2023. At the effective time of the Merger, membership interests in the Company were
converted into the right to receive each member’s pro rate share of 65,647,676 shares of Common Stock and PrairieCo assumed and
converted non-compensatory options to purchase membership interests of the Company into non-compensatory options to acquire 8,000,000
shares of Common Stock for $0.25 per share, which are only exercisable if specific production hurdles are achieved.