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DOCUMENTS INCORPORATED BY REFERENCE None.
VICTORY OILFIELD TECH, INC.
ANNUAL REPORT ON
FORM 10-K
For the year ended December 31, 2022
TABLE OF CONTENTS
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INTRODUCTORY NOTE
Use of Terms
In this report, unless otherwise specified or the context otherwise requires, references to “we,” “us,” “our,” and “Company” refer to Victory Oilfield Tech, Inc., a Nevada corporation, together with its wholly owned subsidiary, Pro-Tech Hardbanding Services, Inc. from July 31, 2018, the date of acquisition.
Cautionary Notice Regarding Forward Looking Statements
We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our Company and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords.
From time to time, our management or persons acting on our behalf may make forward-looking statements to inform existing and potential security holders about our Company. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, plans and objectives of management for future operations, industry conditions, and indebtedness covenant compliance are forward-looking statements. When used in this report, forward-looking statements are generally accompanied by terms or phrases such as “estimate,” “project,” “predict,” “believe,” “expect,” “continue,” “anticipate,” “target,” “could,” “plan,” “intend,” “seek,” “goal,” “will,” “should,” “may” or other words and similar expressions that convey the uncertainty of future events or outcomes. Items contemplating or making assumptions about actual or potential future production and sales, cash flows, and trends or operating results also constitute such forward-looking statements.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our Company’s control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following: changes in crude oil and natural gas prices, the pace of drilling and completions activity on our properties, our ability to acquire additional development opportunities, potential or pending acquisition transactions, the projected capital efficiency savings and other operating efficiencies and synergies resulting from our acquisition transactions, integration and benefits of property acquisitions, or the effects of such acquisitions on our Company’s cash position and levels of indebtedness, changes in our reserves estimates or the value thereof, disruptions to our Company’s business due to acquisitions and other significant transactions, general economic or industry conditions, nationally and/or in the communities in which our Company conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, our ability to raise or access capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, and other economic, competitive, governmental, regulatory and technical factors affecting our Company’s operations, products and prices, the COVID-19 pandemic and its related economic repercussions and effect on the oil and natural gas industry, and the impact of recent inflationary pressures on the Company’s operations.
We have based any forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Accordingly, results actually achieved may differ materially from expected results described in these statements. Forward-looking statements speak only as of the date they are made. You should consider carefully the statements in “Item 1A. Risk Factors” and other sections of this report, which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements. Our Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the United States Securities and Exchange Commission (the “SEC”) which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.
Please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for an additional cautionary notice regarding forward-looking statements.
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PART I
Item 1. Business
Overview
We are an Austin, Texas based publicly held oilfield energy technology products company focused on improving well performance and extending the lifespan of the industry’s most sophisticated and expensive equipment. America’s resurgence in oil and gas production is largely driven by new innovative technologies and processes as most dramatically and recently demonstrated by fracking. We provide and apply wear-resistant alloys for use in the global oilfield services industry which are mechanically stronger, harder and more corrosion resistant than typical alloys found in the market today. This combination of characteristics creates opportunities for drillers to dramatically improve lateral drilling lengths, well completion time and total well costs.
Our wear-resistant alloys reduce drill-string torque, friction, wear and corrosion in a cost-effective manner, while protecting the integrity of the base metal. We apply our coatings using advanced welding techniques and thermal spray methods. We also utilize common materials, such as tungsten carbide to chromium carbide, to deliver the optimal solution to the customers. Some of our hardbanding processes protect wear in tubulars using materials that achieve a low coefficient of friction to protect the drill string and casing from abrasion.
We plan to continue our U.S. oilfield services company acquisition initiative, aimed at companies which are already recognized as a high-quality service providers to strategic customers in the major North American oil and gas basins. When completed, we expect that each of these oilfield services company acquisitions will provide immediate revenue from their current regional customer base, while also providing us with a foundation for channel distribution and product development of our existing products. We intend to grow each of these established oilfield services companies by providing better access to capital, more disciplined sales and marketing development, integrated supply chain logistics and infrastructure build out that emphasizes outstanding customer service and customer collaboration, future product development and planning.
We believe that a well-capitalized technology-enabled oilfield services business will provide the basis for more accessible financing to grow the Company and execute our oilfield services company acquisitions strategy. We anticipate new innovative products will come to market as we collaborate with drillers to solve their other down-hole needs.
Acquisition of Pro-Tech Hardbanding Services, Inc.
On July 31, 2018, the Company entered into a stock purchase agreement to purchase 100% of the issued and outstanding common stock of Pro-Tech Hardbanding Services, Inc., (“Pro-Tech”), an Oklahoma corporation which is a hardbanding company servicing Oklahoma, Texas, Kansas, Arkansas, Louisiana, and New Mexico. The Company believes that the acquisition of Pro-Tech will create opportunities to leverage its existing portfolio of intellectual property to fulfill its mission of operating as a technology-focused oilfield services company. The stock purchase agreement was included as Exhibit 10.1 on the Form 8-K filed by us on August 2, 2018.
Our Industry and Market
The following information excerpts were sourced from a September 2020 “Anti-Corrosion Coatings Market Size Report, 2020-2027” published by Grand View Research (Report ID: CVR-4-68039-128-0), available at www.grandviewresearch.com.
The global anti-corrosion coatings market size was valued at USD 27.2 billion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 4.6% from 2020 to 2027. The rising demand for thin-walled durable metallic components in the manufacturing of lightweight products, which are used in various industries including building and construction, automotive, marine, and oil & gas is expected to propel the market growth over the forecast period. Amid the global COVID-19 pandemic, the demand for anti-corrosion coatings has increased primarily in the oil and gas and marine application industries owing to the reduced exploration and marine operation. The machines and equipment that are not in operations need maintenance so as to avoid the degradation and rusting as such equipment has crude oil residual, water, salt, and other chemicals, which cause corrosion.
The regional market is mainly dominated by North America and the Middle East and Africa, with the presence of major oil and gas exploration markets such as the U.S. and Saudi Arabia. Government initiatives coupled with infrastructural developments in these countries are further propelling the growth of the market in these regions.
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Sector Insights
The upstream sector of the oil and gas industry involves activities such as exploration and production of crude oil and natural gas. These activities primarily include drilling of exploratory wells, making requisite operations and bringing natural gas and other products to the ground surface. For these activities, various components require protection as they get older. Carbon steel is extensively used in this industry especially for pipelines and it freely corrodes when it comes into contact with water, which is produced with the natural gas and crude oil from underwater reservoirs.
The midstream sector consists of transportation activity of crude oil and natural gas. These products are transported by various mediums including pipelines, tankers, tank cars, and trucks. The outer surface of the tanks or pipelines is protected from the atmospheric corrosion with the help of coatings and cathodic protection.
In the downstream sector, during the refinery operations, most of the corrosion occurs due to the presence of water, H2S, CO2, sodium chloride and sulfuric acid. In downstream, deterioration occurs due to curing agents those are present in crude oil or feedstock and are associated with process or control. To prevent such corrosion, various products including coatings, inhibitors, cathodic protection and paints are used.
Regional Insights
North America and the Middle East and African regions are projected to contribute to market growth in coming years primarily fueled by the need for transportation/supply infrastructure and technological innovations for the corrosion detection in various countries including the U.S., Canada, Saudi Arabia, UAE, and others. The applications in oil and gas sector such upstream, midstream and downstream have been experiencing significant growth in these countries over the past few years.
Our Products and Services
In today’s harsher drilling environment, exploration and productions companies are seeking new methods and technologies for reducing drill-string torque and down-hole friction when drilling long laterals. Without a comprehensive solution, drill pipe, tubing, tool joints and drill string mid-sections will suffer from aggressive wear that will negatively impact drilling torque, friction, time to complete and total drilling costs. Our wear-resistant alloys will solve these problems. Our goal is to help drillers across the major oil and gas basins of North America create better oil and gas well outcomes and lower total well costs when drilling long laterals. Our initial product line will be focused on tubing and drill-pipe metal coating products, RFID enclosure products and other services that provide protection and friction reduction for nearly every metal component of a drilling operation.
With hardness that can range from 900 to 1500 Vickers, our coatings products will be 3 to 5 times harder than normal metals such as titanium and steel. Oilfield products protected by our wear-resistant alloys are lasting two to ten times longer than other coated products in field applications. Additionally, our coatings products will deliver a friction coefficient of 0.05 to 0.12, similar to the smoothness of Teflon.
With the acquisition of Pro-Tech, a hardbanding service provider servicing Oklahoma, Texas, Kansas, Arkansas, Louisiana, and New Mexico, we believe we will create opportunities to leverage our existing portfolio of intellectual property to fulfill our mission of operating as a technology-focused oilfield services company.
Our Competitors
The key players in the global market include The 3M Company, AkzoNobel N.V, Jotun A/S, Hempel A/S, Arkerma Group Axalta Coating System Ltd., The Sherwin-Williams Company, Kansai Paints Co. Ltd., Nippon Paints, RPM International, Inc., Aegion Corporation, Ashland Inc., Beckers Group, and BASF SE. The industry is characterized by mergers and acquisitions as the players are focusing on increasing their market presence.
Our Growth Strategies
Our goal is to continue to expand the range of oil and gas product solutions that we deliver to the global oilfield services industry.
| ● | Our Company will continue to pursue U.S. oilfield services company acquisition initiative, as appropriate, aimed at companies who are already recognized as a high-quality services provider to strategic customers in the major north American oil and gas basins. When completed, each of these oilfield services company acquisitions will provide immediate revenue from their current regional customer base, while also providing us with a foundation for channel distribution and product development of our existing products and services. We intend to grow each of these established oilfield services companies by providing better access to capital, more disciplined sales and marketing development, integrated supply chain logistics and infrastructure build out that emphasizes outstanding customer service and customer collaboration future product development and planning. |
| ● | We believe that a well-capitalized technology-enabled oilfield services business will provide the basis for more accessible financing to grow our Company and execute our oilfield services company acquisitions strategy. |
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| ● | We plan to establish full-service facilities in each major geographic area of drilling with products and services such as pipe coating services, hardbanding, inspection services, and machining and thread repair. |
| ● | We believe that the current environment in the oil and gas industry can provide the potential for opportunistic acquisitions at reasonable valuations. |
Governmental Regulation
Our business is impacted by federal, state and local laws and other regulations relating to the oil and natural gas industry, as well as laws and regulations relating to worker safety and environmental protection. We cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on us, our business or financial condition.
In addition, our customers are impacted by laws and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we currently operate. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services.
Environmental Matters
Our operations, and those of our customers, will be subject to extensive laws, regulations and treaties relating to air and water quality, generation, storage and handling of hazardous materials, and emission and discharge of materials into the environment. We believe we are in substantial compliance with all regulations affecting our business. Historically, our expenditures in furtherance of our compliance with these laws, regulations and treaties have not been material, and we do not expect the cost of compliance to be material in the future.
Employees
We have eight full-time employees as of April 11, 2023. We believe that our relationships with our employees are satisfactory, and we enjoy low turnover. We support diversity in our workforce and are committed to safety in the workplace and compliance with applicable regulatory and legal requirements. We utilize the services of independent contractors to perform various daily operational and administrative duties.
Seasonal Trends
We
have not experienced and do not expect to experience seasonal trends in future business operations.
Our Corporate History
Our Company was organized under the laws of the State of Nevada on January 7, 1982 under the name All Things Inc. On March 21, 1985, our Company’s name was changed to New Environmental Technologies Corporation. On April 28, 2003, our Company’s name was changed to Victory Capital Holdings Corporation. On May 3, 2006, our Company’s name was changed to Victory Energy Corporation. On May 29, 2018, our Company’s name was changed to Victory Oilfield Tech, Inc.
From inception until 2004, we had no material business operations. In 2004, we began the search for the acquisition of assets, property or businesses that could benefit our Company and its stockholders. In 2005, management determined that we should focus on projects in the oil and gas industry.
In January 2008, we and Navitus Energy Group (“Navitus”) established Aurora Energy Partners (“Aurora”). Prior to the Divesture of Aurora described below we were the managing partner of Aurora and held a 50% partnership interest in Aurora. All of our oil and natural gas operations were conducted through Aurora.
On August 21, 2017, we entered into the Divestiture Agreement with Navitus, and on September 14, 2017, we entered into Amendment No. 1 to the Divestiture Agreement. Pursuant to the Divestiture Agreement, as amended, we agreed to divest and transfer our 50% ownership interest in Aurora to Navitus, which owned the remaining 50% interest.
On July 31, 2018, the Company entered into a stock purchase agreement to purchase 100% of the issued and outstanding common stock of Pro-Tech Hardbanding Services, Inc., (“Pro-Tech”), an Oklahoma corporation which is a hardbanding company servicing Oklahoma, Texas, Kansas, Arkansas, Louisiana, and New Mexico.
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Item 1A. Risk Factors
Our business is subject to a number of risks including, but not limited to, those described below:
Risks Related to Health Epidemics and other Outbreaks
We face various risks related to health epidemics and other outbreaks, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We face various risks related to health epidemics and other outbreaks, including the global outbreak of coronavirus (“COVID-19”). The COVID-19 pandemic, changes in customer behavior related to illness, pandemic fears and market downturns, and restrictions intended to slow the spread of COVID-19, including quarantines, government-mandated actions, stay-at-home orders and other restrictions, have led to disruption and volatility in the global capital markets, which has adversely affected our ability to access the capital markets.
In addition, the COVID-19 pandemic and restrictions intended to slow the spread of COVID-19 may adversely affect our business in a number of ways.
If significant portions of our workforce are unable to work effectively as a result of the COVID-19 pandemic, including because of illness, quarantines, facility closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted. Certain of our third-party suppliers and business partners that we rely on to deliver our products and services and to operate our business could inform us that they will be unable to perform fully, which could adversely impact our ability to operate our business and increase our costs and expenses. These increased costs and expenses may not be fully recoverable or adequately covered by insurance.
The foregoing impacts and other unforeseen impacts not referenced herein, as well as the ultimate impact of the COVID-19 pandemic, are difficult to predict. While we have seen a return to more stable quarter-over-quarter demand for our services, we remain cognizant of future COVID-19 developments, such as impacts from new variants, employee absenteeism, lockdowns or other restrictions, that could materially impact our future results of operations, financial condition and cash flows.
Risks Related to Our Business, Industry, and Strategy
We have substantial liabilities that will require that we raise additional financing to continue operations. Such financing may be available on less advantageous terms, if at all. Additional financing may result in substantial dilution.
As of December 31, 2022, we had $73,636 of cash, total current assets of $289,618, current liabilities of $4,135,547 and a working capital deficit of $(3,845,929). Our current liabilities mainly include short-term notes payable, and to a lesser extent, accounts payable. We are currently unable to pay all of our accounts payable. If any material creditor decides to commence legal action to collect from us, it could jeopardize our ability to continue in business.
We will be required to seek additional debt or equity financing in order to pay our current liabilities and to support our anticipated operations. We may not be able to obtain additional financing on satisfactory terms, or at all, and any new equity financing could have a substantial dilutive effect on our existing stockholders. If our cash on hand, cash flows from operating activities, and borrowings under our credit facility are not sufficient to fund our capital expenditures, we may be required to refinance or restructure our debt, if possible, sell assets, or reduce or delay acquisitions or capital investments, even if publicly announced. If we cannot obtain additional financing, we will not be able to conduct the operating activities that we need to generate revenue to cover our costs, and our results of operations would be negatively affected.
There is substantial uncertainty we will continue operations in which case you could lose your investment.
We have determined that there is substantial doubt that we can continue as an ongoing business for the next 12 months. The financial statements do not include any adjustments that might result from the uncertainty about our ability to continue in business. As such we may have to cease operations and you could lose your entire investment.
The accompanying financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As presented in the financial statements, we have incurred losses of $341,739 and $260,859 for the years ended December 31, 2022 and 2021, respectively.
Loans from affiliates have allowed us to continue operations. We anticipate that operating losses will continue in the near term until we begin to operate as a technology focused oilfield services business.
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Our ability to achieve and maintain profitability and positive cash flow is dependent upon:
| ● | Our ability to raise capital to fund our operations, working capital needs, capital expenses and potential acquisitions; |
| ● | The success of our oilfield services acquisition initiative; |
| ● | Our ability to establish full service facilities in each major geographic area of drilling with products and services such are RFID enclosures, pipe coating services, hardbanding, inspection services, and machining and thread repair; and |
| ● | Our ability to develop life cycle management services, providing drill pipe asset tracking from cradle to grave, predictive maintenance modeling, collection and maintenance of all service history and delivery of this data-driven software tool to customers via cloud-based systems. |
Based upon current plans, we expect to incur operating losses in future periods as we will be incurring expenses and not generating significant revenues. We cannot guarantee that we will be successful in generating significant revenues in the future. Failure to generate revenues that are greater than our expenses could result in the loss of all or a portion of your investment.
We plan to operate in a highly competitive industry, with intense price competition, which may intensify as our competitors expand their operations.
The market for oilfield services in which we plan to operate is highly competitive and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial resources than we do. Contracts are traditionally awarded on the basis of competitive bids or direct negotiations with customers. The principal competitive factors in our markets are product and service quality and availability, responsiveness, experience, equipment quality, reputation for safety and price. The competitive environment has intensified as recent mergers among exploration and production companies have reduced the number of available customers. The fact that drilling rigs and other vehicles and oilfield services equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry. We may be competing for work against competitors that may be better able to withstand industry downturns and may be better suited to compete on the basis of price, retain skilled personnel and acquire new equipment and technologies, all of which could affect our revenue and profitability.
Downturns in the oil and gas industry, including the oilfield services business, may have a material adverse effect on our financial condition or results of operations.
The oil and gas industry is highly cyclical and demand for most our future oilfield services and products will be substantially dependent on the level of expenditures by the oil and gas industry for the exploration, development and production of crude oil and natural gas reserves, which are sensitive to oil and natural gas prices and generally dependent on the industry’s view of future oil and gas prices. There are numerous factors affecting the supply of and demand for our future services and products, which are summarized as:
| ● | general and economic business conditions; |
| ● | market prices of oil and gas and expectations about future prices; |
| ● | cost of producing and the ability to deliver oil and natural gas; |
| ● | the level of drilling and production activity; |
| ● | mergers, consolidations and downsizing among our future clients or acquisition targets; |
| ● | coordination by OPEC; |
| ● | the impact of commodity prices on the expenditure levels of our future clients or acquisition targets; |
| ● | financial condition of our client base and their ability to fund capital expenditures; |
| ● | the physical effects of climatic change, including adverse weather, such as increased frequency or severity of storms, droughts and floods, or geologic/geophysical conditions; |
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| ● | the adoption of legal requirements or taxation, including, for example, a carbon tax, relating to climate change that lowers the demand for petroleum-based fuels; |
| ● | civil unrest or political uncertainty in oil producing or consuming countries; |
| ● | level of consumption of oil, gas and petrochemicals by consumers; |
| ● | changes in existing laws, regulations, or other governmental actions, including temporary or permanent moratoria on hydraulic fracturing or offshore drilling, or shareholder activism or governmental rulemakings or agreements to restrict greenhouse gas emissions, or GHGs, which developments could have an adverse impact on the oil and gas industry and/or demand for our future services; |
| ● | the business opportunities (or lack thereof) that may be presented to and pursued by us; |
| ● | availability of services and materials for our future clients or acquisition targets to grow their capital expenditures; | |
| ● | ability of our future clients or acquisition targets to deliver product to market; |
| ● | availability of materials and equipment from key suppliers; and |
| ● | cyber-attacks on our network that disrupt operations or result in lost or compromised critical data. |
The oil and gas industry has historically experienced periodic downturns, which have been characterized by diminished demand for oilfield services and products and downward pressure on pricing. A significant downturn in the oil and gas industry could result in a reduction in demand for oilfield services and could adversely affect our future operating results.
Our business could be adversely affected by unfavorable economic and political conditions, which in turn, can negatively impact our ability to generate returns to you.
Our business and operations are sensitive to general business and economic conditions in the United States. Factors beyond our control could cause fluctuations resulting in adverse conditions, such as heightened inflation. Sustained inflationary pressures resulted in the Federal Reserve Board increasing interest rates significantly during 2022, and the Federal Reserve Board has continued to raise interest rates in 2023. To the extent such conditions worsen, it may negatively impact our ability to generate returns to you.
In addition, national and regional economies and financial markets have become increasingly interconnected, which increases the possibilities that conditions in one country, region, or market might adversely impact issuers in a different country, region, or market. Major economic or political disruptions, such as the slowing economy in China, the war in Ukraine and sanctions on Russia, and a potential economic slowdown in the United Kingdom and Europe, may have global negative economic and market repercussions. Russia’s conflict with Ukraine and the sanctions and other measures imposed by various governments in response to this conflict have increased the level of economic and political uncertainty globally. A significant escalation or expansion of economic disruption or countries subject to sanctions or the conflict’s scope could have a material adverse effect on our results of operations, financial condition and cash flows.
Our oilfield services business depends on domestic drilling activity and spending by the oil and natural gas industry in the United States. The level of oil and natural gas exploration and production activity in the United States is volatile and we may be adversely affected by industry conditions that are beyond our control.
We depend on our future customers’ willingness to make expenditures to explore for and to develop and produce oil and natural gas in the United States. We cannot accurately predict which or what level of our future services and products our clients will need in the future. Our future customers’ willingness to undertake these activities depends largely upon prevailing industry conditions that are influenced by numerous factors over which management has no control, such as:
| ● | domestic and worldwide economic conditions, including inflation; |
| ● | the supply and demand for oil and natural gas; |
| ● | the level of prices, and expectations about future prices, of oil and natural gas; |
| ● | the cost of exploring for, developing, producing and delivering oil and natural gas; |
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| ● | the expected rates of declining current production; |
| ● | the discovery rates of new oil and natural gas reserves; |
| ● | available pipeline, storage and other transportation capacity; |
| ● | federal, state and local regulation of exploration and drilling activities; |
| ● | weather conditions, including hurricanes that can affect oil and natural gas operations over a wide area; |
| ● | political instability in oil and natural gas producing countries; |
| ● | technical advances affecting energy consumption; |
| ● | the price and availability of alternative fuels; |
| ● | the ability of oil and natural gas producers to raise equity capital and debt financing; and |
| ● | merger and divestiture activity among oil and natural gas producers. |
We expect that our revenues will be generated from customers or acquisition targets who are engaged in drilling for and producing oil and natural gas. Developments that adversely affect oil and natural gas drilling and production services could adversely affect our customers’ demand for our products and services, resulting in a material adverse effect on our business, financial condition and results of operations. Current and anticipated oil and natural gas prices, the related level of drilling activity, and general production spending in the areas in which we plan to have operations are the primary drivers of demand for our future services. The level of oil and natural gas exploration and production activity in the United States is volatile and this volatility could have a material adverse effect on the level of activity by our future customers. Any reduction by our future customers of activity levels may adversely affect the prices that we can charge or collect for our services. In addition, any prolonged substantial reduction in oil and natural gas prices would likely affect oil and natural gas production levels and, therefore, affect demand for the services we plan to provide. Moreover, a decrease in the development rate of oil and natural gas reserves in our acquisition targets’ market areas, whether due to increased governmental regulation of or limitations on exploration and drilling activity or other factors, may also have an adverse impact on our business, even in an environment of stronger oil and natural gas prices.
Our planned operations are subject to hazards inherent in the oil and natural gas industry.
The operational risks inherent in our industry could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to retain our future services if they view our safety record as unacceptable, which could cause us to lose substantial revenue. We do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. We evaluate certain of our risks and insurance coverage annually. After carefully weighing the costs, risks, and benefits of retaining versus insuring various risks, we occasionally opt to retain certain risks not covered by our insurance policies. The occurrence of an event not fully insured against, or the failure of an insurer to meet its insurance obligations, could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and there can be no assurance that insurance will be available to cover any or all of these risks, or, even if available, that it will be adequate or that insurance premiums or other costs will not rise significantly in the future, making such insurance costs prohibitive. In addition, our insurance is subject to coverage limits and some policies exclude coverage for damages resulting from environmental contamination.
We may not realize the anticipated benefits of acquisitions or divestitures.
We continually seek opportunities to increase efficiency and value through various transactions, including purchases or sales of assets or businesses. We intend to pursue our U.S. oilfield services company acquisition initiative, aimed at companies who are already recognized as a high- quality services provider to strategic customers in the major North American oil and gas basins. These transactions are intended to result in the offering of new services or products, the entry into new markets, the generation of income or cash, the creation of efficiencies or the reduction of risk. Whether we realize the anticipated benefits from an acquisition or any other transactions depends, in part, upon our ability to timely and efficiently integrate the operations of the acquired business, the performance of the underlying product and service portfolio, and the management team and other personnel of the acquired operations. Accordingly, our financial results could be adversely affected from unanticipated performance issues, legacy liabilities, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets, credit guarantees, partner performance and indemnifications. In addition, the financing of any future acquisition completed by us could adversely impact our capital structure or increase our leverage. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful. We also may make strategic divestitures from time to time. These transactions may result in continued financial involvement in the divested businesses, such as guarantees or other financial arrangements, following the transaction. Nonperformance by those divested businesses could affect our future financial results through additional payment obligations, higher costs or asset write- downs. Except as required by law or applicable securities exchange listing standards, which would only apply when, and if, we are listed on a national securities exchange, we do not expect to ask our shareholders to vote on any proposed acquisition or divestiture. Moreover, we generally do not announce our acquisitions or divestitures until we have entered into a definitive agreement for an acquisition or divestiture.
7
There are risks relating to our acquisition strategy. If we are unable to successfully integrate and manage businesses that we plan to acquire in the future, our results of operations and financial condition could be adversely affected.
One of our key business strategies is to acquire technologies, operations and assets that are complementary to our existing businesses. There are financial, operational and legal risks inherent in any acquisition strategy, including:
| ● | increased financial leverage; |
| ● | ability to obtain additional financing; |
| ● | increased interest expense; and |
| ● | difficulties involved in combining disparate company cultures and facilities. |
The success of any completed acquisition will depend on our ability to effectively integrate the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. No assurance can be given that we will be able to continue to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to incorporate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operation.
If we are not successful in continuing to grow our oilfield services business, then we may have to scale back or even cease our ongoing business operations.
Our success is significantly dependent on our U.S. oilfield services company acquisition initiative, aimed at service companies who are recognized as a high-quality services provider to strategic customers in the major North American oil and gas basins. When and if completed, these oilfield services company acquisitions are expected to provide immediate revenue from their current regional customer base, while also providing us with a foundation for channel distribution and product development of our amorphous alloy technology products. We may be unable to locate suitable companies or operate on a profitable basis. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our Company.
We depend on key management personnel and technical experts. The loss of key employees or access to third party technical expertise could impact our ability to execute our business.
If we lose the services of the senior management, or access to independent land men, geologists and reservoir engineers with whom we have strategic relationships during our transition period, our ability to function and grow could suffer, in turn, negatively affecting our business, financial condition and results of operations.
Effective April 17, 2019, Mr. Kenneth Hill resigned as the Company’s Chief Executive Officer, interim Chief Financial Officer, Secretary, Treasurer and member of the Board of Directors. On April 23, 2019, the Company’s Board of Directors appointed Mr. Kevin DeLeon as interim Chief Executive Officer and interim Secretary of the Company until a permanent replacement is appointed. Mr. DeLeon has assumed the duties of these positions effective immediately. If we are not able to find a qualified permanent replacement for these positions, it could have a material adverse effect on our ability to effectively pursue our business strategy and our relationships with advertisers and content partners. Leadership transitions can be inherently difficult to manage and may cause uncertainty or a disruption to our business or may increase the likelihood of turnover of other key officers and employees.
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We depend on computer and telecommunications systems, and failures in our systems or cyber security attacks could significantly disrupt our business operations.
We have entered into agreements with third parties for hardware, software, telecommunications and other information technology services in connection with our business. In addition, we have developed or may develop proprietary software systems, management techniques and other information technologies incorporating software licensed from third parties. It is possible that we, or these third parties, could incur interruptions from cyber security attacks, computer viruses or malware (including ransomware), or that third party service providers could cause a breach of our data. Any interruptions to our arrangements with third parties for our computing and communications infrastructure or any other interruptions to, or breaches of, our information systems could lead to data corruption, communication interruption, loss of sensitive or confidential information or otherwise significantly disrupt our business operations. There can be no assurance that the procedures and controls that we utilize to monitor, and mitigate our exposure to, these threats will be sufficient in preventing security threats from materializing. To our knowledge we have not experienced any material losses relating to cyber-attacks; however, there can be no assurance that we will not suffer material losses in the future either as a result of an interruption to or a breach of our systems or those of our third party vendors and service providers.
Severe weather could have a material adverse effect on our future business.
Our business could be materially and adversely affected by severe weather. Our future clients or acquisition targets with oil and natural gas operations located in various parts of the United States may be adversely affected by hurricanes and storms, resulting in reduced demand for our future services. Furthermore, our future clients or acquisition targets may be adversely affected by seasonal weather conditions. Adverse weather can also directly impede our own future operations. Repercussions of severe weather conditions may include:
| ● | curtailment of services; | |
| ● | weather-related damage to facilities and equipment, resulting in suspension of operations; | |
| ● | inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and | |
| ● | loss of productivity. |
These constraints could delay our future operations and materially increase our operating and capital costs. Unusually warm winters may also adversely affect the demand for our services by decreasing the demand for natural gas.
We are subject to federal, state and local regulation regarding issues of health, safety and protection of the environment. Under these regulations, we may become liable for penalties, damages or costs of remediation. Any changes in laws and government regulations could increase our costs of doing business.
Our operations and the operations of our customers are subject to extensive and frequently changing regulations. More stringent legislation, regulation or taxation of drilling activity could directly curtail such activity or increase the cost of drilling, resulting in reduced levels of drilling activity and therefore reduced demand for our services. Numerous federal, state and local departments and agencies are authorized by statute to issue, and have issued, rules and regulations binding upon participants in the oil and gas industry. Our operations and the markets in which we participate are affected by these laws and regulations and may be affected by changes to such laws and regulations in the future, which may cause us to incur materially increased operating costs or realize materially lower revenue, or both.
Laws protecting the environment generally have become more stringent over time and are expected to continue to do so, which could lead to material increases in costs for future environmental compliance and remediation. The modification or interpretation of existing laws or regulations, or the adoption of new laws or regulations, could curtail exploratory or developmental drilling for oil and natural gas and could limit well site services opportunities. Additionally, environmental groups have advocated increased regulation in certain areas in which we currently operate or in which we may operate in the future. These initiatives could lead to more stringent permitting requirements, increased regulation, possible enforcement actions against the regulated community, and a moratorium or delays on permitting, which could adversely affect our well site service opportunities.
Some environmental laws and regulations may impose strict liability, which means that in some situations we could be exposed to liability as a result of our conduct that was lawful at the time it occurred as a result of conduct of, or conditions caused by, prior operators or other third parties. Clean-up costs and other damages, arising as a result of environmental laws, and costs associated with changes in environmental laws and regulations could be substantial and could have a material adverse effect on our financial condition. In addition, the occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on our financial condition and operations.
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Increased regulation of hydraulic fracturing could result in reductions or delays in oil and gas production by our customers, which could adversely impact our revenue.
We anticipate that a significant portion of our customers’ oil and gas production will be developed from unconventional sources, such as shales, that require hydraulic fracturing as part of the completion process. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate production. We do not engage in any hydraulic fracturing activities ourselves although many of our customers may do so. If additional levels of regulation and permits were required through the adoption of new laws and regulations at the federal or state level that could lead to delays, increased operating costs and prohibitions for our customers, such regulations could reduce demand for our services and materially adversely affect our results of operations.
Climate change legislation, regulatory initiatives and litigation could result in increased operating costs and reduced demand for the services we provide.
In recent years, the U.S. Congress has considered legislation to restrict or regulate greenhouse gases (“GHGs”), such as carbon dioxide and methane that may be contributing to global warming. In addition, almost half of the states, either individually or through multi-state regional initiatives, have begun to address GHGs, primarily through the planned development of emission inventories or regional GHG cap and trade programs.
Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing GHGs would impact our business, either directly or indirectly, any future federal or state laws or implementing regulations that may be adopted to address GHGs could require us to incur increased operating costs and could adversely affect demand for the natural gas our customers extract using our services. Moreover, incentives to conserve energy or use alternative energy sources could reduce demand for oil and natural gas, resulting in a decrease in demand for our services. We cannot predict with any certainty at this time how these possibilities may affect our operations.
Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us.
We plan to enter into agreements with our customers governing the provision of our services, which usually will include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition and results of operations.
Delays in obtaining permits by our future customers or acquisition targets for their operations could impair our business.
Our future customers or acquisition targets are required to obtain permits from one or more governmental agencies in order to perform drilling and/or completion activities. Such permits are typically required by state agencies but can also be required by federal and local governmental agencies. The requirements for such permits vary depending on the location where such drilling and completion activities will be conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued and the conditions that may be imposed in connection with the granting of the permit. Certain regulatory authorities have delayed or suspended the issuance of permits while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. Permitting delays, an inability to obtain new permits or revocation of our future customers’ or acquisition targets’ current permits could cause a loss of revenue and could materially and adversely affect our business, financial condition and results of operations.
Gas drilling and production operations require adequate sources of water to facilitate the fracturing process and the disposal of that water when it flows back to the wellbore. If our future customers or acquisition targets are unable to obtain adequate water supplies and dispose of the water we use or remove at a reasonable cost and within applicable environmental rules, it may have an adverse impact on our business.
New environmental regulations governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells may increase our customers’ operating costs and cause delays, interruptions or termination of operations, the extent of which cannot be predicted, all of which could have an adverse effect on our operations and financial performance. Water that is used to fracture gas wells must be removed when it flows back to the wellbore. Our future customers’ or acquisition targets’ ability to remove and dispose of water will affect production and the cost of water treatment and disposal and may affect their profitability. The imposition of new environmental initiatives and regulations could include restrictions on our customers’ ability to conduct hydraulic fracturing or disposal of waste, including produced water, drilling fluids and other wastes associated with the exploration, development and production of hydrocarbons. This may have an adverse impact on our business.
10
If we are unable to obtain patents, licenses and other intellectual property rights covering our services and products, our operating results may be adversely affected.
Our success depends, in part, on our ability to obtain patents, licenses and other intellectual property rights covering our services and products. To that end, we have obtained certain patents and intend to continue to seek patents on some of our inventions, services and products. While we have patented some of our key technologies, we do not patent all of our proprietary technology, even when regarded as patentable. The process of seeking patent protection can be long and expensive. There can be no assurance that patents will be issued from currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. In addition, effective copyright and trade secret protection may be unavailable or limited in certain countries. Litigation, which could demand significant financial and management resources, may be necessary to enforce our patents or other intellectual property rights. Also, there can be no assurance that we can obtain licenses or other rights to necessary intellectual property on acceptable terms.
If we are not able to develop or acquire new products or our products become technologically obsolete, our results of operations may be adversely affected.
The market for our future services and products is characterized by changing technology and product introduction. As a result, our success is dependent upon our ability to develop or acquire new services and products on a cost-effective basis and to introduce them into the marketplace in a timely manner. While we intend to continue committing substantial financial resources and effort to the development of new services and products, we may not be able to successfully differentiate our future services and products from those of our competitors. Our future clients may not consider our proposed services and products to be of value to them; or if the proposed services and products are of a competitive nature, our clients may not view them as superior to our competitors’ services and products. In addition, we may not be able to adapt to evolving markets and technologies, develop new products, or achieve and maintain technological advantages.
If we are unable to continue developing competitive products in a timely manner in response to changes in technology, our future business and operating results may be materially and adversely affected. In addition, continuing development of new products inherently carries the risk of inventory obsolescence with respect to our older products.
Our ability to conduct our business might be negatively impacted if we experience difficulties with outsourcing and similar third-party relationships.
We plan to outsource certain business and administrative functions and rely on third parties to perform certain services on our behalf. We may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies, such strategies prove to be ineffective or fail to provide expected cost savings, or our third-party providers fail to perform as anticipated, we may experience operational difficulties, increased costs, reputational damage and a loss of business that may have a material adverse effect on our business, financial condition and results of operations.
We have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential stockholders could lose confidence in our financial statements, which would harm the trading price of our common stock.
Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting.
Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated filers or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies, like us, are not required to include an attestation report of their auditors in annual reports.
A report of our management is included under Item 9A “Controls and Procedures.” We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in our annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive a positive attestation from our independent auditors.
11
During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2022, management identified material weaknesses. These material weaknesses were associated with our lack of sufficient segregation of duties within accounting functions, lack of documentation for certain expense transactions, and our lack of sufficient oversight over cyber security. We are undertaking remedial measures, which measures will take time and capital to implement and test, to address these material weaknesses. There can be no assurance that such measures will be sufficient to remedy the material weaknesses identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. See Item 9A “Controls and Procedures” for more information.
Risks Related to Our Common Stock
Because we did not timely comply with our SEC filing obligations, our common stock was downgraded to the OTC Pink Market which may limit our trading market and may adversely affect the liquidity of our common stock.
We did not timely file with the SEC our quarterly and annual reports during 2019 and 2020 and our quarterly reports for the first and second quarters of 2021. As a consequence, our common stock was moved from the OTCQB Venture Market to the OTC Pink Market, which is a more limited market than the OTCQB marketplace. Securities on the Pink Market are more volatile, and the risk to investors is greater. The quotation of our common stock on the OTC Pink Market 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 an adverse impact on our ability to raise capital in the future.
We intend to reapply to the OTC Markets Group for our common stock to trade on the OTCQB, which application may or may not be approved. There can be no assurance that there will be a more active market for our shares of common stock either now or in the future or that stockholders will be able to liquidate their investment or liquidate it at a price that reflects the value of the business. As a result, our stockholders may not find purchasers for our securities should they desire to sell them.
On September 16, 2020, the Securities and Exchange Commission (“SEC”) adopted extensive amendments to Rule 15c2-11 (“Rule”) under the Securities Exchange Act of 1934 (“Exchange Act”). The Rule governs the publication of quotations for securities in the over-the-counter (“OTC”) market, including the OTC Pink Market where our common stock is quoted. Rule 15c2-11 makes it unlawful for a broker-dealer to initiate a quotation for a security unless the broker dealer has in its records prescribed information about the issuer that is current and publicly available. The lack of full time accounting personnel and financial constraints resulting in delayed payments to our external professional services providers have restricted our ability to gather, analyze and properly review information related to financial reporting in a timely manner.
The price of our common stock could experience significant volatility.
The market price for our common stock could fluctuate due to various factors. In addition to other factors described in this section, these factors may include, among others:
| ● | conversion of outstanding stock options or warrants; | |
| ● | announcements by us or our competitors of new investments; | |
| ● | developments in existing or new litigation; | |
| ● | changes in government regulations; | |
| ● | fluctuations in our quarterly and annual operating results; and | |
| ● | general market and economic conditions, including recent inflationary pressures. |
In addition, the stock markets have, in recent years, experienced significant volume and price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stock is traded. Market prices and the trading volume of our stock may continue to experience significant fluctuations due to the matters described above, as well as economic and political conditions in the United States and worldwide, investors’ attitudes towards our business prospects, and changes in the interests of the investing community. As a result, the market price of our common stock has been and may continue to be adversely affected and our stockholders may not be able to sell their shares or to sell them at desired prices.
12
We may be subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption from this rule. In any event, even if our common stock were exempt from this rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
Future sales or perceived sales of our common stock could depress our stock price.
If the holders of shares of our common stock were to attempt to sell a substantial amount of their holdings at once, our stock price could decline. Moreover, the perceived risk of this potential dilution could cause stockholders to attempt to sell their shares and investors to short the shares, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of shares being offered for sale to increase, our stock price would likely further decline. All of these events could combine to make it very difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
Issuance of shares of our common stock upon the exercise of options or warrants will dilute the ownership interest of our existing stockholders and could adversely affect the market price of our common stock.
As of December 31, 2022, we had outstanding stock options to purchase an aggregate of 211,186 shares of common stock and warrants to purchase an aggregate of 2,257,294 shares of common stock. The exercise of the stock options and warrants and the sales of stock issuable pursuant to them would further reduce a stockholder’s percentage voting and ownership interest. Further, the stock options and warrants are likely to be exercised when our common stock is trading at a price that is higher than the exercise price of these options and warrants and we would be able to obtain a higher price for our common stock than we would receive under such options and warrants. The exercise, or potential exercise, of these options and warrants could adversely affect the market price of our common stock and the terms on which we could obtain additional financing. The ownership interest of our existing stockholders may be further diluted through adjustments to certain outstanding warrants under the terms of their anti-dilution provisions.
Concentration of ownership of management and directors may reduce the control by other stockholders over our Company.
Our executive officers and directors own or exercise full or partial control over approximately 89% of our outstanding common stock. Thus, other investors in our common stock may not have much influence on corporate decision-making. In addition, the concentration of control over our common stock in the executive officers and directors could prevent a change in control of our Company.
Our future capital needs could result in dilution of your investment.
Our Board of Directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of our common stock or other securities. These issuances would likely dilute the ownership interests of our current investors and may dilute the net tangible book value per share of our common stock. Investors in subsequent offerings may also have rights, preferences and privileges senior to our current stockholders, which may adversely impact our current stockholders.
We have not paid dividends in the past and our Board of Directors does not expect to pay dividends in the future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future.
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The payment of dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payments of dividends present in any of our future debt agreements and other factors our Board of Directors may deem relevant. If we do not pay dividends, a return on your investment will only occur if our stock price appreciates.
Securities analysts may not initiate coverage for our common stock or may issue negative reports and this may have a negative impact on the market price of our common stock.
The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. It may be difficult for companies such as us, with smaller market capitalizations, to attract a sufficient number of securities analysts that will cover our common stock. If one or more of the analysts who elect to cover our Company downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our Company, we could lose visibility in the market, which in turn could cause our stock price to decline. This could have a negative effect on the market price of our stock.
Nevada law and our charter documents contain provisions that could delay or prevent actual and potential changes in control, even if they would benefit stockholders.
Our articles of incorporation authorize the issuance of preferred shares, which may be issued with dividend, liquidation, voting and redemption rights senior to our common stock without prior approval by the stockholders. The preferred stock may be issued for such consideration as may be fixed from time to time by our Board of Directors. Our Board may issue such shares of preferred stock in one or more series, with such designations, preferences and rights or qualifications, limitations or restrictions thereof as shall be stated in the resolution of resolutions.
The issuance of preferred stock could adversely affect the voting power and other rights of the holders of common stock. Preferred stock may be issued quickly with terms calculated to discourage, make more difficult, delay or prevent a change in control of our Company or make removal of management more difficult. As a result, our Board of Directors’ ability to issue preferred stock may discourage the potential hostile acquirer, possibly resulting in beneficial negotiations. Negotiating with an unfriendly acquirer may result in, among other things, terms more favorable to us and our stockholders. Conversely, the issuance of preferred stock may adversely affect any market price of, and the voting and other rights of the holders of the common stock.
These and other provisions in the Nevada corporate statutes and our charter documents could delay or prevent actual and potential changes in control, even if they would benefit our stockholders.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Pro-Tech leases a building of approximately 400 square feet at 2101 S Eastern Ave, Oklahoma City, OK 73129 at an annual cost of $3,000.
We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.
Item 3. Legal Proceedings
Cause No. CV-47,230; James Capital Energy, LLC and Victory Energy Corporation v. Jim Dial, et al.; In the 142nd District Court of Midland County, Texas.
This is a lawsuit filed on or about January 19, 2010, by James Capital Energy, LLC and our Company against numerous parties for fraud, fraudulent inducement, negligent misrepresentation, breach of contract, breach of fiduciary duty, trespass, conversion and a few other related causes of action. This lawsuit stems from an investment our Company entered into for the purchase of six wells on the Adams Baggett Ranch with the right of first refusal on option acreage.
14
On December 9, 2010, our Company was granted an interlocutory Default Judgment against Defendants Jim Dial, 1st Texas Natural Gas Company, Inc., Universal Energy Resources, Inc., Grifco International, Inc., and Precision Drilling & Exploration, Inc. The total judgment amounted to approximately $17,183,987.
Our Company has added additional parties to this lawsuit. Discovery is ongoing in this case and no trial date has been set at this time.
We believe we will be victorious against all the remaining Defendants in this case.
On October 20, 2011, Defendant Remuda filed a Motion to Consolidate and a Counterclaim against our Company. Remuda is seeking to consolidate this case with two other cases wherein Remuda is the named Defendant. An objection to this motion was filed and the cases have not been consolidated. Additionally, we do not believe that the counterclaim made by Remuda has any legal merit.
There was no further activity related to this case during the years ended December 31, 2022 and 2021, respectively.
Item 4. Mine Safety Disclosure
Not applicable.
15
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the OTC Pink Market operated by OTC Markets Group under the symbol “VYEY.” The following table sets forth the high and low bid information for each quarter for the years ended December 31, 2022 and 2021. Since May 20, 2019 the high and low bid price data for our common stock are reported by the OTC Pink Market. The information reflects prices between dealers, and does not include retail markup, markdown, or commission, and may not represent actual transactions.
The quotation of our common stock on such marketplace 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 an adverse impact on our ability to raise capital in the future.
| Bid Prices | ||||||||||
| Fiscal Year Ended December 31, | Period | High | Low | |||||||
| 2021 | First Quarter | $ | 1.06 | $ | 0.10 | |||||
| Second Quarter | $ | 1.00 | $ | 0.20 | ||||||
| Third Quarter | $ | 0.81 | $ | 0.12 | ||||||
| Fourth Quarter | $ | 0.51 | $ | 0.11 | ||||||
| 2022 | First Quarter | $ | 0.51 | $ | 0.16 | |||||
| Second Quarter | $ | 0.48 | $ | 0.20 | ||||||
| Third Quarter | $ | 0.44 | $ | 0.22 | ||||||
| Fourth Quarter | $ | 0.40 | $ | 0.17 | ||||||
Holders
On December 31, 2022, there were approximately 1,423 holders of record of our common stock. This number excludes the shares owned by shareholders holding shares under nominee security position listings.
The transfer agent for our common stock is Transfer Online, Inc., 512 SE Salmon Street, Portland, Oregon 97214.
Dividend Policy
We have not paid any cash dividends on our common stock and do not expect to do so in the foreseeable future. We intend to apply our earnings, if any, in expanding our operations and related activities. The payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend upon such factors as earnings levels, capital requirements, our financial condition and other factors deemed relevant by the Board of Directors.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Recent Sales of Unregistered Securities
We have not sold any securities during the 2022 fiscal year that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K.
Purchases of Equity Securities
We did not purchase any of our own common stock during 2022 or 2021.
Item 6. [Reserved]
Not applicable.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Victory Oilfield Tech, Inc. MD&A is presented in the following seven sections:
| ● | Cautionary Information about Forward-Looking Statements; |
| ● | Business Overview; |
| ● | Results of Operations; |
| ● | Liquidity and Capital Resources; |
| ● | Critical Accounting Policies and Estimates; |
| ● | Recently Adopted Accounting Standards; and |
| ● | Recently Issued Accounting Standards. |
MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated balance sheets as of December 31, 2022 and 2021 and our audited consolidated statements of operations, stockholders’ equity and cash flows for the years then ended and the related notes thereto.
In MD&A, we use “we,” “our,” “us,” “Victory” and “the Company” to refer to Victory Oilfield Tech. and its wholly-owned subsidiary, unless the context requires otherwise. Amounts and percentages in tables may not total due to rounding. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. We caution readers that important facts and factors described in MD&A and elsewhere in this document sometimes have affected, and in the future could affect our actual results, and could cause our actual results during 2023 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us.
As reported in the Report of Independent Registered Public Accounting Firm on our December 31, 2022 consolidated financial statements, we have suffered recurring losses from operations which raises substantial doubt about our ability to continue as a going concern.
CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
Many statements made in the following discussion and analysis of our financial condition and results of operations and elsewhere in this Annual Report on Form 10-K that are not statements of historical fact, including statements about our beliefs and expectations, are “forward-looking statements” within the meaning of federal securities laws and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan, strategies and capital structure. In particular, the words “anticipate,” “expect,” “suggests,” “plan,” “believe,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast,” variations of such words, and other similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Annual Report on Form 10-K, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions, including, but not limited to, the risks and uncertainties described in Item 1A “Risk Factors” and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include:
| ● | continued operating losses; |
| ● | adverse developments in economic conditions and, particularly, in conditions in the oil and gas industries; |
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| ● | volatility in the capital, credit and commodities markets; |
| ● | our inability to successfully execute on our growth strategy; |
| ● | the competitive nature of our industry; |
| ● | credit risk exposure from our customers; |
| ● | price increases or business interruptions in our supply of raw materials; |
| ● | failure to develop and market new products and manage product life cycles; |
| ● | business disruptions, security threats and security breaches, including security risks to our information technology systems; |
| ● | terrorist acts, conflicts, wars, natural disasters, pandemics and other health crises that may materially adversely affect our business, financial condition and results of operations; |
| ● | failure to comply with anti-terrorism laws and regulations and applicable trade embargoes; |
| ● | risks associated with protecting data privacy; |
| ● | significant environmental liabilities and costs as a result of our current and past operations or products, including operations or products related to our licensed coating materials; |
| ● | transporting certain materials that are inherently hazardous due to their toxic nature; |
| ● | litigation and other commitments and contingencies; |
| ● | ability to recruit and retain the experienced and skilled personnel we need to compete; |
| ● | work stoppages, labor disputes and other matters associated with our labor force; |
| ● | delays in obtaining permits by our future customers or acquisition targets for their operations; |
| ● | our ability to protect and enforce intellectual property rights; |
| ● | intellectual property infringement suits against us by third parties; |
| ● | our ability to realize the anticipated benefits of any acquisitions and divestitures; |
| ● | risk that the insurance we maintain may not fully cover all potential exposures; |
| ● | risks associated with changes in tax rates or regulations, including unexpected impacts of the new U.S. TCJA legislation, which may differ with further regulatory guidance and changes in our current interpretations and assumptions; |
| ● | our substantial indebtedness; |
| ● | the results of pending litigation; |
| ● | our ability to obtain additional capital on commercially reasonable terms may be limited; |
| ● | any statements of belief and any statements of assumptions underlying any of the foregoing; |
| ● | other factors disclosed in this Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission; and |
| ● | other factors beyond our control. |
These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this Annual Report on Form 10-K. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Potential investors should not make an investment decision based solely on our projections, estimates or expectations.
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BUSINESS OVERVIEW
General
We are an Austin, Texas based publicly held oilfield energy technology products company focused on improving well performance and extending the lifespan of the industry’s most sophisticated and expensive equipment. America’s resurgence in oil and gas production is largely driven by new innovative technologies and processes as most dramatically and recently demonstrated by fracking. One such process is hardbanding, in which a wear-resistant alloy is applied to the tool joints of drill pipe or drill collars to prolong the life of oilfield tubulars. We utilize wear-resistant alloys which are mechanically stronger, harder and more corrosion resistant than typical alloys found in the market today. This combination of characteristics creates opportunities for drillers to dramatically improve lateral drilling lengths, well completion time and total well costs.
Growth Strategy
We plan to continue our U.S. oilfield services company acquisition initiative, aimed at companies which are already recognized as a high-quality services provider to strategic customers in the major North American oil and gas basins. When completed, we expect that each of these oilfield services company acquisitions will provide immediate revenue from their current regional customer base, while also providing us with a foundation for channel distribution and product development of our existing products and services. We intend to grow each of these established oilfield services companies by providing better access to capital, more disciplined sales and marketing development, integrated supply chain logistics and infrastructure build out that emphasizes outstanding customer service and customer collaboration, future product development and planning.
We believe that a well-capitalized technology-enabled oilfield services business will provide the basis for more accessible financing to grow the Company and execute our oilfield services company acquisitions strategy.
Recent Developments
Russia conflict with Ukraine
Russia’s conflict with Ukraine and the sanctions and other measures imposed by various governments in response to this conflict have increased the level of economic and political uncertainty globally. While we have no operations in Russia or Ukraine, a significant escalation or expansion of economic disruption or countries subject to sanctions or the conflict’s scope could have a material adverse effect on our results of operations, financial condition and cash flows. We are actively monitoring the broader economic impact on commodities from the current conflict, especially on the price and supply of raw materials.
Impact of Coronavirus Pandemic
During the year ended December 31, 2022, our business continued to recover from the significant adverse impact on the demand for our products and, thus, our income from operations caused by the COVID-19 pandemic, which began in early 2020. While we have seen a return to more stable quarter-over-quarter demand for our products and services, we remain cognizant of future COVID-19 developments, such as impacts from new variants, employee absenteeism, lockdowns or other restrictions that could impact our future results of operations, financial condition and cash flows.
Two additional issues continue to affect national and global market conditions. First, supply chain disruptions have become more frequent in recent months. Thus far, we have not experienced material adverse effects from materials shortages; however, timely sourcing of certain materials is of increased concern. Second, published articles and corporate announcements continue to address the global semiconductor chip shortage, which is anticipated to continue in 2023. This shortage could affect some of our customers which could impact our revenue, volume, and profitability. We continue to actively monitor these developments, including ongoing contact with our suppliers and customers, and adapting to their specific circumstances and forecasts.
VPEG Note
During the period of January 1, 2023 through April 11, 2023 we received additional loan proceeds of $52,500 from VPEG pursuant to the New VPEG Note (See Note 11, Related Party Transactions, to the consolidated financial statements for a definition and description of the New VPEG Note).
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Factors Affecting our Operating Results
The following discussion sets forth certain components of our statements of operations as well as factors that impact those items.
Total revenue
We generate revenue from hardbanding solutions to oilfield operators for drill pipe, weight pipe, tubing and drill collars and grinding services.
Our revenues are generally impacted by the following factors:
| ● | our ability to successfully develop and launch new solutions and services |
| ● | changes in buying habits of our customers |
| ● | changes in the level of competition faced by our products |
| ● | domestic drilling activity and spending by the oil and natural gas industry in the United States |
Total cost of revenue
The costs associated with generating our revenue fluctuate because of changes in sales volumes, average selling prices, product mix, and changes in the price of raw materials and consist primarily of the following:
| ● | hardbanding production materials purchases |
| ● | hardbanding supplies |
| ● | labor |
| ● | depreciation expense for hardbanding equipment |
| ● | field expenses |
Selling, general and administrative expenses (“SG&A”)
Our selling, general and administrative expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as administrative overhead costs, including:
| ● | compensation and benefit costs for management, sales personnel and administrative staff, which includes share-based compensation expense |
| ● | rent expense, communications expense, and maintenance and repair costs |
| ● | legal fees, accounting fees, consulting fees and insurance expenses. |
These expenses are not expected to materially increase or decrease directly with changes in total revenue.
Depreciation and amortization
Depreciation and amortization expenses consist of amortization of intangible assets, depreciation of property, plant and equipment, net of depreciation of hardbanding equipment, which is reported in Total cost of revenue.
Interest expense
Interest expense, net consists primary of interest expense and loan fees on borrowings as well as amortization of debt issuance costs and debt discounts associated with our indebtedness.
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Other (income) expense, net
Other (income) expense, net represents costs incurred, net of income, from various non-operating items including costs incurred in conjunction with our debt refinancing and extinguishment transactions, interest income, gain or loss on disposal of fixed assets, as well as non-operational gains and losses unrelated to our core business.
Income tax benefit (provision)
We are subject to income tax in the various jurisdictions in which we operate. While the extent of our future tax liability is uncertain, our operating results, the availability of any net operating loss carryforwards, any future business combinations, and changes to tax laws and regulations are key factors that will determine our future book and taxable income.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information contained in the accompanying financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our historical results of operations summarized and analyzed below may not necessarily reflect what will occur in the future.
| For the Years Ended December 31, | Percentage | |||||||||||||||
| ($ in thousands) | 2022 | 2021 | Change | Change | ||||||||||||
| Total revenue | $ | 1,624.6 | $ | 815.3 | $ | 809.3 | 99 | % | ||||||||
| Total cost of revenue | 903.6 | 491.7 | 411.9 | 84 | % | |||||||||||
| Gross profit | 721.0 | 323.6 | 397.4 | 123 | % | |||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | 994.5 | 1,031.8 | (37.3 | ) | -4 | % | ||||||||||
| Depreciation and amortization | 21.7 | 20.5 | 1.2 | 6 | % | |||||||||||
| Total operating expenses | 1,016.2 | 1,052.3 | (36.1 | ) | -3 | % | ||||||||||
| Loss from operations | (295.2 | ) | (728.7 | ) | 433.5 | -59 | % | |||||||||
| Other income (expense) | ||||||||||||||||
| Other income | 1.6 | 526.7 | (525.1 | ) | -32819 | % | ||||||||||
| Interest expense | (27.9 | ) | (58.9 | ) | 31.0 | -53 | % | |||||||||
| Total other income (expense) | (26.3 | ) | 467.8 | (494.1 | ) | -106 | % | |||||||||
| Loss from operations before tax benefit | (321.5 | ) | (260.9 | ) | (60.6 | ) | 23 | % | ||||||||
| Tax benefit | - | - | - | 0 | % | |||||||||||
| Loss applicable to common stockholders | $ | (321.5 | ) | $ | (260.9 | ) | $ | (60.6 | ) | 23 | % | |||||
Total Revenue
Total revenue increased by $809,368, or 99%, in the year ended December 31, 2022 as compared to the year ended December 31, 2021 due to an increase in the number of drilling rigs driving hardbanding and grinding revenue generated by Pro-Tech.
Total Cost of Revenue
Total cost of revenue increased by $411,916, or 84%, in the year ended December 31, 2022 as compared to the year ended December 31, 2021 due primarily to increases in materials, direct labor, other direct costs resulting from increases in Pro-Tech’s revenue generating activities as compared to the year ended December 31, 2021. The majority of the increase can be found in direct labor costs. Our gross margin increased to 44% during 2022 as compared to a gross margin of 40% during 2022 because of higher labor and material costs.
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Selling, general and administrative
Selling, general and administrative expenses decreased by $37,303 or 4%, in the year ended December 31, 2022 as compared to the year ended December 31, 2021 due as a result of provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020) and the Coronavirus Response and Consolidated Appropriations Act (2021).
Depreciation and amortization
Depreciation and amortization increased by $1,205 or 6%, during the year ended December 31, 2022 compared to the year ended December 31, 2021 due to fixed asset additions during 2022.
Other income
We reported other income of $1,585 in the year ended December 31, 2022 attributable to interest on a refund of federal payroll taxes as a result of provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020) and the Coronavirus Response and Consolidated Appropriations Act (2021). We reported other income of $526,730 in the year ended December 31, 2021. Of the total amount, $171,173 resulted from a gain on forgiveness of debt recognized in connection with the forgiveness of principal and accrued interest on the First PPP Loan (See Note 5, Notes Payable, to the consolidated financial statements for more information). The remainder of $355,557 resulted primarily from de-recognition of certain accounts payable that are no longer recoverable under Texas law.
Interest expense
Interest expense decreased by $30,970, or 53%, in the year ended December 31, 2022 as compared to the year ended December 31, 2021. The overall decrease resulted from decreases related to forgiveness of the First PPP Note and a reduction in advances pursuant to the New VPEG Note. See Note 6, Notes Payable, to the consolidated financial statements for more information.
Tax benefit
There is no material provision for income tax expenses recorded for the twelve months ended December 31, 2022 and 2021 due to the net operating losses, (“NOL”) in each of the respective years. The realization of future tax benefits is dependent on our ability to generate taxable income within the NOL carry forward period. Given our history of net operating losses, management has determined that it is more-likely-than-not we will not be able to realize the tax benefit of our NOL carry forwards. Current standards require that a valuation allowance thus be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.
Loss Applicable to Common Stockholders
As a result of the foregoing, loss applicable to common stockholders for the year ended December 31, 2022 was $(321,484), or $(0.01) per share, compared to a loss applicable to common stockholders of $(260,859), or $(0.01) per share, for the year ended December 31, 2021 on weighted average shares of 28,037,713 in each of the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern
Historically we have experienced, and we continue to experience, net losses, net losses from operations, negative cash flow from operating activities, and working capital deficits. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date of issuance of the accompanying consolidated financial statements. The accompanying consolidated financial statements do not reflect any adjustments that might result if we are unable to continue as a going concern.
Management anticipates that operating losses will continue in the near term as we continue efforts to leverage our intellectual property through the platform provided by the acquisition of Pro-Tech and, potentially, other acquisitions. In the near term, we are relying on financing obtained from VPEG through the New VPEG Note to fund operations as we seek to generate positive cash flows from operations. See Note 6 “Notes Payable,” and Note 11 “Related Party Transactions,” to the accompanying consolidated financial statements for additional information regarding the New VPEG Note. In addition to increasing cash flow from operations, we will be required to obtain other liquidity resources to support ongoing operations. We are addressing this need by developing additional capital sources which we believe will enable us to execute our recapitalization and growth plan. This plan includes the expansion of Pro-Tech’s core hardbanding business through additional drilling services and the development of additional products and services including wholesale materials, RFID enclosures and mid-pipe coating solutions.
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Based upon capital formation activities as well as the ongoing near-term funding provided through the New VPEG Note, we believe we will have enough capital to cover expenses through at least the next twelve months. We will continue to monitor liquidity carefully, and in the event we do not have enough capital to cover expenses, we will make the necessary and appropriate reductions in spending to remain cash flow positive.
Capital Resources
During the twelve months ended December 31, 2022, we obtained $152,000 from VPEG through the New VPEG Note. On September 3, 2021, we and VPEG entered into an amendment to the New Debt Agreement (the “Third Amendment”), pursuant to which the parties agreed to increase the loan amount to up to $4,000,000 to cover future working capital needs.
As of the date of this Annual Report on Form 10-K and for the foreseeable future, we expect to cover operating shortfalls with funding through the New VPEG Note while we enact our strategy to become a technology-focused oilfield services company and seek additional sources of capital. As of April 11, 2023 the remaining amount available to us for additional borrowings on the New VPEG Note, as amended, was approximately $230,000.
Material Cash Requirements
Our material short-term cash requirements include recurring payroll and benefits obligations for our employees, capital and operating expenditures and other working capital needs. Working capital, defined as total current assets less total current liabilities, fluctuates depending on borrowing as well as effective management of receivables from our purchasers and payables to our vendors. We do not anticipate any material capital expenditures during the twelve months following December 31, 2022. We believe that material cash requirements for operating expenditures in excess of cash provided by operations may range from $0 per month to $20,000 per month during the twelve months following December 31, 2022.
Our long-term material cash requirements from currently known obligations consist of repayment of outstanding borrowings and interest payment obligations.
The following table summarizes our estimated material cash requirements for known obligations as of April 11, 2023. This table does not include amounts payable under obligations where we cannot forecast with certainty the amount and timing of such payments. The following table does not include any cash requirements related to our office space in Texas or the Pro-Tech facility in Oklahoma because the office space in Texas is leased on a month-to-month basis, and the lease agreement for the Pro-Tech facility in Oklahoma is cancellable at any time by giving notice of 90 days.
| ($ in thousands) | Payments Due by Period | |||||||||||||||||||
| Material Cash Requirements | Total | <1 Year | 1-3 Years | 3-5 Years | >5 Years | |||||||||||||||
| Economic Injury Disaster Loan repayment | $ | 150.0 | $ | 8.8 | $ | 17.5 | $ | 17.5 | $ | 106.2 | ||||||||||
| Paycheck Protection Program Loan (1) | 98.6 | - | 49.3 | 49.3 | - | |||||||||||||||
| Arvest Loan | 10.0 | 10.0 | - | - | - | |||||||||||||||
| Vehicle Loan | 31.4 | 7.0 | 14.1 | 10.3 | - | |||||||||||||||
| New VPEG Note | 3,717.5 | 3,717.5 | - | - | - | |||||||||||||||
| $ | 4,007.5 | $ | 3,743.3 | $ | 80.9 | $ | 77.1 | $ | 106.2 | |||||||||||
| (1) | we have applied for full forgiveness of this loan |
We believe it will be necessary to obtain additional liquidity resources to satisfy our material cash requirements. We are addressing our liquidity needs by seeking to generate positive cash flows from operations and developing additional backup capital sources.
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Paycheck Protection Program Loan
On April 15, 2020, we received loan proceeds in the amount of $168,800 under the Paycheck Protection Program (the “PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) and administered by the U.S. Small Business Administration (the “SBA”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The unsecured loan (the “First PPP Loan”) is evidenced by a promissory note (the “First PPP Note”) issued by us, dated April 14, 2020, in the principal amount of $168,800 with Arvest Bank. As of August 6, 2021, we received notice from Arvest Bank and the SBA that the full amount of the First PPP Loan had been forgiven. The amount forgiven, including principal of $168,800 and accrued interest of $2,373, has been recorded as other income in the accompanying consolidated financial statements. The entire amount of recorded gain on forgiveness of the First PPP Loan was excluded from income for tax purposes.
The foregoing description of the First PPP Note does not purport to be complete is qualified in its entirety by reference to the full text of the First PPP Note, a copy of which is filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q for the periods ended June 30, 2020.
On February 1, 2021, we received loan proceeds in the amount of $98,622 pursuant to a second draw loan under the PPP. The unsecured loan (the “Second PPP Loan”) is evidenced by a promissory note (the “Second PPP Note”) issued by us, dated January 28, 2021, in the principal amount of $98,622 with Arvest Bank.
Under the terms of the Second PPP Note and the PPP, interest accrues on the outstanding principal at the rate of 1.0% per annum with a deferral of payments for the first 10 months. The term of the Second PPP Note is five years, though it may be payable sooner in connection with an event of default under the Second PPP Note. To the extent the amount of the Second PPP Loan is not forgiven under the PPP, we will be obligated to make equal monthly payments of principal and interest beginning after a 10-month deferral period provided in the Second PPP Note and through January 28, 2026.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, we may apply for forgiveness for all or a part of the Second PPP Loan. The amount of Second PPP Loan proceeds eligible for forgiveness is based on a formula established by the SBA. Subject to the other requirements and limitations on forgiveness, only that portion of the Second PPP Loan proceeds spent on payroll and other eligible costs during the covered twenty-four-week period will qualify for forgiveness. Although we have used the entire amount of the PPP Loans for qualifying expenses, no assurance is provided that we will obtain forgiveness of the Second PPP Loan in whole or in part.
The Second PPP Note may be prepaid in part or in full, at any time, without penalty. The Second PPP Note provides for certain customary events of default, including our: (i) failure to make a payment when due; (ii) breach of the note terms; (iii) default on any other loan with the Lender; (iv) filing of a bankruptcy petition by or against us; (v) reorganization merger, consolidation or other change in ownership or business structure without the Lender’s prior written consent; (vi) adverse change in financial condition or business operation that the Lender believes may affect our ability to pay the Second PPP Note; and (vii) default on any loan or agreement with another creditor, if the Lender believes the default may materially affect our ability to pay the Second PPP Note. Upon the occurrence of an event of default, the Lender has customary remedies and may, among other things, require immediate payment of all amounts owed under the Second PPP Note, collect all amounts owing from us and file suit and obtain judgment against us.
The foregoing description of the Second PPP Note does not purport to be complete and is qualified in its entirety by reference to the full text of the Second PPP Note, a copy of which is filed as Exhibit 10.7 to the Quarterly Report on Form 10-Q for the periods ended June 30, 2020.
Economic Injury Disaster Loan
Additionally, on June 15, 2020, we received $150,000 in loan funding from the SBA under the Economic Injury Disaster Loan (“EIDL”) program administered by the SBA, which program was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note, dated June 11, 2020 (the “EIDL Note”) in the original principal amount of $150,000 with the SBA, the lender.
Under the terms of the EIDL Note, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of the EIDL Note is 30 years, though it may be payable sooner upon an event of default under the EIDL Note. Under the EIDL Note, we are obligated to make equal monthly payments of principal and interest beginning in December 2022 through the maturity date of June 11, 2050. The EIDL Note may be prepaid in part or in full, at any time, without penalty.
We made interest-only payments of $2,924 and $5,117 on the EIDL Note for the years ended December 31, 2022 and 2021, respectively.
We recorded interest expense of $5,703 and $5,703 related to the EIDL Note for the years ended December 31, 2022 and 2021, respectively.
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The EIDL Note provides for certain customary events of default, including: (i) a failure to comply with any provision of the EIDL Note, the related Loan Authorization and Agreement, or other EIDL loan documents; (ii) a default on any other SBA loan; (iii) a sale or transfer of, or failure to preserve or account to SBA’s satisfaction for, any of the collateral or its proceeds; (iv) a failure of us or anyone acting on its behalf to disclose any material fact to SBA; (v) the making of a materially false or misleading representation to SBA by us or anyone acting on our behalf; (vi) a default on any loan or agreement with another creditor, if SBA believes the default may materially affect our ability to pay the EIDL Note; (vii) a failure to pay any taxes when due; (viii) if we become the subject of a proceeding under any bankruptcy or insolvency law; (ix) if a receiver or liquidator is appointed for any part of our business or property; (x) the making of an assignment for the benefit of creditors; (xi) has any adverse change in financial condition or business operation that SBA believes may materially affect our ability to pay the EIDL Note; (xii) effects any reorganization, merger, consolidation, or other transaction changing ownership or business structure without SBA’s prior written consent; or (xiii) becomes the subject of a civil or criminal action that SBA believes may materially affect our ability to pay the EIDL Note. The foregoing description of the EIDL Note does not purport to be complete and is qualified in its entirety by reference to the full text of the EIDL Note, a copy of which is filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q for the periods ended June 30, 2020.
New VPEG Note
See Note 11, Related Party Transactions to the accompanying consolidated financial statements, for a definition and description of the VPEG Note and the New VPEG Note. The outstanding balance on the New VPEG Note was $3,717,476 and $3,550,276 at December 31, 2022 and 2021, respectively. We recorded interest expense of $15,200 and $42,600 related to the New VPEG Note for the twelve months ended December 31, 2022 and 2021, respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current of future effect on our financial condition.
Cash Flow
The following table provides detailed information about our net cash flows for the years ended December 31, 2022 and 2021:
| Years Ended December 31, | ||||||||
| ($ in thousands) | 2022 | 2021 | ||||||
| Net cash used in operating activities | $ | (98.8 | ) | $ | (658.0 | ) | ||
| Net cash used in investing activities | (71.0 | ) | (33.0 | ) | ||||
| Net cash provided by financing activities | 190.5 | 551.6 | ||||||
| Net increase (decrease) in cash and cash equivalents | 20.7 | (139.4 | ) | |||||
| Cash and cash equivalents at beginning of period | 52.9 | 192.3 | ||||||
| Cash and cash equivalent at end of period | $ | 73.6 | $ | 52.9 | ||||
Net cash used in operating activities for the year ended December 31, 2022 was $98,839. Net loss adjusted for non-cash items (depreciation and amortization) used cash of $157,433. Changes in operating assets and liabilities provided cash of $58,594. The most significant uses of cash were increases in prepaid and other current assets and inventory due to purchases, as well as an increase in accounts receivable. These changes were offset by cash provided by increases in accrued and other short-term liabilities and accounts payable.
This compares to net cash used in operating activities for the year ended December 31, 2021 of $658,026. Net loss adjusted for non-cash items (depreciation, amortization, and Paycheck Protection Program loan forgiveness) used cash of $255,860. Changes in operating assets and liabilities used cash of $402,166. The most significant uses of cash were increases in accounts receivable due to timing of collections, inventory due to purchases, and prepaids and other current assets, as well as a significant decrease in accounts payable. These changes were partially offset by cash provided by a decrease in other receivables due to a refund of a receivable for tax overpayment and an increase in accrued and other short-term liabilities.
Net cash used in investing activities for the year ended December 31, 2022 was $70,992 due to fixed asset purchases. This compares to $32,998 of cash used by investing activities for the year ended December 31, 2021 due to fixed asset purchases.
Net cash provided by financing activities for the year ended December 31, 2022 was $190,559 compared to $551,595 in net cash provided by financing activities during the year ended December 31, 2021. In each of the 2022 and 2021 periods, net cash provided by financing activities was primarily due to debt financing proceeds from affiliates in addition to debt financing proceeds from one PPP loans. See Note 6, Notes Payable, to the consolidated financial statements, and Note 11, Related Party Transactions, to the consolidated financial statements for more information regarding our financing activities.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.
While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements, areas that are particularly significant include:
| ● | Cash and cash equivalents; | |
| ● | Property, plant, and equipment; | |
| ● | Other property and equipment; | |
| ● | Fair value; | |
| ● | Concentration of Credit Risk, Accounts Receivable and Allowance for Doubtful Accounts; | |
| ● | Inventory | |
| ● | Goodwill and other intangible assets | |
| ● | Revenue recognition | |
| ● | Business combinations | |
| ● | Share-based compensation, | |
| ● | Income taxes and | |
| ● | Earnings per share |
In addition, please refer to Note 1, Organization and Summary of Significant Accounting Policies, to the consolidated financial statements for further discussion of our significant accounting policies.
Cash and Cash Equivalents:
We consider all liquid investments with original maturities of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents. We had no cash equivalents at December 31, 2022 and 2021.
Property, plant and equipment
Property, plant and equipment is stated at cost. Maintenance and repairs are charged to expense as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. When property, plant and equipment is disposed of, the cost and related accumulated depreciation are removed from the consolidated balance sheets and any gain or loss is included in Other income/(expense) in the consolidated statement of operations.
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Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, as follows:
| Asset category | Useful Life | |
| Welding equipment, Trucks, Machinery and equipment | 5 years | |
| Office equipment | 5 - 7 years | |
| Computer hardware and software | 7 years |
See Note 3, Property, plant and equipment, to the consolidated financial statements for further information.
Other Property and Equipment:
Our office equipment in Austin, Texas is being depreciated on the straight-line method over the estimated useful life of three to seven years.
Fair Value:
Financial Accounting Standard Board, or FASB, Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, established a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring fair value. This framework defined three levels of inputs to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined by FASB ASC Topic 820 hierarchy are as follows:
Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
Leve1 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Leve1 2 input must be observable for substantially the full term of the asset or liability; and
Leve1 3 - unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).
Receivables are carried at amounts that approximate fair value. Receivables are recognized net of an allowance for doubtful accounts receivable. The allowance for doubtful accounts reflects the current estimate of credit losses expected to be incurred over the life of the financial asset, based on historical experience current conditions and reasonable forecasts of future economic conditions. Accounts receivable are written down or off when a portion or all of such account receivable is determined to be uncollectible.
Inventories are valued at the lower of cost or net realizable value with cost being determined on the weighted average cost method. Elements of cost in inventories include raw materials and direct labor.
Supplies are valued at the lower of cost or net realizable value; cost is generally determined by the first-in first-out cost method. Inventories deemed to have costs greater than their respective market values are reduced to net realizable value with a loss recorded in income in the period recognized.
At December 31, 2022 and 2021, the carrying value of our financial instruments such as accounts receivable and payables approximated their fair values based on the short-term nature of these instruments. The carrying value of short-term notes and advances approximated their fair values because the underlying interest rates approximated market rates at the balance sheet dates.
Concentration of Credit Risk, Accounts Receivable and Allowance for Doubtful Accounts
Financial instruments that potentially subject us to concentrations of credit risk primarily consist of cash and cash equivalents placed with high credit quality institutions and accounts receivable due from Pro-Tech’s customers. Management evaluates the collectability of accounts receivable based on a combination of factors. If management becomes aware of a customer’s inability to meet its financial obligations after a sale has occurred, we record an allowance to reduce the net receivable to the amount that it reasonably believes to be collectable from the customer. Accounts receivable are written off at the point they are considered uncollectible. An allowance of $0 and $5,002 has been recorded at December 31, 2022 and 2021, respectively. We suffered $5,002 losses in 2022 and no losses in 2021. If the financial conditions of Pro-Tech’s customers were to deteriorate or if general economic conditions were to worsen, additional allowances may be required in the future.
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As of December 31, 2022 and 2021, three and three customers comprised 78.2% and 64.9% of our gross accounts receivables, respectively. For the years ended December 31, 2022 and 2021, three and four customers comprised 52.7% and 60.1%, respectively, of our total revenues.
Inventory
Our inventory balances are stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventory consists of products purchased by Pro-Tech for use in the process of providing hardbanding services. No impairment losses on inventory were recorded for the twelve months ended December 31, 2022 or 2021.
Goodwill and Other Intangible Assets
Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis or the pattern in which economic benefits are consumed, if reliably determinable. We review our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
We perform an impairment test of goodwill annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. We have determined that the Company is comprised of one reporting unit at December 31, 2022 and 2021, and the goodwill balances of $145,149 at December of each year are included in the single reporting unit. To date, an impairment of goodwill has not been recorded. For the year ended December 31, 2022, we bypassed the qualitative assessment, and proceeded directly to the quantitative test for goodwill impairment.
Our Goodwill balance consists of the amount recognized in connection with the acquisition of Pro-Tech. Our other intangible assets are comprised of contract-based and marketing-related intangible assets, as well as acquisition-related intangibles. Acquisition-related intangibles include the value of Pro-Tech’s trademark and customer relationships, both of which are being amortized over their expected useful lives of 10 years beginning August 2018.
Revenue Recognition
We recognize revenue as it satisfies contractual performance obligations by transferring promised goods or services to the customers. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service.
We have one revenue stream, which relates to the provision of hardbanding services by its subsidiary Pro-Tech. All performance obligations of our contracts with customers are satisfied over the duration of the contract as customer-owned equipment is serviced and then made available for immediate use as completed during the service period. We have reviewed our contracts with Pro-Tech customers and determined that due to their short-term nature, with durations of several days of service at the customer’s location, it is only those contracts that occur near the end of a financial reporting period that will potentially require allocation to ensure revenue is recognized in the proper period. We have reviewed all such transactions and recorded revenue accordingly.
For the years ended December 31, 2022 and 2021, all of our revenue was recognized from contracts with oilfield operators, and we did not recognize impairment losses on any receivables or contract assets.
Because our contracts have an expected duration of one year or less, we have elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date in the Company’s consolidated financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill.
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Share-Based Compensation
From time to time we may issue stock options, warrants and restricted stock as compensation to employees, directors, officers and affiliates, as well as to acquire goods or services from third parties. In all cases, we calculate share-based compensation using the Black-Scholes option pricing model and expenses awards based on fair value at the grant date on a straight-line basis over the requisite service period, which in the case of third party suppliers is the shorter of the period over which services are to be received or the vesting period, and for employees, directors, officers and affiliates is typically the vesting period. Share-based compensation is included in general and administrative expenses in the consolidated statements of operations. See Note 8, Warrants for Stock, and Note 9, Stock Options to the consolidated financial statements, for further information.
Income Taxes:
We account for income taxes in accordance with FASB ASC 740, Income Taxes, which requires an asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Deferred tax assets include tax loss and credit carry forwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Earnings per Share:
Basic earnings per share are computed using the weighted average number of common shares outstanding at December 31, 2022 and 2021, respectively. The weighted average number of common shares outstanding was 28,037,713 at each of December 31, 2022 and 2021. Diluted earnings per share reflect the potential dilutive effects of common stock equivalents such as options, warrants and convertible securities.
The following table outlines outstanding common stock shares and common stock equivalents:
| Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Common Stock Shares Outstanding | 28,037,713 | 28,037,713 | ||||||
| Common Stock Equivalents Outstanding | ||||||||
| Warrants | 2,257,294 | 2,648,621 | ||||||
| Stock Options | 211,186 | 211,186 | ||||||
| Total Common Stock Equivalents Outstanding | 2,468,480 | 2,859,807 | ||||||
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. We adopted ASU 2021-04 effective January 1, 2022. The adoption of ASU 2021-04 did not have any impact on our consolidated financial statement presentation or disclosures.
RECENTLY ADOPTED ACCOUNTING STANDARDS
From time to time, new accounting pronouncements are issued by the FASB that are adopted by us as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our financial statements upon adoption.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, and has since issued various amendments including ASU No. 2018-19, ASU No. 2019-04, and ASU No. 2019-05. The guidance and related amendments modify the accounting for credit losses for most financial assets and require the use of an expected loss model, replacing the currently used incurred loss method. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The new guidance is effective for us for the fiscal year, and interim periods within the fiscal year, beginning January 1, 2023. The adoption of ASU 2016-13 is not expected to have a material impact on our consolidated financial statements.
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In
February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). This guidance, as amended by subsequent
ASU’s on the topic, improves transparency and comparability among companies by recognizing right of use (ROU) assets and lease
liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for public
business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with
early adoption permitted. We adopted ASU No. 2016-02 in our fiscal year beginning January 1, 2019 and used the optional transition method
provided by the FASB in ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11, “Leases
(Topic 842): Targeted Improvements”, with no restatement of comparative periods. The adoption of ASU 2016-02 had no material impact
on the Company’s consolidated financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, “Liabilities – Supplier Finance Programs.” The ASU codifies disclosure requirements for supplier financing programs. The new standard is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. We are currently evaluating the impact of ASU 2022-04 on our financial statements but do not expect the guidance to have a material impact.
Management believes that other 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 do not have a material impact on the Company’s present or near future financial statements.
We believe that other 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 do not have a material impact on our present or near future financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 is incorporated by reference to the Financial Statements beginning at page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of December 31, 2022. Based upon, and as of the date of this evaluation, our chief executive officer and principal financial officer determined that, because of the material weaknesses described below, our disclosure controls and procedures were not effective.
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Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial and accounting officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that:
| (1) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | |
| (2) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and | |
| (3) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this evaluation, management used the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on our evaluation, we determined that, as of December 31, 2022, our internal control over financial reporting was not effective due to the following material weaknesses.
We lack sufficient segregation of duties within accounting functions, which is a basic internal control. In addition, we currently do not have any full-time accounting personnel. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency represents a material weakness.
In order to cure the foregoing material weakness, the initiation of transactions, the custody of assets and the recording of transactions are performed by separate individuals to the extent possible. In addition, we will look to hire additional personnel with technical accounting expertise. As necessary, we will continue to engage consultants or outside accounting firms in order to ensure proper accounting for our consolidated financial statements.
We lack sufficient training and oversight with respect to potential cyber security risks, which is an important element of an effective control environment. We are not aware of any breaches of our information systems, nor any theft, loss, or unwanted exposure of data contained within our information systems; however, due to the risk that a material misstatement of our annual or interim financial statements may not be prevented or detected on a timely basis as a result of this control deficiency, our management has concluded that the control deficiency represents a material weakness.
To remediate the foregoing material weakness, we intend to implement additional preventive and detective controls, including establishment of new procedures for oversight over cyber security by our Board of Directors, employee cyber security training, and implementation of new risk assessment and incident response protocols.
We intend to complete the remediation of the material weaknesses discussed above as soon as practicable but we can give no assurance that we will be able to do so. Designing and implementing an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weaknesses that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.
The lack of full time accounting personnel and financial constraints resulting in delayed payments to our external professional services providers restricted our ability to gather, analyze and properly review information related to financial reporting in a timely manner during 2019, 2020, and the first six months of 2021. For these reasons, we were unable to timely file our quarterly reports and annual report during 2019 and 2020, and the first and second quarters of 2021.
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Due to resource constraints, over a period of approximately thirty months we did not have the resources to fund sufficient staff and pay professional fees to ensure that all our reports were filed timely. However, our management has recently obtained, and continues to actively seek, additional sources of capital which allowed us to bring current our obligations to our external professional services providers.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
Except for the identified material weaknesses, there was no change in our internal control over financial reporting during the fourth quarter of fiscal year 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
We have no information to disclose that was required to be disclosed in a report on Form 8-K during the fourth quarter of fiscal year 2022, that was not reported.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table sets forth information regarding the names, ages (as of April 11, 2023) and positions held by each of our executive officers.
| Name | Age | Positions Held | ||
| Kevin DeLeon | 55 | Chief Executive Officer, President, Principal Financial and Accounting Officer and Director | ||
| Ronald W. Zamber | 61 | Chairman of the Board of Directors | ||
| Robert Grenley | 65 | Director | ||
| Ricardo A. Salas | 58 | Director |
Kevin DeLeon – Chief Executive Officer, President, Principal Financial and Accounting Officer and Director
Mr. DeLeon has served as a member of our Board of Directors since August 21, 2017. He has served as a General Partner and Director of Corporate Strategy for Visionary Private Equity Group, a private equity firm that invests in early stage, high growth companies, since 2015. Mr. DeLeon has spent more than twenty-five years in global finance, both on the buy and sell side, in New York, London, and Tokyo. For the past decade, his focus has been in natural resources, most recently as Senior Advisor to our Company since February, 2015. Prior to joining our Company, he served in the same capacity at Miller Energy, a NYSE-listed Alaska focused oil and gas exploration and production company, from June 2013 to February 2015. At Miller, Mr. DeLeon was responsible for overseeing corporate strategy, with particular focus on financing the company’s drilling program and acquisitions, as well as investor relations and corporate governance. Prior to Miller, Mr. DeLeon spent approximately six years spearheading the U.S. operations for a boutique U.K. investment bank, with a strong focus in E&P and metals & mining. Early in his career, he worked for Yamaichi, one of the Big Four Japanese securities houses, where he received the Chairman’s award for his consistent revenue contributions. Mr. DeLeon was also a founding partner of Bracken Partners, a London-based corporate finance advisory and fund management firm with particular focus on the U.K. private equity markets. He has served as both a senior executive and non-executive director of numerous public and private U.K. and U.S. companies. Mr. DeLeon is a 1990 graduate of Yale University, with a B.A in Economics. Mr. DeLeon was selected to serve on our Board of Directors due to his extensive global finance experience.
Ronald W. Zamber, M.D. Director – Chairman of the Board
Dr. Zamber has served as a member of our Board of Directors since January 24, 2009. Dr. Zamber is founder, Managing Director and Chairman of Visionary Private Equity Group since 2010, and a Managing Director of Navitus since 2011, Navitus Partners since 2011 and James Capital Energy since 2007. He brings more than 20 years of experience in corporate management and business development extending across the public, private and non-profit arenas. Dr. Zamber has helped build profitable companies in healthcare, private and public petroleum E&P, consumer products and Internet technology industries. Dr. Zamber is a Board-Certified Ophthalmologist and founder of International Vision Quest, a non-profit organization that performs humanitarian medical and surgical missions, builds water treatment facilities and supports food delivery programs to impoverished communities around the world. He has served as an examiner with the American Board of Ophthalmologists and Secretariat for State Affairs with the American Academy of Ophthalmology. Dr. Zamber is the 2009 recipient of Notre Dame’s prestigious Harvey Foster Humanitarian Award. He now serves on the advisory board of Feed My Starving Children, one of the highest rated and fastest growing charities in the country. Dr. Zamber received his Bachelor’s degree with high honors from the University of Notre Dame and his medical degree with honors from the University of Washington. Dr. Zamber was selected to serve on our Board of Directors due to his over 20 years of experience in corporate management and business development extending across the public, private and non-profit arenas.
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Robert Grenley – Director
Mr. Grenley has served as a member of our Board of Directors since June 1, 2010. Mr. Grenley has over 25 years of experience in financial management, business development and entrepreneurial experience. This financial experience includes 12 years managing early-stage organizations with equity capital. Mr. Grenley’s broader financial management experience includes over 10 years of direct portfolio management and investment expertise including common and preferred stock, stock options, corporate and municipal bonds as well as syndicated investments and private placements. Recently, Mr. Grenley has been associated with the Visionary Private Equity Group since 2012, and is currently its Director of Capital Development, as well as the Chief Financial Officer of the Visionary Media Group, a wholly owned subsidiary. Mr. Grenley served as the Chief Financial Officer of POP Gourmet, a fast-growing Seattle-based snack food company, since early 2013, where he was responsible for the creation, production, and execution of POP Gourmet’s first equity financing ($2.5 million in 2013), its second equity financing ($8.5 million in 2015), and its first credit facility ($2 million in 2015). As the company has matured, it has been able to attract a consumer product group specialist as Chief Financial Officer, and Mr. Grenley currently retains the Director, Corporate Finance title, focusing on credit facilities, investor relations, and other related matters. Mr. Grenley holds a BA in Economics from Duke University. Mr. Grenley was selected to serve on our Board of Directors due to his over 25 years of experience in financial management, business development and entrepreneurial experience.
Ricardo A. Salas – Director
Mr. Salas has served as a member of our Board of Directors since August 21, 2017. He has served as the President of Armacor Holdings, LLC, an investment holding company for Liquidmetal Coatings, LLC, which develops, supplies and provides application service of leading metallic coatings which protect against wear and corrosion in oil and gas, power, pulp & paper and other industrial environments, since May of 2012. He has served as a Director of Liquidmetal Coatings, LLC since June 2007. Between 2008 and 2015, Mr. Salas served as Executive Vice President and a Director of Liquidmetal Technologies, Inc., a pioneer in developing and commercializing a family of amorphous metal alloys. In 2001, he founded and became CEO of iLIANT Corporation, a health care information technology and outsourcing service provider. Following iLIANT’s merger with MED3000 Group, Inc., he continued to serve as a Director of MED3000 Group, Inc. and on its Special Committee leading up to its sale to McKesson Corporation in December of 2012. He serves as a Director of Advantum Health, a private equity backed healthcare IT enabled services company. Mr. Salas received an Economics degree from Harvard College in 1986. Mr. Salas was selected to serve on our Board of Directors due to his extensive management experience.
Our directors currently have terms which will end at our next annual meeting of the stockholders or until their successors are elected and qualify, subject to their prior death, resignation or removal.
Family Relationships
There are no family relationships among any of our officers or directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
| ● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| ● | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; |
| ● | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; | |
| ● | been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
| ● | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| ● | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self- regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
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Corporate Governance
Governance Structure
We chose to appoint a separate chairman of our Board of Directors who is not our Chief Executive Officer. Our Board of Directors has made this decision based on their belief that an independent Chairman of the Board can act as a balance to the Chief Executive Officer, who also serves as a non-independent director.
The Board’s Role in Risk Oversight
Our Board of Directors administers its risk oversight function as a whole by making risk oversight a matter of collective consideration. While management is responsible for identifying risks, our Board of Directors has charged the Audit Committee of the Board of Directors with evaluating financial and accounting risk and the Compensation Committee of the Board of Directors with evaluating risks associated with employees and compensation. Investor- related risks are usually addressed by the Board of Directors as a whole. We believe an independent Chairman of the Board adds an additional layer of insight to our Board of Directors’ risk oversight process.
Independent Directors
In considering and making decisions as to the independence of each of the directors of our Company, the Board considered transactions and relationships between our Company and each director (and each member of such director’s immediate family and any entity with which the director or family member has an affiliation such that the director or family member may have a material indirect interest in a transaction or relationship with such entity). For the year ended December 31, 2022, the Board has determined that the following directors and director nominees are independent as defined in applicable SEC and Nasdaq Stock Market rules and regulations, and that each constitutes an “Independent Director” as defined in Nasdaq Marketplace Rule 5605: Ron Zamber, Rob Grenley, and Ricardo A. Salas.
Audit Committee
Our Board of Directors has established an Audit Committee to assist it in fulfilling its responsibilities for general oversight of our accounting and financial reporting processes, audits of our financial statements, and internal control and audit functions. The Audit Committee is responsible for, among other things:
| ● | appointing, evaluating and determining the compensation of our independent auditors; | |
| ● | establishing policies and procedures for the review and pre-approval by the Audit Committee of all auditing services and permissible non-audit services (including the fees and terms thereof) to be performed by the independent auditor; | |
| ● | reviewing with our independent auditors any audit problems or difficulties and management’s response; | |
| ● | reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the Securities Act of 1933, as amended; | |
| ● | discussing our financial statements with management and our independent auditors; | |
| ● | reviewing and discussing reports from the independent auditor on critical accounting policies and practices used by our Company and alternative accounting treatments; | |
| ● | reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant internal control deficiencies; | |
| ● | reviewing and discussing with management our major financial risk exposures and the steps management has taken to monitor and control such exposures; | |
| ● | meeting separately and periodically with management and our internal and independent auditors; | |
| ● | reviewing matters related to the corporate compliance activities of our Company; |
| ● | reviewing and approving our code of ethics, as it may be amended and updated from time to time, and reviewing reported violations of the code of ethics; | |
| ● | annually reviewing and reassessing the adequacy of our Audit Committee charter; and | |
| ● | such other matters that are specifically delegated to our Audit Committee by our Board from time to time. |
35
The Audit Committee works closely with management as well as our independent auditors. The Audit Committee has the authority to obtain advice and assistance from, and receive appropriate funding from us for, outside legal, accounting or other advisors as the Audit Committee deems necessary to carry out its duties.
Our Board of Directors has adopted a written charter for the Audit Committee that meets the applicable standards of the SEC and The Nasdaq Stock Market. The members of the Audit Committee are Ronald W. Zamber, Robert Grenley and Ricardo A. Salas. Ricardo A. Salas serves as the chair of the Audit Committee.
Our Board has determined that Ricardo A. Salas qualifies as an “audit committee financial expert” under Item 407(d)(5) of Regulation S-K and has the requisite accounting or related financial expertise required by applicable Nasdaq Stock Market rules.
Compensation Committee
Our Board of Directors has established a Compensation Committee to discharge our Board’s responsibilities relating to compensation of our Chief Executive Officer and other executive officers and to provide general oversight of compensation structure. Other specific duties and responsibilities of the Compensation Committee include:
| ● | reviewing and approving objectives relevant to executive officer compensation; | |
| ● | evaluating performance and recommending to the Board of Directors the compensation, including any incentive compensation, of our Chief Executive Officer and other executive officers in accordance with such objectives; | |
| ● | reviewing and approving compensation packages for new executive officers and termination packages for executive officers; | |
| ● | recommending to the Board of Directors the compensation for our directors; | |
| ● | administering our equity compensation plans and other employee benefit plans; | |
| ● | reviewing periodic reports from management on matters relating to our personnel appointments and practices; | |
| ● | evaluating periodically the Compensation Committee charter; | |
| ● | such other matters that are specifically delegated to our Compensation Committee by our Board from time to time. |
Our Board of Directors has adopted a written charter for the Compensation Committee. The members of the Compensation Committee are Ronald W. Zamber and Ricardo A. Salas. Dr. Zamber serves as the chair of the Compensation Committee. Our Board of Directors determined that each member of the Compensation Committee satisfies the independence requirements of The Nasdaq Stock Market.
The Compensation Committee reviews executive compensation from time to time and reports to the Board of Directors, which makes all final decisions with respect to executive compensation.
Director Nominations
We currently do not have a standing nominating committee or committee performing similar functions. Our entire Board of Directors undertakes the functions that would otherwise be undertaken by a nominating committee.
Our Board utilizes a variety of methods for identifying and evaluating nominees for our directors. Our Board regularly assesses the appropriate size of our Board and whether any vacancies on the Board are expected due to retirement or other circumstances.
When considering potential director nominees, the Board considers the candidate’s character, judgment, diversity, age, skills, including financial literacy and experience in the context of the needs of our Company and of our existing directors. The Board also seeks director nominees who are from diverse backgrounds and who possess a range of experiences as well as a reputation for integrity. The Board considers all of these factors to ensure that our Board as a whole possesses a broad range of skills, knowledge and experience useful to the effective oversight and leadership of our Company.
36
Our Board does not have a specific policy with regard to the consideration of candidates recommended by stockholders, however any nominees proposed by our stockholders will be considered on the same basis as nominees proposed by the Board. If a stockholder wants to submit a candidate for consideration to the Board, the stockholder may submit a proposal to our interim Corporate Secretary, Kevin DeLeon, in with the stockholder communication procedures set forth below.
Stockholder Communications with the Board of Directors
Our Board of Directors has established a process for stockholders to communicate with the Board of Directors or with individual directors. Stockholders who wish to communicate with our Board of Directors or with individual directors should direct written correspondence to Kevin DeLeon, Corporate Secretary, at kdeleon@vpeg.net, or to the following address (our principal executive offices): Board of Directors, c/o Corporate Secretary, 3355 Bee Caves Road, Suite 608, Austin, Texas 78746.
The Corporate Secretary will forward such communications to our Board of Directors or the specified individual director to whom the communication is directed unless such communication is unduly hostile, threatening, illegal or similarly inappropriate, in which case the Corporate Secretary has the authority to discard the communication or to take appropriate legal action regarding such communication.
Code of Ethics
We have adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Such code of ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, and reporting of violations of the code.
We are required to disclose any amendment to, or waiver from, a provision of our code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions. We intend to use our website as a method of disseminating this disclosure, as permitted by applicable SEC rules. Any such disclosure will be posted to our website within four business days following the date of any such amendment to, or waiver from, a provision of our code of ethics.
Delinquent Section 16(a) Reports
None.
Item 11. Executive Compensation
Summary Compensation Table - Fiscal Years Ended December 31, 2022 and 2021
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officers received total annual salary and bonus compensation in excess of $100,000.
| Name and Principal Position | Year | Salary ($) | Option Awards ($)(1) | Total ($) | |||||||||||
| Kevin DeLeon, Chief Executive Officer (2) | 2022 | 120,000 | — | 120,000 | |||||||||||
| 2021 | 109,000 | — | 109,000 | ||||||||||||
| (1) | These amounts shown represent the aggregate grant date fair value for options granted to the named executive officers computed in accordance with FASB ASC Topic 718. |
| (2) | On October 25, 2019 we entered into an employment agreement with Mr. Kevin DeLeon having a term of one year. Pursuant to the employment agreement, we agreed to pay Mr. DeLeon a salary of $120,000 per year, effective November 1, 2019. In addition, in consideration for past services, we issued Mr. DeLeon a three year warrant to purchase 100,000 shares of the Company’s stock at $0.80 per share. Mr. DeLeon will also be eligible to participate in the standard benefits plans offered to similarly situated employees by us from time to time, subject to plan terms and our generally applicable policies. On October 26, 2020, the term of the employment agreement was extended to October 31, 2021, with all other terms in the employment agreement remaining in effect. Mr. DeLeon and the Company have agreed to continue Mr. DeLeon’s employment beyond the extended October 31, 2021 termination of the employment agreement, on the same terms as set forth in the employment agreement, terminable at the option of either party. |
37
Director Compensation
No member of our Board of Directors received any compensation for services as a director during the fiscal year ended December 31, 2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial ownership of our voting stock as of April 11, 2023 (i) by each person who is known by us to beneficially own more than 5% of our voting stock; (ii) by each of our officers, directors and director nominees; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of our Company, 3355 Bee Caves Road, Suite 608, Austin, Texas 78746.
| Amount of Beneficial Ownership(1) | Percent of | |||||||||||||||||||||||||||
| Name and Address of Beneficial Owner | Shares | Options | Warrants | Common Stock | Series D PS Converted to CS | Percent of Common Stock(2) | Total Voting Stock(3) | |||||||||||||||||||||
| Ronald Zamber, Director (4) | 7,261,501 | - | 1,882,294 | 9,164,644 | - | 30.56 | % | 30.56 | % | |||||||||||||||||||
| Robert Grenley, Director (5) | 3,357 | - | - | 3,357 | - | 0.01 | % | 0.01 | % | |||||||||||||||||||
| Ricardo A. Salas, Director (6) | 20,000,000 | - | - | 20,000,000 | - | 66.84 | % | 66.84 | % | |||||||||||||||||||
| Kevin DeLeon, Interim CEO and Director | - | - | - | - | - | 0.0 | % | 0.0 | % | |||||||||||||||||||
| All directors and officers as a group (4 persons named above) | 27,264,858 | - | 1,882,294 | 29,247,152 | - | 97.41 | % | 97.41 | % | |||||||||||||||||||
Less than 1%
| (1) | Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator. |
| (2) | Based on 28,037,713 shares of our common stock outstanding as of April 11, 2023. |
| (3) | There were no shares of voting stock other than common stock outstanding as of April 11, 2023. |
| (4) | Includes 291,866 shares of common stock; 4,382,872 shares of common stock owned by Navitus Energy Group, of which Mr. Zamber is the managing member of its managing partner, James Capital Consulting, LLC; 2,787 shares of common stock and warrants for the purchase of 2,343 shares of common stock exercisable within 60 days owned by James Capital Consulting, LLC; 64,951 shares of common stock owned by Visionary Investments, LLC, of which Dr. Zamber is sole member; and 2,519,025 shares of common stock and warrants for the purchase of 1,900,800 shares of common stock exercisable within 60 days owned by Visionary Private Equity Group I, LP, of which Dr. Zamber is senior managing director of its general partner, Visionary PE GP I, LLC. |
| (5) | Includes 3,357 shares of common stock. |
| (6) | Represents 20,000,000 shares issued to Armacor Victory Ventures, LLC, pursuant to the Supplementary Agreement, dated April 10, 2018 among the Company and Armacor Victory Ventures, LLC. Mr. Salas is the managing member of Armacor Victory Ventures, LLC. |
38
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information about the securities authorized for issuance under our incentive plans as of December 31, 2022.
| Equity Compensation Plan Information | ||||||||||||||||
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||||||
| (a) | (b) | (c) | ||||||||||||||
| Equity compensation plans approved by security holders | 211,186 | $ | 2.15 | 15,000,000 | ||||||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||||||
| Total | 211,186 | $ | 2.15 | 15,000,000 | ||||||||||||
In 2014, our Board of Directors and stockholders approved our 2014 Long Term Incentive Plan. No shares remain available under the 2014 Long Term Incentive Plan.
In 2017, our Board of Directors and stockholders approved our 2017 Equity Incentive Plan. As of December 31, 2022, no shares have been granted under our 2017 Equity Incentive Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons
There have been no transactions since the beginning of our 2021 fiscal year, and there are no any currently proposed transactions, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”).
Promoters and Certain Control Persons
We did not have any promoters at any time during the past five fiscal years.
Director Independence
Our board of directors has determined that Ron Zamber, Robert Grenley and Ricardo A. Salas are independent directors as that term is defined in the applicable rules of the Nasdaq Stock Market.
Item 14. Principal Accounting Fees and Services
Audit Fees
For the years ended December 31, 2022 and 2021, we paid $115,850 and $119,715, respectively, in fees to our principal accountants.
Tax Fees
None.
All Other Fees
None.
All fees described above for the years ended December 31, 2022 and 2021, were approved by the Board of Directors.
39
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) List of Documents Filed as a Part of This Report:
(1) Index to the Consolidated Financial Statements:
| Page | ||
| Audited Consolidated Financial Statements for the Years Ended December 31, 2022 and 2021 | ||
| Report of Independent Registered Public Accounting Firm | F-2 | |
| Consolidated Balance Sheets as of December 31, 2022 and 2021 | F-4 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 | F-5 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 | F-6 | |
| Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2022 and 2021 | F-7 | |
| Notes to Consolidated Financial Statements for the Years Ended December 31, 2022 and 2021 | F-8 |
(2) Index to Consolidated Financial Statement Schedules:
All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or because it is not required.
(3) Index to Exhibits:
40
41
| * | Filed herewith. |
| † | Executive Compensation Plan or Agreement. |
| ++XBRL | (Extensible Business Reporting Language) information is furnished and not filed or a part of a report for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
Item 16. Form 10-K Summary
None.
42
PART IV
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Victory Oilfield Tech, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Victory Oilfield Tech, Inc. and Subsidiary (the Company) as of December 31, 2022 and 2021, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements 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.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the entity has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility
of the entity’s management. Our responsibility is to express an opinion on these 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 consolidated 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 entity’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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
F-2
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involve especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition
Description of the Critical Audit Matter
The Company has recognized revenue from oilfield services during the year ended December 31, 2022 totaling $1,624,635.
The Company generates revenue from contracts with customers in the oilfield service industry, which is notorious for its handshake and undocumented agreements and arrangements. Revenue recognition from these agreements and arrangements, including the appropriate recognition, measurement, and disclosure, was significant to our audit because the amounts resulting from these transactions are material to the Company’s consolidated financial statements. Auditing these transactions is critical because of the nature and extent of auditor effort required to address the matter, and the risk that these transactions are inappropriately considered for recognition, measurement, or disclosure.
How We Addressed the Critical Audit Matter in Our Audit
We obtained an understanding and evaluated the design of controls over the Company’s recognition, measurement, and disclosure of revenue from contracts with customers. Our procedures also included, among others, vouching revenues recognized to evidence of the completion of the contract, and inquiring of management and staff about unusual revenue terms.
We have served as Victory Oilfield Tech, Inc.'s auditor since 2013.
PCAOB ID
April 11, 2023
F-3
VICTORY OILFIELD TECH, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued and other short-term liabilities | ||||||||
| Short term advance from shareholder | ||||||||
| Short term notes payable, net | ||||||||
| Current portion of long-term notes payable | - | |||||||
| Short term notes payable - affiliate, net | ||||||||
| Total current liabilities | ||||||||
| Long term notes payable, net | ||||||||
| Total long-term liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred Series D stock, $ | ||||||||
| Common stock, $ | ||||||||
| Receivable for stock subscription | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
VICTORY OILFIELD TECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For
the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Total revenue | $ | $ | ||||||
| Total cost of revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Selling, general and administrative | ||||||||
| Depreciation and amortization | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Other income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Total other income (expense) | ( | ) | ||||||
| Loss from operations before tax benefit | ( | ) | ( | ) | ||||
| Tax expense | ||||||||
| Loss applicable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Loss per share applicable to common stockholders | ||||||||
| $ | ( | ) | $ | ( | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
VICTORY OILFIELD TECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For
the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of original issue discount | ||||||||
| Amortization of intangible assets | ||||||||
| Depreciation | ||||||||
| Paycheck Protection Program loan forgiveness | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Other receivables | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid and other current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued and other short-term liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Investment in fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from notes payable - affiliate | ||||||||
| Payments on long term notes payable | ( | ) | ||||||
| Proceeds from credit line | ||||||||
| Repayment of short term advance from shareholder | ( | ) | ||||||
| Proceeds from long term notes payable | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Beginning cash and cash equivalents | ||||||||
| Ending cash and cash equivalents | $ | $ | ||||||
| For
the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
VICTORY OILFIELD TECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
| Common
Stock $0.001 Par Value | Preferred
D $0.001 Par Value | Receivable for Stock | Additional Paid In | Accumulated | Total | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Subscription | Capital | Deficit | Equity | |||||||||||||||||||||||||
| January 1, 2021 Balance | $ | $ | | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Loss attributable to common stockholders | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| December 31, 2021 Balance | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Common
Stock $0.001 Par Value | Preferred
D $0.001 Par Value | Receivable for Stock | Additional Paid In | Accumulated | Total | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Subscription | Capital | Deficit | Equity | |||||||||||||||||||||||||
| January 1, 2022 Balance | $ | $ | | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Loss attributable to common stockholders | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| December 31, 2022 Balance | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Victory Oilfield Tech, Inc.
Notes to the Consolidated Financial Statements
Note 1 – Organization and Summary of Significant Accounting Policies:
Organization and nature of operations
Victory Oilfield Tech, Inc. (“Victory”), a Nevada corporation, is an oilfield technology products company offering patented oil and gas drilling products designed to improve well performance and extend the lifespan of the industry’s most sophisticated and expensive equipment. On July 31, 2018, Victory entered into an agreement to acquire Pro-Tech Hardbanding Services, Inc., an Oklahoma corporation (“Pro-Tech”), which provides various hardbanding solutions to oilfield operators for drill pipe, weight pipe, tubing and drill collars.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Victory and Pro-Tech, its wholly owned subsidiary, for all periods presented. All significant intercompany transactions and accounts between Victory and Pro-Tech (together, the “Company”) have been eliminated.
The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any future periods.
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, all adjustments, consisting of normal and recurring accruals considered necessary for a fair presentation, have been included.
Going Concern
Historically
the Company has experienced, and continues to experience, net losses, net losses from operations, negative cash flow from operating activities,
and working capital deficits. The Company has incurred an accumulated deficit of $(
The Company anticipates that operating losses will continue in the near term as our management continues efforts to leverage the Company’s intellectual property through the platform provided by the acquisition of Pro-Tech and, potentially, other acquisitions. The Company intends to meet near-term obligations through funding under the New VPEG Note (see Note 11, Related Party Transactions) as it seeks to generate positive cash flow from operations.
In addition to increasing cash flow from operations, we will be required to obtain other liquidity resources in order to support ongoing operations. We are addressing this need by developing additional capital sources which we believe will enable us to execute our recapitalization and growth plan. This plan includes the expansion of Pro-Tech’s core hardbanding business through additional drilling services and the development of additional products and services including wholesale materials, RFID enclosures and mid-pipe coating solutions.
Based upon anticipated new sources of capital, and ongoing near-term funding provided through the New VPEG Note, we believe we will have enough capital to cover expenses through at least the next twelve months. We will continue to monitor liquidity carefully, and in the event we do not have enough capital to cover expenses, we will make the necessary and appropriate reductions in spending to remain cash flow positive. While management believes our plans help mitigate the substantial doubt that we are a going concern, there is no guarantee that our plans will be successful or if they are, will fully alleviate the conditions that raise substantial doubt that we are a going concern.
F-8
Capital Resources
During
2022, the Company received loan proceeds of $
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used primarily when accounting for depreciation and amortization expense, various common stock, warrants and option transactions, evaluation of intangible assets, and loss contingencies.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents. The Company had no cash equivalents at December 31, 2022 and December 31, 2021.
Fair Value
Financial Accounting Standard Board, or FASB, Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, established a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring fair value. This framework defined three levels of inputs to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined by FASB ASC Topic 820 hierarchy are as follows:
Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
Leve1 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Leve1 2 input must be observable for substantially the full term of the asset or liability; and
Leve1 3 - unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).
Receivables are carried at amounts that approximate fair value. Receivables are recognized net of an allowance for doubtful accounts receivable. The allowance for doubtful accounts reflects the current estimate of credit losses expected to be incurred over the life of the financial asset, based on historical experience current conditions and reasonable forecasts of future economic conditions. Accounts receivable are written down or off when a portion or all of such account receivable is determined to be uncollectible.
At December 31, 2022 and 2021, the carrying value of the Company’s financial instruments such as accounts receivable and payables approximated their fair values based on the short-term nature of these instruments. The carrying value of short-term notes and advances approximated their fair values because the underlying interest rates approximated market rates at the balance sheet dates.
F-9
Revenue Recognition
The Company recognizes revenue as it satisfies contractual performance obligations by transferring promised goods or services to the customers. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for those promised goods or services A good or service is transferred to a customer when, or as, the customer obtains control of that good or service.
The Company has one revenue stream, which relates to the provision of hardbanding services by its subsidiary Pro-Tech. All performance obligations of the Company’s contracts with customers are satisfied over the duration of the contract as customer-owned equipment is serviced and then made available for immediate use as completed during the service period. The Company has reviewed its contracts with Pro-Tech customers and determined that due to their short-term nature, with durations of several days of service at the customer’s location, it is only those contracts that occur near the end of a financial reporting period that will potentially require allocation to ensure revenue is recognized in the proper period. The Company has reviewed all such transactions and recorded revenue accordingly.
For
the twelve months ended December 31, 2022 and 2021, the Company recognized revenue of $
Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations.
Concentration of Credit Risk, Accounts Receivable and Allowance for Doubtful Accounts
Financial
instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents placed
with high credit quality institutions and accounts receivable due from Pro-Tech’s customers. Management evaluates the collectability
of accounts receivable based on a combination of factors. If management becomes aware of a customer’s inability to meet its financial
obligations after a sale has occurred, the Company records an allowance to reduce the net receivable to the amount that it reasonably
believes to be collectable from the customer. Accounts receivable are written off at the point they are considered uncollectible. An
allowance of $
As
of December 31, 2022 and 2021,
Inventory
The Company’s inventory balances are stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventory consists of products purchased by Pro-Tech for use in the process of providing hardbanding services. No impairment losses on inventory were recorded for the twelve months ended December 31, 2022 and 2021.
Inventories are valued at the lower of cost or net realizable value with cost being determined on the weighted average cost method. Elements of cost in inventories include raw materials and direct labor.
Supplies are valued at the lower of cost or net realizable value: cost is generally determined by the first-in, first-out cost method. Inventories deemed to have costs greater than their respective market values are reduced to net realizable value with a loss recorded in income in the period recognized.
Property, Plant and Equipment
Property, Plant and Equipment is stated at cost. Maintenance and repairs are charged to expense as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. When property, plant and equipment is disposed of, the cost and related accumulated depreciation are removed from the consolidated balance sheets and any gain or loss is included in Other income/(expense) in the consolidated statements of operations.
F-10
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, as follows:
| Asset category | Useful Life | |
| Welding equipment, Trucks, Machinery and equipment | ||
| Office equipment | ||
| Computer hardware and software |
See Note 3, Property, Plant and Equipment, for further information.
Goodwill and Other Intangible Assets
Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis or the pattern in which economic benefits are consumed, if reliably determinable. The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
We
perform an impairment test of goodwill annually and whenever events or changes in circumstances indicate that the carrying amount may
not be recoverable. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill,
exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. We have determined that the Company
is comprised of one reporting unit at December 31, 2022 and 2021, and the goodwill balances of $
The
Company’s Goodwill balance consists of the amount recognized in connection with the acquisition of Pro-Tech. The Company’s
other intangible assets are comprised of contract-based and marketing-related intangible assets, as well as acquisition-related intangibles.
Acquisition-related intangibles include the value of Pro-Tech’s trademark and customer relationships, both of which are being amortized
over their expected useful lives of
See Note 4, Goodwill and Other Intangible Assets, for further information.
PPP Loans
The Company accounts for loans issued pursuant to the Paycheck Protection Program of the U.S. Small Business Administration as debt. The Company will continue to record the Second PPP Note as debt until either (1) the Second PPP Note is partially or entirely forgiven and the Company has been legally released, at which point the amount forgiven will be recorded as income or (2) the Company pays off the Second PPP Note. See Note 6, Notes Payable, for further information.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date in the Company’s consolidated financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill.
Share-Based Compensation
The Company from time to time may issue stock options, warrants and restricted stock as compensation to employees, directors, officers and affiliates, as well as to acquire goods or services from third parties. In all cases, the Company calculates share-based compensation using the Black-Scholes option pricing model and expenses awards based on fair value at the grant date on a straight-line basis over the requisite service period, which in the case of third party suppliers is the shorter of the period over which services are to be received or the vesting period, and for employees, directors, officers and affiliates is typically the vesting period. Share-based compensation is included in general and administrative expenses in the consolidated statements of operations. See Note 9, Stock Options, for further information.
F-11
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires an asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Deferred tax assets include tax loss and credit carry forwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Earnings per Share
Basic
earnings per share are computed using the weighted average number of common shares outstanding at December 31, 2022 and 2021, respectively.
The weighted average number of common shares outstanding was
The following table outlines outstanding common stock shares and common stock equivalents:
| Years
Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Common Stock Shares Outstanding | ||||||||
| Common Stock Equivalents Outstanding | ||||||||
| Warrants | ||||||||
| Stock Options | ||||||||
| Total Common Stock Equivalents Outstanding | ||||||||
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company adopted ASU 2021-04 effective January 1, 2022. The adoption of ASU 2021-04 did not have any impact on the Company’s consolidated financial statement presentation or disclosures.
Note 2 – Recent Accounting Pronouncements
Recently Issued Accounting Standards
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, “Liabilities – Supplier Finance Programs.” The ASU codifies disclosure requirements for supplier financing programs. The new standard is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. We are currently evaluating the impact of ASU 2022-04 on our financial statements but do not expect the guidance to have a material impact.
Management believes that other 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 do not have a material impact on the Company’s present or near future financial statements.
F-12
Recently Adopted Accounting Standards
From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, and has since issued various amendments including ASU No. 2018-19, ASU No. 2019-04, and ASU No. 2019-05. The guidance and related amendments modify the accounting for credit losses for most financial assets and require the use of an expected loss model, replacing the currently used incurred loss method. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The new guidance is effective for the Company for the fiscal year, and interim periods within the fiscal year, beginning January 1, 2023. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). This guidance, as amended by subsequent ASU’s on the topic, improves transparency and comparability among companies by recognizing right of use (ROU) assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. We adopted ASU No. 2016-02 in our fiscal year beginning January 1, 2019 and used the optional transition method provided by the FASB in ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, with no restatement of comparative periods. The adoption of ASU 2016-02 had no material impact on the Company’s consolidated financial statements upon adoption.
Note 3 – Property, plant and equipment
Property, plant and equipment, at cost, consisted of the following at December 31:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Trucks | $ | $ | ||||||
| Welding equipment | ||||||||
| Office equipment | ||||||||
| Machinery and equipment | ||||||||
| Furniture and office equipment | ||||||||
| Computer hardware | ||||||||
| Computer software | ||||||||
| Total property, plant and equipment, at cost | ||||||||
| Less -- accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation
expense for the twelve months ended December 31, 2022 and 2021 was $
Note 4 – Goodwill and Other Intangible Assets
The
Company recorded $
The following table shows intangible assets, other than goodwill, and related accumulated amortization as of December 31, 2022 and 2021.
| December 31, 2022 | December 31, 2021 | |||||||
| Pro-Tech customer relationships | $ | $ | ||||||
| Pro-Tech trademark | ||||||||
| Accumulated amortization & impairment | ( | ) | ( | ) | ||||
| Other intangible assets, net | $ | $ | ||||||
F-13
Note 5 – Income Taxes
There was no material provision for (benefit of) income taxes for the years ended December 31, 2022 and 2021, after the application of ASC 740 “Income Taxes.”
The
Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses in the event of
an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited
as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”).
For
the years ending December 31, 2022 and 2021, the Company incurred a net operating loss carry forward of $
Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the net operating loss carry forwards. ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Accordingly, the Company has recorded a full valuation allowance against its net deferred tax assets at December 31, 2022 and 2021, respectively. Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the deferred tax benefit associated with the use of the net operating loss carry forwards and will recognize a deferred tax asset at that time.
All
deferred income tax assets and liabilities, including NOL’s have been measured using a
Significant components of the Company’s deferred income tax assets are as follows:
| 2022 | 2021 | |||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Depreciation | ( | ) | ( | ) | ||||
| Equity based expenses | ||||||||
| Other | ( | ) | ( | ) | ||||
| Deferred taxes | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred income tax assets | $ | $ | ||||||
Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:
| 2022 | 2021 | |||||||
| Federal taxes at statutory rate | % | % | ||||||
| Noncompulsory stock warrants | % | % | ||||||
| State tax & other permanent items | % | % | ||||||
| Change in state tax rate | ( | )% | % | |||||
| Intangible impairment | % | % | ||||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| Effective income tax rate | % | % | ||||||
ASC 740 provides guidance which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the current accounting guidelines, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2022 and 2021 the Company does not have a liability for unrecognized tax benefits.
The Company has elected to include interest and penalties related to uncertain tax positions as a component of income tax expense. To date, no penalties or interest has been accrued.
Tax years 2019 and forward are open and subject to examination by the Federal taxing authority. The Company is not currently under examination and it has not been notified of a pending examination.
F-14
Note 6 – Notes Payable
Notes payable were comprised of the following at December 31:
| 2022 | 2021 | |||||||
| Economic Injury Disaster Loan | $ | $ | ||||||
| Vehicle Loan | ||||||||
| Paycheck Protection Program Loan | ||||||||
| Arvest Loan | ||||||||
| New VPEG Note | ||||||||
| Total notes payable | $ | $ | ||||||
| Current portion of notes payable | ||||||||
| Long term notes payable, net | $ | $ | ||||||
Amortization
of discount and issuance costs during the year ended December 31, 2022 was $
Future payments on notes payable at December 31, 2022 were:
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 and beyond | ||||
| Total | $ |
Paycheck Protection Program Loan
On
April 15, 2020, the Company received loan proceeds in the amount of $
As
of August 6, 2021, the Company received notice from Arvest Bank and the SBA that the full amount of the First PPP Loan had been forgiven.
The amount forgiven, including principal of $
The foregoing description of the First PPP Note does not purport to be complete is qualified in its entirety by reference to the full text of the First PPP Note, a copy of which is filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q for the periods ended June 30, 2020.
On
February 1, 2021, the Company received loan proceeds in the amount of $
Under
the terms of the Second PPP Note and the PPP, interest accrues on the outstanding principal at the rate of
F-15
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for forgiveness for all or a part of the Second PPP Loan. The amount of the Second PPP Loan proceeds eligible for forgiveness is based on a formula established by the SBA. Subject to the other requirements and limitations on the Second PPP Loan forgiveness, only that portion of the Second PPP Loan proceeds spent on payroll and other eligible costs during the covered twenty-four -week period will qualify for forgiveness. Although the Company has used the entire amount of the Second PPP Loan for qualifying expenses, no assurance is provided that the Company will obtain forgiveness of the Second PPP Loan in whole or in part.
The
Second PPP Note may be prepaid in part or in full, at any time, without penalty. The
The foregoing description of the Second PPP Note does not purport to be complete is qualified in its entirety by reference to the full text of the Second PPP Note, a copy of which is filed as Exhibit 10.7 to the Quarterly Report on Form 10-Q for the periods ended June 30, 2020.
Economic Injury Disaster Loan
Additionally,
on June 15, 2020, the Company received $
Under
the terms of the EIDL Note, interest accrues on the outstanding principal at the rate of
The
Company made interest-only payments of $
The
Company recorded interest expense of $
The EIDL Note provides for certain customary events of default, including: (i) a failure to comply with any provision of the EIDL Note, the related Loan Authorization and Agreement, or other EIDL loan documents; (ii) a default on any other SBA loan; (iii) a sale or transfer of, or failure to preserve or account to SBA’s satisfaction for, any of the collateral or its proceeds; (iv) a failure of the Company or anyone acting on its behalf to disclose any material fact to SBA; (v) the making of a materially false or misleading representation to SBA by the Company or anyone acting on their behalf; (vi) a default on any loan or agreement with another creditor, if SBA believes the default may materially affect the Company’s ability to pay the EIDL Note; (vii) a failure to pay any taxes when due; (viii) if the Company becomes the subject of a proceeding under any bankruptcy or insolvency law; (ix) if a receiver or liquidator is appointed for any part of the Company’s business or property; (x) the making of an assignment for the benefit of creditors; (xi) has any adverse change in financial condition or business operation that SBA believes may materially affect the Company’s ability to pay the EIDL Note; (xii) effects any reorganization, merger, consolidation, or other transaction changing ownership or business structure without SBA’s prior written consent; or (xiii) becomes the subject of a civil or criminal action that SBA believes may materially affect the Company’s ability to pay the EIDL Note. The foregoing description of the EIDL Note does not purport to be complete is qualified in its entirety by reference to the full text of the EIDL Note, a copy of which is filed as Exhibit 10.6 to the Quarterly Report on Form 10-Q for the periods ended June 30, 2020.
F-16
New VPEG Note
See
Note 11, Related Party Transactions, for a definition and description of the VPEG Note and the New VPEG Note. The outstanding
balance on the New VPEG Note was $
Vehicle Loan
On
June 14, 2022, Pro-Tech, the Company’s wholly-owned subsidiary, entered into a Promissory Note and Security Agreement in the amount
of $
Arvest Loan
On
July 11, 2022, Pro-Tech, the Company’s wholly-owned subsidiary, entered into a Promissory Note and Security Agreement with Arvest
Bank for a revolving loan for up to $
Note 7 – Stockholders’ Equity
Preferred Stock
Series D Preferred Stock
The
terms of the Series D Preferred Stock are governed by a certificate of designation (the “Series D Certificate of Designation”)
filed by the Company with the Nevada Secretary of State on August 21, 2017. Pursuant to the Series D Certificate of Designation, the
Company designated
Dividends. Except for stock dividends and distributions for which adjustments are to be made pursuant to the Series D Certificate of Designation, holders of Series D Preferred Stock are not entitled to dividends.
Liquidation.
Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of shares of Series D Preferred
Stock are entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any payment shall
be made to the holders of shares of common stock, an amount equal to the Stated Value per share, plus any dividends declared but unpaid
thereon. The “Stated Value” shall initially be $
Voting Rights. Holders of shares of Series D Preferred Stock vote together with the holders of common stock on an as-if-converted-to-common-stock basis. Except as provided by law, the holders of shares of Series D Preferred Stock vote together with the holders of shares of common stock as a single class. However, as long as any shares of Series D Preferred Stock are outstanding, the Company may not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series D Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series D Preferred Stock or alter or amend the Series D Certificate of Designation, (b) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to the Series D Preferred Stock, (c) amend the Company’s articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders, (d) increase the number of authorized shares of Series D Preferred Stock, or (e) enter into any agreement with respect to any of the foregoing.
F-17
Redemption.
To the extent of funds legally available for the payment therefor, the Company is required to redeem the outstanding shares of Series
D Preferred Stock, at a redemption price equal to the Stated Value per share (subject to adjustment), payable in cash in equal monthly
installments commencing on the fifteenth (15th) calendar day following the date that the Company obtained stockholder approval (which
was obtained on November 20, 2017) (each such date, a “Redemption Date”). If funds legally available for redemption on the
Redemption Date are insufficient to redeem the total number of outstanding shares of Series D Preferred Stock, the holders of shares
of Series D Preferred Stock shall share ratably in any funds legally available for redemption of such shares according to the respective
amounts which would be payable with respect to the full number of shares owned by them if all such outstanding shares were redeemed in
full. At any time thereafter when additional funds are legally available for the redemption, such funds will be used, at the end of the
next succeeding fiscal quarter, to redeem the balance of such shares, or such portion thereof for which funds are then legally available.
During the year ended December 31, 2017, the Company redeemed
Conversion.
If, following the date when stockholder approval has been obtained, any portion of the redemption price has not been paid by the Company
on any Redemption Date, the holder may, at its option, elect to convert each share of Series D Preferred Stock plus accrued, but unpaid
dividends thereon, into such number of fully paid and non-assessable shares of common stock as is determined by dividing the Stated Value
by the Conversion Price in effect on such conversion date; provided, however, that in lieu of such conversion and before giving effect
thereto, the Company may elect to bring current the redemption payments payable. The “Conversion Price” is initially equal
to $
Other Rights. Holders of Series D Preferred Stock have no preemptive or subscription rights and there are no sinking fund provisions applicable to Series D Preferred Stock.
Common Stock
The Company did not issue any shares of its common stock during the years ended December 31, 2022 and 2021.
Note 8 – Warrants for Stock
At December 31, 2022 and 2021 warrants outstanding for common stock of the Company were as follows:
| Number
of Shares Underlying Warrants | Weighted Average Exercise Price | |||||||
| Balance January 1, 2021 | $ | |||||||
| Granted | $ | - | ||||||
| Exercised | $ | |||||||
| Canceled | ( | ) | $ | |||||
| Balance December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Exercised | ||||||||
| Canceled | ( | ) | $ | |||||
| Balance December 31, 2022 | $ | |||||||
All warrants were valued using the Black Scholes pricing model.
The following table summarizes information about underlying outstanding warrants for common stock of the Company outstanding and exercisable as of December 31, 2022:
| Warrants Outstanding | Weighted | Warrants Exercisable | ||||||||||||||||||
| Range of Exercise Prices | Number
of Shares Underlying Warrants | Weighted Average Exercise Price | Average Remaining Contractual Life (in years) | Number
of Shares Underlying Warrants | Weighted Average Exercise Price | |||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
F-18
The following table summarizes information about underlying outstanding warrants for common stock of the Company outstanding and exercisable as of December 31, 2021:
| Warrants Outstanding | Weighted | Warrants Exercisable | ||||||||||||||||||
| Range of Exercise Prices | Number
of Shares Underlying Warrants |
Weighted Average Exercise Price |
Average Remaining Contractual Life (in years) |
Number
of Shares Underlying Warrants |
Weighted Average Exercise Price |
|||||||||||||||
| $ |
$ | $ | ||||||||||||||||||
| $ |
$ | |
|
$ | |
|||||||||||||||
At
each of December 31, 2022 and 2021 the aggregate intrinsic value of the warrants outstanding and exercisable was $
Note 9 – Stock Options
The following table summarizes stock option activity in the Company’s stock-based compensation plans for the years ended December 31, 2022 and 2021. All options issued were non-qualified stock options.
| Number
of Options | Weighted Average Exercise Price | Aggregate Intrinsic Value (1) | Number
of Options Exercisable | Weighted Average Fair Value At Date of Grant | ||||||||||||||||
| Outstanding at January 1, 2021 | $ | $ | ||||||||||||||||||
| Granted at Fair Value | ||||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Canceled | ||||||||||||||||||||
| Outstanding at December 31, 2021 | $ | $ | $ | |||||||||||||||||
| Granted at Fair Value | ||||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Canceled | ||||||||||||||||||||
| Outstanding at December 31, 2022 | $ | $ | $ | |||||||||||||||||
| (1) |
During the year ended December 31, 2022, the Company did not grant employee stock options or stock options for consulting services.
The fair value of the stock option grants is amortized over the respective vesting period using the straight-line method. Forfeitures and cancellations are recorded as they occur.
Compensation
expense related to stock options included in general and administrative expense in the accompanying consolidated statements of operations
was $
As of December 31, 2022, all share-based compensation for unvested options, net of expected forfeitures, was fully recognized.
Stock options are granted at the fair market value of the Company’s common stock on the date of grant. Options granted to officers and other employees vest immediately or over 36 months as provided in the option agreements at the date of grant.
The fair value of options granted are estimated using the Black-Scholes Option Pricing Model. No options were granted in 2022 or 2021.
F-19
The following table summarizes information about stock options outstanding at December 31, 2022:
| Range of Exercise Prices | Number
of Options | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Aggregate Intrinsic Value | Number Exercisable | Weighted Average Exercise Price of Exercisable Options | Aggregate Intrinsic Value | |||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The following table summarizes information about options outstanding at December 31, 2021:
| Range of Exercise Prices | Number
of Options | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Aggregate Intrinsic Value | Number Exercisable | Weighted Average Exercise Price of Exercisable Options | Aggregate Intrinsic Value | |||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||||||||||
A summary of the Company’s non-vested stock options at December 31, 2022 and December 31, 2021 and changes during the years are presented below.
| Non-Vested Stock Options | Options | Weighted Average Grant Date Fair Value | ||||||
| Non-Vested at December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Vested | $ | |||||||
| Forfeited | $ | |||||||
| Non-Vested at December 31, 2022 | $ |
Note 10 – Commitments and Contingencies
Rent
expense for the years ended December 31, 2022 and 2021 was $
We are subject to legal claims and litigation in the ordinary course of business, including but not limited to employment, commercial and intellectual property claims. The outcome of any such matters is currently not determinable.
Note 11 – Related Party Transactions
Settlement Agreement
On
August 21, 2017, the Company entered into a secured convertible original issue discount promissory note issued by the Company to VPEG
(the “VPEG Note”). The VPEG Note was subsequently amended on October 11, 2017 and again on January 17, 2018. On April 10,
2018, the Company and Visionary Private Equity Group I, LP, a Missouri limited partnership (“VPEG”) entered into a settlement
agreement and mutual release (the “Settlement Agreement”), pursuant to which VPEG agreed to release and discharge the Company
from its obligations under the VPEG Note (see below). Pursuant to the Settlement Agreement, and in consideration and full satisfaction
of the outstanding indebtedness of $
F-20
On
April 10, 2018, in connection with the Settlement Agreement, the Company and VPEG entered into a loan Agreement (the “New Debt
Agreement”), pursuant to which VPEG may, at is discretion, loan to the Company up to $
On
October 30, 2020, the Company and VPEG entered into an amendment to the New Debt Agreement (the “Amendment”), pursuant to
which the parties agreed to increase the loan amount to up to $
On
January 31, 2021, the Company and VPEG entered into an amendment to the New Debt Agreement (the “Second Amendment”), pursuant
to which the parties agreed to increase the loan amount to up to $
On
September 3, 2021, the Company and VPEG entered into an amendment to the New Debt Agreement (the “Third Amendment”), pursuant
to which the parties agreed to increase the loan amount to up to $
See Note 6, Notes Payable, and Note 15, Subsequent Events, for further information.
Note 12 – Segment and Geographic Information and Revenue Disaggregation
The
Company has one reportable segment: Hardband Services. Hardband Services provides various hardbanding solutions to oilfield operators
for drill pipe, weight pipe, tubing and drill collars. All Hardband Services revenue is generated in the United States, and all assets
related to Hardband Services are located in the United States. Because the Company operates with only
To provide users of the financial statements with information depicting how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, we have disaggregated revenue by customer, with customers representing more than five percent of total annual revenues comprising the first category, and those representing less than five percent of total annual revenues comprising the second category.
| Year
Ended December 31, | ||||||||
| Category | 2022 | 2021 | ||||||
| >5% | $ | $ | ||||||
| <5% | ||||||||
| $ | $ | |||||||
F-21
Note 13 – Net Loss Per Share
Basic loss per share is computed using the weighted average number of common shares outstanding at December 31, 2022 and 2021, respectively. Diluted loss per share reflects the potential dilutive effects of common stock equivalents such as options, warrants and convertible securities.
The following table sets forth the computation of net loss per common share – basic and diluted:
| Years
Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Numerator: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Denominator | ||||||||
| Basic weighted average common shares outstanding | ||||||||
| Effect of dilutive securities | ||||||||
| Diluted weighted average common shares outstanding | ||||||||
| Net loss per common share | ||||||||
| $ | ( | ) | $ | ( | ) | |||
For
the years ended December 31, 2022 and 2021, potentially dilutive shares of
Note 14 – Employee Benefit Plan
The
Company sponsors a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code covering full-time employees
of Pro-Tech (“Pro-Tech 401(k) Plan”). The Pro-Tech 401(k) Plan is intended to qualify under Section 401 of the Internal
Revenue Code. Participants meeting certain criteria, as defined in the plan document, are eligible for a matching contribution, in amounts
determined at the discretion of the Company. Contributions to the Pro Tech Hardbanding 401(k) Plan by the Company were $
Note 15 – Subsequent Events
During
the period of January 1, 2023 through April 11, 2023 the Company received additional loan proceeds of $
F-22
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Austin, State of Texas, on this 11th day of April, 2023.
| VICTORY OILFIELD TECH, INC. | ||
| By: | /s/ Kevin DeLeon | |
| Kevin DeLeon | ||
| Chief Executive Officer and Director | ||
In accordance with the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||
| /s/ Kevin DeLeon | Chief Executive Officer, Principal | April 11, 2023 | ||
| Kevin DeLeon | Financial and Accounting Officer and | |||
| Director (Principal Executive Officer and | ||||
| Principal Financial and Accounting | ||||
| Officer) | ||||
| /s/ Ronald W. Zamber | Chairman of the Board of Directors | April 11, 2023 | ||
| Ronald W. Zamber | ||||
| /s/ Robert Grenley | Director | April 11, 2023 | ||
| Robert Grenley | ||||
| /s/ Ricardo A. Salas | Director | April 11, 2023 | ||
| Ricardo A. Salas |
43