ZEST Ecoark Holdings Inc

As of June 30, 2023, the Company performed an evaluation of the recoverability of these long-lived assets. There has been no impairment for the three months ended June 30, 2023 and 2022.

Depreciation expense for the three months ended June 30, 2023 and 2022 was $32,899 and $35,975, respectively. 

We have only included descriptions of warrants that are still outstanding as of June 30, 2023.

On August 6, 2021, the Company closed a $20,000,000 registered direct offering. The Company sold 115,942 shares of common stock and 115,942 warrants at $172.50 per share. The warrants are exercisable through April 8, 2025. The Company also issued the placement agent 8,116 warrants exercisable at $215,625 per share. Further information on the offering and compensation to the placement agent is contained in the prospectus supplement dated August 4, 2021. The fair value of the investor warrants was estimated to be $11,201,869 at inception and $123 as of June 30, 2023. The fair value of the placement agent warrants was estimated to be $744,530 at inception and $6 as of June 30, 2023.

On April 27, 2023, the Company closed a $6,875,000 senior secured convertible promissory note and with the senior secured convertible note, the Company granted the noteholders 2,728,175 warrants that expire five years from the issuance date and have a strike price of $3.28. The warrants contain a rachet provision which the Company has determined meets the criteria for accounting treatment as a derivative liability. The Company recorded a discount on the convertible note of $4,329,755 which represents the derivative liability at inception of the warrants. The fair value of the warrants was estimated to be $2,138,542 as of June 30, 2023.

The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of June 30, 2023 and March 31, 2023. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate.

Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each warrant is estimated using the Black-Scholes valuation model. The following assumptions were used on June 30, 2023 and March 31, 2023 and at inception: 

The Company’s remaining derivative liabilities as of June 30, 2023 and March 31, 2023 associated with warrant offerings were as follows.

During the three months ended June 30, 2023 and 2022 the Company recognized changes in the fair value of the derivative liabilities of $2,197,348 and $(393,532), respectively.

Activity related to the warrant derivative liabilities for the three months ended June 30, 2023 was as follows:

Activity related to the warrant derivative liabilities for the three months ended June 30, 2022 was as follows:

Convertible Notes

On April 27, 2023, the Company sold $6.875 million of principal face amount senior secured convertible notes with an original issue discount to sophisticated investors for gross proceeds to the Company of $5.5 million. The notes mature on April 27, 2024 and are secured by all of the assets of the Company and certain of its subsidiaries, including BNC. There is no interest on the convertible notes unless there is an event of default. The notes are convertible into shares of common stock at $3.28, however there is a rachet provision in the convertible note that enables the holders of the notes to receive a lower conversion rate upon future issuances by the Company that fall below the $3.28 price. The conversion option meets the criteria of a derivative instrument, and the convertible note has been discounted $5,500,000 for the day one derivative liability. In addition, the Company has recorded $1,375,000 in original issue discount, which is being amortized over the interest method for the term of the note. Amortization of discount related to the convertible note was $241,096 for the three months ended June 30, 2023.

Activity related to the convertible note derivative liabilities for the three months ended June 30, 2023 is as follows:

As described in Note 19 “Commitments and Contingencies”, Nasdaq is alleging that the November 2022 amendment to the Series A violated its voting and stockholder approval requirements, and has also done so with regard to the recent BNC transaction, although the Company plans to seek stockholder approval for both transactions subject to Nasdaq approval therefore and make any modifications Nasdaq requires.

Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of the preferred stock liability is estimated using the Black-Scholes valuation model. The following assumptions were used for the three months ended June 30, 2023 and year ended March 31, 2023:

Negative Covenants and Approval Rights

The BitNile Metaverse Series A Certificate of Designation (the “Certificate”) subjects the Company to negative covenants restricting its ability to take certain actions without prior approval from the holder(s) of a majority of the outstanding shares of BitNile Metaverse Series A for as long as the holder(s) continue to hold at least 25% (or such higher percentage as set forth in the Certificate (as defined below)) of the BitNile Metaverse Series A shares issued on the closing date under the Series A Agreement. These restrictive covenants include the following actions by the Company, subject to certain exceptions and limitations:

The above and other negative covenants in the Series A Certificate do not apply to a reverse merger with an entity with securities quoted on a market operated by OTC Markets or listed on a national securities exchange.  

Warrant

Prior to its cancellation, the Warrant, as amended, provided the Purchaser or its assignees (the “Holder”) with the right to purchase a number of shares of common stock as would enable the holder together with its affiliates to beneficially own 49% of the Company’s common stock, calculated on a fully diluted basis, at an exercise price of $0.03 per share, including the Commitment Shares and Conversion Shares unless sold. Subject to stockholder approval, the Warrant was to vest and become exercisable into shares of the Company’s stock if, as of June 8, 2024: (i) the Company had failed to complete the distributions to the Company’s security holders or to any other subsidiary of the Company’s equity ownership of its three principal subsidiaries: Agora, Banner Midstream and Zest Labs (or their principal subsidiaries) (the “Distributions”), and/or (ii) the Holder together with its affiliates does not beneficially own at least 50% of the Company’s outstanding common stock. Provided, the Company must retain 20% of its common stock of Agora. The Warrant was to be exercised on a cashless basis and expire on June 8, 2027.

On November 14, 2022, the Company and the Warrant holder canceled the warrant which was originally issued to the holder on June 8, 2022, as subsequently amended and restated, in exchange for $100 as the Company has substantially met the conditions under Section 1(a) of the Warrant, therefore, the Company did not compute any derivative liability on the warrants.

Registration Rights

Pursuant to the Series A Agreement, the Company has agreed to register the sale by the Purchaser of up to 174,882 shares of common stock, representing the Commitment Shares issued at the closing plus 171,453 of the shares of common stock issuable upon conversion of the BitNile Metaverse Series A. This amount equals 19.9% of the Company’s outstanding common stock immediately prior to the closing. The Company registered the sale by filing a prospectus supplement pursuant to the Company’s registration statement on Form S-3 (File No. 333-249532), originally filed with the SEC on October 16, 2020, as amended, which became effective on December 29, 2020, and the base prospectus included therein. On January 23, 2023, the Purchaser agreed to reduce its secondary offering of shares of our common stock issuable upon conversion of the Series A by $3,500,000. See Note 18 “Stockholders’ Deficit.”

The description above is not a substitute for reviewing the full text of the referenced documents, which were attached as exhibits to the Company’s Current Report on Form 8-K as filed with the SEC on June 9, 2022, and the Company’s Current Report on Form 8-K as filed with the SEC on July 15, 2022 when we filed the amended and restated warrant, and the aforementioned amendment filed on November 29, 2022.

Preferred Stock Derivative Liability

BitNile Metaverse Series A

As discussed herein, the Company determined that the BitNile Metaverse Series A upon the amendment on November 28, 2022, constituted a derivative liability under ASC 815. As a result of this classification, the Company determined that on November 28, 2022 (inception), the value of the derivative liability was $7,218,319.

On December 9, 2022, the BitNile Metaverse Series A holder converted 50 shares of BitNile Metaverse Series A into 38,015 common shares that resulted in a loss on conversion of $3,923.

The derivative liability for the BitNile Metaverse Series A was remeasured at June 30, 2023 and is valued at $169,323, resulting in a gain of $1,490,879 in the change in fair value.

In addition, during March 2023 the Company advanced $635,000 and $1,205,000 during the three months ended June 30, 2023 to a third-party related to an obligation by the BitNile Metaverse Series A shareholder and this amount will be reflected as a redemption upon the dividend that will be paid to the Company’s shareholders of record as of September 30, 2022 for the WTRV and Wolf Energy Services Corp. divestitures.

Activity related to the preferred stock derivative liabilities for the three months ended June 30, 2023 is as follows:

BitNile Metaverse Series B and C

On February 8, 2023, the Company entered into the SEA by and among AAI, a significant shareholder, the owner of approximately 86% of BNC, and the Minority Stockholders. The SEA provided that, subject to the terms and conditions set forth therein, the Company was to acquire the assets and assume the liabilities of BNC as well as the common stock of Earnity, Inc. beneficially owned by BNC (which represents approximately 19.9% of the outstanding common stock of Earnity, Inc. as of the date of the SEA) which has no value, in exchange for the following: (i) 8,637.5 shares of Series B, and (ii) 1,362.5 shares of Series C. The Preferred Stock, the terms of which are summarized in more detail below, have a combined Stated Value of $100,000,000, and subject to adjustment are, subject to Nasdaq and shareholder approval, convertible into a total of up to 13,333,333 shares of the Company’s common stock, which represent approximately 92.4% of the Company’s outstanding common stock on a fully diluted basis. The Company has independently valued the Preferred Stock as of the date of acquisition. The combined value of the Preferred Stock issued to AAI was $53,913,000 using a blended fair value of the discounted cash flow method and option pricing method.

The terms of the Preferred Stock as set forth in the Certificates of Designations of the Rights, Preferences and Limitations of each such series of Preferred Stock (each, a “Certificate,” and together the “Certificates”) are essentially identical except the Series B is super voting and must approve any modification of various negative covenants and certain other corporate actions as more particularly described below.

Pursuant to the Series B Certificate, each share of Series B is convertible into a number of shares of the Company’s common stock determined by dividing the Stated Value by $7.50, or 1,333 shares of common stock. The conversion price is subject to certain adjustments, including potential downward adjustment if the Company closes a qualified financing resulting in at least $25,000,000 in gross proceeds at a price per share that is lower than the conversion price. The Series B holders are entitled to receive dividends at a rate of 5% of the Stated Value per annum from issuance until February 7, 2033 (the “Dividend Term”). During the first two years of the Dividend Term, dividends will be payable in additional shares of Series B rather than cash, and thereafter dividends will be payable in either additional shares of Series B or cash as each holder may elect. If the Company fails to make a dividend payment as required by the Series B Certificate, the dividend rate will be increased to 12% for as long as such default remains ongoing and uncured. Each share of Series B also has an $11,000 liquidation preference in the event of a liquidation, change of control event, dissolution or winding up of the Company, and ranks senior to all other capital stock of the Company with respect thereto other than the Series C with which the Series B shares equal ranking. Each share of Series B is entitled to vote with the Company’s common stock at a rate of 300 votes per share of common stock into which the Series B is convertible.

In addition, for as long as at least 25% of the shares of Series B remain outstanding, AAI (and any transferees) has consent rights with respect to certain corporate events, including reclassifications, fundamental transactions, stock redemptions or repurchases, increases in the number of directors, and declarations or payment of dividends, and further the Company is subject to certain other negative covenants, including covenants against issuing additional shares of capital stock or derivative securities, incurring indebtedness, engaging in related party transactions, selling of properties having a value of over $50,000, altering the number of directors, and discontinuing the business of any subsidiary, subject to certain exceptions and limitations.

The terms, rights, preferences and limitations of the Series Care substantially the same as those of the Series B, except that the Series B holds negative covenant and consent rights, and Series C holders vote with the Company’s common stock on an as-converted basis. The Company is required to maintain a reserve of authorized and unissued shares of common stock equal to 200% of the shares of common stock issuable upon conversion of the Preferred Stock, which is initially 26,666,667 shares.

Pending stockholder approval of the transaction, the Preferred Stock combined are subject to a 19.9% beneficial ownership limitation. That limitation includes shares of Series A issued to AAI on June 8, 2022 and any common stock held by AAI. Certain other rights are subject to stockholder approval as described below. The SEA provides that the Company will seek stockholder approval following the closing. The entire transaction is subject to compliance with Nasdaq Rules and the Certificates each contain a savings clause that nothing shall violate such Rules. Nasdaq may nonetheless disregard the savings clause.

Under the SEA, effective at the closing AAI is entitled to appoint three of the Company’s directors, and following receipt of approval from the Company’s stockholders, a majority of the Company’s directors. The SEA also provides the holders of Preferred Stock with most favored nations rights in the event the Company offers securities with more favorable terms than the Preferred Stock for as long as the Preferred Stock remains outstanding. Under the SEA, while any Preferred Stock is outstanding, the Company is prohibited from redeeming or declaring or paying dividends on outstanding securities other than the Preferred Stock. Further, the SEA prohibits the Company from issuing or amending securities at a price per share below the conversion price of the Preferred Stock, or to engage in variable rate transactions, for a period of 12 months following the closing.

The SEA further provides that following the closing the Company will prepare and distribute a proxy statement and hold a meeting of its stockholders to approve each of the following: (i) the SEA and the transactions contemplated thereby, (ii) a ratification of the Third Certificate Designations of Rights, Preferences, and Limitations of the Series A, (iii) a reverse stock split with a range of between 1-for 2 and 1-for-20, (iv) a change in the Company’s name to BNC, (v) an increase of the Company’s authorized common stock to 1,000,000,000 shares of common stock; and (vi) any other proposals to which the Parties shall mutually agree. In addition, pursuant to the SEA the Company agreed to use its reasonable best efforts to effect its previously announce spin-offs of the common stock of Wolf Energy and WTRV held by or issuable to the Company, use its best efforts to complete one or more financings resulting in total gross proceeds of $100,000,000 on terms acceptable to AAI, and financially support the ongoing Zest Labs litigation. The holders of the Preferred Stock will not participate in the aforementioned spin-offs and distribution. In connection with the SEA, the Company and AAI also agreed that the net litigation proceeds from the Zest Labs litigation that was ongoing as of November 15, 2022 would be held in a trust for the benefit of the Company’s stockholders of record as of such date.

In connection with the SEA, the Company also entered into a Registration Rights Agreement with AAI and the Minority Shareholders pursuant to which the Company agreed to file a registration statement on Form S-3 or Form S-1 with the SEC registering the resale by the holders of the Preferred Stock and/or the shares of common stock issuable upon conversion of the Preferred Stock, to be initially filed within 15 days of the closing, and to use its best efforts to cause such registration statement to be declared effective by the SEC within 45 days thereafter, subject to certain exceptions and limitations.

The SEA contains certain representations and warranties made by each of the Company, AAI and the Minority Shareholders. Upon the closing, which is subject to the closing conditions set forth in the SEA, including among other conditions the parties obtaining a fairness opinion from a national independent valuation firm and satisfactory completion of due diligence by each of the Company and AAI, BNC will continue as a wholly owned subsidiary of the Company. BNC’s principal business entails the development and operation of a metaverse platform, the beta for which launched on March 1, 2023. This transaction closed on March 7, 2023.

The Company determined that the Preferred Stock constituted a derivative liability under ASC 815 on the date of inception March 7, 2023. As a result of this classification, the Company determined that on March 7, 2023 (inception), the value of the derivative liability was $42,426,069.

The derivative liability for the preferred stock Preferred Stock was remeasured at June 30, 2023 and is valued at $2,427,669 resulting in a gain of $16,403,090 in the change in fair value for the three months ended June 30, 2023. The Company has accrued $1,597,222 in dividends on the Series B and C Preferred stock as of June 30, 2023.

Activity related to the preferred stock derivative liabilities for the Preferred Stock for the three months ended June 30, 2023 is as follows:

On April 4, 2023, the Company entered into an agreement with Ault Lending, LLC (“Ault”) and WTRV pursuant to which the Company agreed to advance to WTRV payments of up to $3.25 million (the “Amounts”), and WTRV agreed to accept the Amounts as payment of Ault’s $3.25 million payable to WTRV from Ault’s exercise of participation rights in oil and gas exploration and drilling ventures which WTRV granted Ault in connection with its acquisition of White River Holdings Corp. in July 2022. The parties agreed that the Amounts will be treated as a credit to the sums owed to WTRV, and the Company and Ault agreed that in lieu of repayment of the Amounts advanced to WTRV, Ault will permit the Company to redeem shares of the Company’s Series A Convertible Redeemable Preferred Stock (the “Series A”) held by Ault by dividing the Amounts by the stated value of such shares, or one share of Series A for each $10,833.33 advanced to WTRV. The redemption cannot occur until the previously announced spin-offs by the Company of shares of common stock of WTRV and Wolf Energy Services Inc. occur which would permit Ault to receive its full dividends thereunder.

The Shares were being offered and sold pursuant to a prospectus supplement filed with the Securities and Exchange Commission (the “SEC”) on January 24, 2023 and the accompanying base prospectus which is part of the Company’s effective Registration Statement on Form S-3 (File No. 333-249532) (the “Registration Statement”).

In the three months ended June 30, 2023, the Company issued 40,022 shares for payment of a preferred stock dividend of $300,158 and 935,452 shares in the ATM which we received $1,780,440.

As of June 30, 2023 and March 31, 2023, 2,359,306 and 1,383,832 shares of common stock were issued and outstanding, respectively.

Agora Common Stock

Agora is authorized to issue 250,000,000 shares of common stock, par value $0.001. On September 22, 2021, the Company purchased 100 shares of Agora for $10.

On October 1, 2021, the Company purchased 41,671,121 shares of Agora common stock for $4,167,112 which Agora used to purchase equipment to commence the Bitstream operations. 

In addition, between October 1 and December 7, 2021, Agora issued 4,600,000 restricted common shares to its management, non-employee directors, employees and advisors. After issuance of these shares, the Company controls approximately 90% of Agora. The future stock-based compensation related to these shares that will be measured consists of $12,166,680 over a three-year period in service-based grants ($9,611,145 in year one, $1,861,096 in year two, and $694,436 in year 3) and $10,833,320 in performance-based grants ($5,416,660 for the deployment of 20 MW in the State of Texas, and $5,416,660 for the deployment of 40 MW in the State of Texas) for a total of $23,000,000. These restricted common shares were measured pursuant to ASC 718-10-50 at an estimated value per share of $5.00 and consist of both service-based and performance-based criteria.

On August 7, 2022, Agora issued 400,000 shares of common stock to its management, non-employee directors, employees and advisors. After issuance of these shares, the Company controlled approximately 89% of Agora. The future stock-based compensation related to these shares that will be measured consists of $2,000,000 ranging from immediate vesting through the three-year anniversary in service-based grants. These restricted common shares were measured pursuant to ASC 718-10-50 at an estimated value per share of $5.00 and consist of service-based criteria only.

Of the 5,000,000 restricted shares of common stock — 2,833,336 shares of restricted stock are considered service grants and 2,166,664 are considered performance grants.

The performance grants vest as follows: 1,083,332 restricted common shares upon Agora deploying a 20 MW power contract in Texas; and 1,083,332 restricted common shares upon the Company deploying a 40 MW power contract in Texas. As of December 31, 2022, none of the performance criteria are probable as no contracts have been signed as the proper funding has not been secured, therefore no compensation expense is recognized in accordance with ASC 718-10-25-20 related to the performance grants. On April 12, 2022, Agora upon board of director approval accelerated the vesting of 250,000 restricted shares for deploying a 20 MW power contract in Texas; and 250,000 restricted shares for deploying a 40 MW power contract in Texas with Agora’s former Chief Financial Officer. All remaining performance grants remain unvested. 

The Company recognized $630,206 and $5,215,287 in stock-based compensation for the three months ended June 30, 2023 and 2022, respectively. The unrecognized stock-based compensation expense as of June 30, 2023 is $8,333,320 in performance based grants and $1,721,312 in service based grants for a total of $10,054,632.

The Company accounts for stock-based payments in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). During the year ended March 31, 2022, in addition to the value measured by the 4,600,000 restricted stock grants, stock-based compensation consists primarily of restricted stock units granted to a Company employee while employed by the Company. The Company measures compensation expense for restricted stock units based on the fair value of the award on the date of grant. The grant date fair value is based on the closing market price of the Company’s common stock on the date of grant.

Share-based Compensation Expense

Share-based compensation for employees is included in salaries and salary related costs and directors and services are included in professional fees and consulting in the consolidated statement of operations for the three months ended June 30, 2023 and 2022.

Share-based compensation for the three months ended June 30, 2023 and 2022 for stock options and restricted stock units granted under the 2013 Incentive Stock Plan and 2017 Omnibus Incentive Stock Plan and non-qualified stock options were $258,655 and $182,561, respectively.

There is $438,231 in share-based compensation accrued as of June 30, 2023 for BitNile Metaverse and $237,499 accrued in Agora for a total of $675,730.

In the letter, the Company was provided 45 calendar days from the date of the letter, or until February 10, 2023, to submit a plan to regain compliance with the referenced Listing Rules, and if such plan is accepted by Nasdaq, the Company can receive an extension of up to 180 calendar days from the date of the letter to evidence compliance. However, if the Company’s plan is not accepted by Nasdaq, or is not sufficiently executed to regain compliance and remedy the matters set forth in the letter, the Company’s Common Stock will be subject to delisting. In connection with the letter the Company was also requested to furnish Nasdaq with certain documents and information related to its sale of WTRV.

In connection with the December 27^th letter, the Company was also requested to provide certain documents and information related to its sale of WTRV, including as it pertains to the $30,000,000 in preferred stock value being carried on the Company’s balance sheet as consideration for the sale of the entity. According to the correspondence, the request was made under Listing Rule 5250 which provides that a listed company will provide Nasdaq with requested information deemed necessary to make a determination regarding such company’s continued listing.

Further, on December 30, 2022, the Company received another letter from the Nasdaq notifying the Company of its noncompliance with Listing Rule 5550(a)(2) by failing to maintain a minimum bid price for its Common Stock of at least $1.00 per share for 30 consecutive business days and providing the Company with a 180 calendar day grace period to regain compliance with the Listing Rule 5550(a)(2), subject to a potential 180 calendar day extension, as described below. To regain compliance, the Company’s Common Stock must have a minimum closing bid price of at least $1.00 per share for at least 10 consecutive business days within the grace period which ended on June 28, 2023. To qualify for the additional grace period, the Company will be required to meet the continued listing requirement for the market value of its publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second grace period, by effecting a reverse stock split if necessary, which would also require stockholder approval unless completed with a proportionate reduction in our authorized Common Stock under our Articles of Incorporation.

On January 26, 2023, Nasdaq sent an email to the Company raising 13 questions concerning the WTRV transaction, WTRV’s business, seeking verification that the Company had in fact transferred $3 million to WTRV last July and questioning the time allocations of the two senior executive officers of the Company and WTRV, among other things. The Company responded on February 15.

The Company provided responses to Nasdaq on January 11, 2023, February 10, 2023 and February 15, 2023.

If our Common Stock is delisted from Nasdaq, we could face significant material adverse consequences, including:

If we are unable to rectify any of the above-described Nasdaq issues, for failure to timely obtain stockholder approval, a delisting will subject us and our stockholders to the above and other adverse consequences and could also delay us from effecting the announced spin-offs of common stock of WTRV and Wolf Energy certain entities as described elsewhere in this Report. See “Risk Factors” contained elsewhere in this Report.

On June 21, 2023, the Company received a letter from the Listing Qualifications staff of Nasdaq (the “Letter”) notifying the Company that the Staff has determined that the Company has violated Nasdaq’s voting rights rule set forth in Listing Rule 5640 (the “Voting Rights Rule”). The alleged violation of the Voting Rights Rule relates to the issuance of (i) 8,637.5 shares of the Series B, and (ii) 1,362.5 shares of the Series C in connection with the acquisition of BNC as well as the securities of Earnity, Inc. beneficially owned by BNC (collectively, the “Assets”) pursuant to the SEA by and among the Company, AAI and the minority stockholders of BNC, which was previously disclosed on Current Reports on Form 8-K filed by the Company on February 14, 2023 and March 10, 2023. The Series B and C Preferred Stock has a collective stated value of $100,000,000 (the “Stated Value”), and votes on an as-converted basis, representing approximately 92.4% of the Company’s outstanding voting power on a fully diluted basis at the time of issuance.

According to the Letter, because the Preferred Stock was not issued for cash, the Staff compared the value of the Assets to the Stated Value and determined that the value of the Assets was less than the Stated Value and that the voting rights attributable to the Series B and C Preferred Stock has the effect of disparately reducing the voting rights of the Company’s existing shareholders. The Staff looked at the total assets and stockholders’ equity of BNC as of March 5, 2023, as well as the market capitalization of AAI prior to entering into the Agreement and immediately after closing of the transaction in determining, in Staff’s opinion, the value of the Assets. The Letter did not make any reference to the projections prepared by AAI as to the future potential of the business of BNC nor to the independent valuation obtained by the Company prior to closing of the transaction, which supported the Stated Value of the Preferred Stock for the total value of the Assets, both of which the Company provided to the Staff prior to receipt of the Letter.

According to the Letter, Nasdaq determined that the voting rights of the Series B and C Preferred Stock, voting on an as-converted basis, are below the minimum price per share of the Company’s common stock at the time of the issuance of the Series B and C Preferred Stock. Additionally, Nasdaq determined that the Series B provides the holder the right to appoint a majority of the Company’s board of directors when such representation is not justified by the relative contribution of the Series B pursuant to the Agreement.

Under the Voting Rights Rule, a company cannot create a new class of security that votes at a higher rate than an existing class of securities or take any other action that has the effect of restricting or reducing the voting rights of an existing class of securities. As such, according to the Letter, the issuance of the Series B and C Preferred Stock violated the Voting Rights Rule because the holders of the Series B and C Preferred Stock are entitled to vote on an as-converted basis, thus having greater voting rights than holders of common stock, and the Series B is entitled to a disproportionate representation on the Company’s board of directors.

According to the Letter, the Company has 45 calendar days from the date of the Letter, or until August 7, 2023, to submit a plan to regain compliance with the Voting Rights Rule, and if such plan is accepted by Nasdaq, the Company can receive an extension of up to 180 calendar days from the date of the Letter to evidence compliance. However, if the Company’s plan is not accepted by Nasdaq, the Company’s common stock will be subject to delisting. The Company would have the right to appeal that decision to a hearings panel. On July 28, 2023, the Company responded and submitted a plan to regain compliance with the Voting Rights Rule.

On May 8, 2023, the Company received a letter from the Listing Qualifications staff (the “Staff”) of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that the Staff has determined to delist the Company’s common stock, par value $0.001 per share (the “Common Stock”) from The Nasdaq Capital Market, effective May 17, 2023, pursuant to Listing Rule 5810(c)(3)(A)(iii), as the Company’s common stock traded below $0.10 per share for 10 consecutive trading days.

On May 12, 2023, the Company issued a press release announcing a 1-for-30 reverse stock split of its outstanding common stock which will be effective for trading purposes as of the commencement of trading on May 15, 2023.

On May 26, 2023, the Company received a letter from Nasdaq stating that the Company’s bid price deficiency had been cured.

ELOC

On June 5, 2023, the Company entered into a purchase agreement (the “ELOC Purchase Agreement”) with Arena Business Results, LLC (“Arena”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Arena to purchase up to an aggregate of $100,000,000 of shares of our common stock over the 36-month term of the ELOC Purchase Agreement. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, including, without limitation, the effectiveness of the Registration Statement (as defined in the ELOC Purchase Agreement), we have the right to present Arena with an advance notice (each, an “Advance Notice”) directing Arena to purchase any amount up to the Maximum Advance Amount (as described below).

Non-cancelable Obligations

In the course of our gaming business in association with our Platform, the Company enters into non-cancelable obligations with certain parties to purchase services, such as technology and the hosting of our metaverse platform. As of June 30, 2023 the Company had outstanding non-cancelable purchase obligations with terms of one year or longer aggregating $4,000,000 and obligations with terms less than one year of $2,000,000.