VICTORY OILFIELD TECH, INC. 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 summarizes the significant factors affecting our operating results,
financial condition, liquidity and cash flow as of and for the periods presented
below and is provided as a supplement to, and should be read in conjunction
with, the consolidated financial statements and notes thereto included elsewhere
in this Quarterly Report on Form 10-Q and Items 7 and 8 of our Annual Report on
Form 10-K for the year ended December 31, 2021 .
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 the remainder of 2022 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
On
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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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 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;
? 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;
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? 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
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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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
Victory Oilfield Tech, Inc. ("Victory", the "Company", "we"), a Nevada
corporation, is 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.
On July 31, 2018 , we entered into a stock purchase agreement to purchase 100% of
the issued and outstanding common stock of 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 and servicing Oklahoma , Texas , Kansas , Arkansas , Louisiana , and New
Mexico . We believe 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 usonAugust 2, 2018 . 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. Growth Strategy We plan to continue ourU.S. oilfield services company acquisition initiative, aimed at companies which are already recognized as 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. Recent Developments
Impact of Coronavirus Pandemic
InDecember 2019 , a novel strain of coronavirus was reported to have surfaced inWuhan, China . The virus has since spread to over 150 countries and every state inthe United States . OnMarch 11, 2020 , theWorld Health Organization declared the outbreak a pandemic, and onMarch 13, 2020 ,the United States declared a national emergency. Most states and cities have reacted by instituting quarantines, restrictions on travel, "stay-at-home" rules and restrictions on the types of businesses that may continue to operate, as well as guidance in response to the pandemic and the need to contain it. We do not expect to experience any material impairments or changes in accounting judgements related to COVID-19. Although we continue to face a period of uncertainty regarding the ongoing impact of the COVID-19 pandemic and emergence of new variants on projected customer demand, market conditions continue to gradually improve. In the midst of this challenging environment, we remain focused on taking the necessary steps to respond appropriately to changes in our business through specific contingency plans including (but not limited to): reviewing and monitoring planned capital expenditures, reviewing all operating expenses for opportunities to reduce and/or defer spending, and exploring new sources of revenue.
We continue to monitor the evolving situation related to COVID-19 including
guidance from federal, state, and local public health authorities and may take
additional actions based on these recommendations. In these circumstances, there
may be developments outside our control requiring us to adjust our operating
plan. As such, given the dynamic nature of this situation, we cannot reasonably
estimate the impacts of COVID-19 or the emergence of new variants on our results
of operations, cash flows and liquidity in the future, but they could be
material.
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 for at least the
remainder of 2022. 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.
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New VPEG Note
Arvest Loan
On July 11, 2022 , Pro-Tech, our wholly-owned subsidiary, entered into a
Promissory Note and Security Agreement with Arvest Bank for a revolving loan for
up to $30,000 (the "Arvest Loan"). See LIQUIDITY AND CAPITAL RESOURCES below
and Note 5, Notes Payable, to the consolidated financial statements for a
definition and description of the Arvest Loan
Market Conditions
Our financial results depend on many factors, including commodity prices and the
ability of our customers to market their production on economically attractive
terms. Commodity prices are affected by many factors outside of our control,
including changes in market supply and demand, which are impacted by pipeline
capacity constraints, inventory storage levels, basis differentials, weather
conditions and other factors.
In recent months, the conflict between Russia and Ukraine has driven oil and
natural gas prices up significantly, in part because of sanctions by the
European Union , the United Kingdom and the U.S. on imports of oil and gas from
Russia , and is expected to have further global economic consequences, including
disruptions of the global supply chain and energy markets. Recent Russian
actions have further contributed to global uncertainties for the future, causing
even higher oil and natural gas prices. The ultimate impact of the war in
Ukraine will depend on future developments and the timing and extent to which
normal economic and operating conditions resume.
Although the current outlook on oil and natural gas prices is generally
favorable and our operations have not been significantly impacted in the
short-term, in the event further disruptions occur and continue for an extended
period of time, our operations could be adversely impacted, and our costs may
increase.
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 as a result 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
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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, amortization of debt issuance costs, and debt discounts associated with our indebtedness.
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.
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RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information contained in the accompanying unaudited financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Our historical results of operations summarized and analyzed below may not necessarily reflect what will occur in the future Three Months EndedSeptember 30, 2022 compared to the Three Months EndedSeptember 30, 2021 For the Three Months Ended September 30, Percentage ($ in thousands) 2022 2021 Change Change Total revenue$ 327.6 $ 257.2 $ 70.3 27 % Total cost of revenue 237.3 144.1 93.2 65 % Gross profit 90.3 113.1 (22.8 ) -20 % Operating expenses Selling, general and administrative 272.7 311.5 (38.8 ) -12 % Depreciation and amortization 5.5 5.1 0.4 7 % Total operating expenses 278.2 316.6 (38.4 ) -12 % Loss from operations (187.9 ) (203.5 ) 15.6 -8 % Other income (expense) Other income 49.5 171.2 (121.7 ) -71 % Interest expense (4.7 ) (18.8 ) 14.1 -75 % Total other expense 44.8 152.3 (107.5 ) -71 %
Loss applicable to common stockholders
180 %
Total Revenue
Total revenue increased by $70,348 , or 27%, in the three months ended September
30, 2022 as compared to the three months ended September 30, 2021 due to an
increase in the number of drilling rigs driving hardbanding and grinding revenue
generated by Pro-Tech.
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Total Cost of Revenue
Total cost of revenue increased by $93,173 , or 65%, in the three months ended
September 30, 2022 as compared to the three months ended September 30, 2021 due
primarily to increases in materials, direct labor, and other direct costs
resulting from increases in Pro-Tech's revenue generating activities. Our gross
profit margin decreased to 28% during the three months ended September 30, 2022
as compared to a gross profit margin of 44% during the three months ended
September 30, 2021 as a result of higher labor and material costs.
Selling, general and administrative
Selling, general and administrative expenses decreased by$38,791 , or 12%, in the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 due primarily to a decrease in accounting and audit fees.
Depreciation and amortization
Depreciation and amortization increased by 7% in the three months ended
Loss from Operations
We reported a loss from operations for the three months ended
Other income
Other income for the three months endedSeptember 30, 2022 was$49,527 and is attributable to 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). Other income of$171,173 for the three months endedSeptember 30, 2021 was attributable to a gain on forgiveness of debt and interest recognized in connection with the forgiveness of the First PPP Loan. See Note 5, Notes Payable, to the consolidated financial statements for more information. Interest expense Interest expense decreased by$14,185 , or 75%, to$4,653 in the three months endedSeptember 30, 2022 as compared to$18,838 for the three months endedSeptember 30, 2021 . The overall decrease resulted from a reduction in advances pursuant to the New VPEG Note. See Note 5, Notes Payable, to the consolidated financial statements for more information.
Loss Applicable to Common Stockholders
As a result of the foregoing, loss applicable to common stockholders for the three months endedSeptember 30, 2022 was$(143,047) , or$(0.01) per share, as compared to a loss applicable to common stockholders of$(51,195) , or$(0.00) per share, for the three months endedSeptember 30, 2021 on weighted average shares of 28,037,713 and 28,037,713, respectively. 22 Nine Months EndedSeptember 30, 2022 compared to the Nine Months EndedSeptember 30, 2021 For the Nine Months Ended September 30, Percentage ($ in thousands) 2022 2021 Change Change Total revenue$ 1,218.5 $ 619.5 $ 599.0 97 % Total cost of revenue 701.2 356.3 345.0 97 % Gross profit 517.3 263.2 254.0 96 % Operating expenses
Selling, general and administrative 849.2 763.0 86.1 11 % Depreciation and amortization 16.2 15.4 0.8 6 % Total operating expenses 865.4 778.4
87.0 11 %
Loss from operations (348.1 ) (515.1 ) 167.0 -32 %
Other income (expense)
Other income 155.5 172.5 (17.0 ) -10 %
Interest expense (24.7 ) (42.5 ) 17.7 -42 %
Total other expense 130.8 130.0 0.7 1 %
Loss applicable to common stockholders
-44 %
Total Revenue
Total revenue increased by $598,993 , or 97%, in the nine months ended September
30, 2022 as compared to the nine months ended September 30, 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 $344,976 , or 97%, in the nine months ended
September 30, 2022 as compared to the nine months ended September 30, 2021 due
primarily to increases in materials, direct labor, and other direct costs
resulting from increases in Pro-Tech's revenue generating activities. Our gross
profit margin was 42% during each of the nine months ended September 30, 2022
and the nine months ended September 30, 2021 .
Selling, general and administrative
Selling, general and administrative expenses increased by$86,139 , or 11%, in the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 due primarily to increases in sales and marketing personnel and insurance costs.
Depreciation and amortization
Depreciation and amortization increased by 6% in the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 due to fixed asset additions. Loss from Operations
We reported a loss from operations for the nine months endedSeptember 30, 2022 of$(348,118) , which was a decrease of 32% compared to the operating loss of$(515,148) for the nine months endedSeptember 30, 2021 . Other income
Other income for the nine months endedSeptember 30, 2022 was$155,527 and is attributable to 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). Other income of$172,513 for the nine months endedSeptember 30, 2021 was primarily attributable to a gain on forgiveness of debt and interest recognized in connection with the forgiveness of the First PPP Loan. See Note 5, Notes Payable, to the consolidated financial statements for more information. 23 Interest expense Interest expense decreased by$17,726 , or 42%, to$24,738 in the nine months endedSeptember 30, 2022 as compared to$42,464 for the nine months endedSeptember 30, 2021 . The overall decrease resulted from decreases related to forgiveness of the First PPP Note and a reduction in advances pursuant to the New VPEG Note. See Note 5, Notes Payable, to the consolidated financial statements for more information.
Loss Applicable to Common Stockholders
As a result of the foregoing, loss applicable to common stockholders for the nine months endedSeptember 30, 2022 was$(217,329) , or$(0.01) per share, as compared to a loss applicable to common stockholders of$(385,099) , or$(0.01) per share, for the nine months endedSeptember 30, 2021 on weighted average shares of 28,037,713 and 28,037,713, respectively.
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 consolidated financial statements. The 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 flow from operations. See Note 5 Notes Payable, and Note 8 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 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 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. 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 followingSeptember 30, 2022 . We believe that material cash requirements for operating expenditures in excess of cash provided by operations may range from$0 per month to$20,000 per month during the twelve months followingSeptember 30, 2022 .
Our long-term material cash requirements from currently known obligations consist of repayment of outstanding borrowings and interest payment obligations.
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The following table summarizes our estimated material cash requirements for known obligations as ofNovember 14, 2022 . This table does not include amounts payable under obligations where we cannot forecast with certainty the amount and timing of such payments. The following table does not include any cash requirements related to our office space inTexas or the Pro-Tech facility inOklahoma because the office space inTexas is leased on a month-to-month basis, and the lease agreement for the Pro-Tech facility inOklahoma is cancellable at any time by giving notice of 90 days. ($ 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 - Vehicle Loan 31.4 7.0 14.1 10.3 - New VPEG Note 3,717.5 3,717.5 - - -$ 3,997.5 $ 3,733.3 $ 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 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. Capital Resources
During the nine months ended
As of the date of this Quarterly Report on Form 10-Q 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 ofNovember 14, 2022 , the remaining amount available to us for additional borrowings on the New VPEG Note was approximately$282,524 .
Paycheck Protection Program Loans
OnApril 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 theU.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, datedApril 14, 2020 , in the principal amount of$168,800 withArvest Bank . As ofAugust 6, 2021 , we received notice fromArvest 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 has been excluded from income for tax purposes. The foregoing description of the First PPP Note does not purport to be complete and 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 endedJune 30, 2020 . 25 OnFebruary 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, datedJanuary 28, 2021 , in the principal amount of$98,622 withArvest 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 throughJanuary 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, and although the Company has already obtained forgiveness for the full amount borrowed pursuant to the First PPP Loan, 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 endedJune 30, 2020 . Economic Injury Disaster Loan Additionally, onJune 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 was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note, datedJune 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 December, 2021 through the maturity date ofJune 11, 2050 . The EIDL Note may be prepaid in part or in full, at any time, without penalty. 26 The Company made interest-only payments of$0 and$2,193 on the EIDL Note during the three and nine months endedSeptember 30, 2022 , respectively. The Company made no payments on the EIDL Note during the three and nine months endedSeptember 30, 2021 .
The Company recorded interest expense 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 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 the Quarterly Report on Form 10-Q for the periods endedJune 30, 2020 . Vehicle Loan OnJune 14, 2022 , Pro Tech our wholly-owned subsidiary, entered into a Promissory Note and Security Agreement in the amount of$31,437.60 withArvest Bank for a vehicle loan (the "Vehicle Loan"). The Vehicle Loan, which is secured by the vehicle, is repayable over five years, maturesJune 15, 2027 , and is repayable at the rate of$586.23 per month including principal and interest at a rate of 4.5% per annum. The monthly payments began onJuly 15, 2022 . The remaining balance of the Vehicle Loan was$30,035 and$0 as ofSeptember 30, 2022 and 2021, respectively.Arvest Loan OnJuly 11, 2022 , Pro-Tech, our wholly-owned subsidiary, entered into a Promissory Note and Security Agreement withArvest Bank for a revolving loan for up to$30,000 (the "Arvest Loan"). The Arvest Loan matures onJuly 11, 2023 and bears interest at 5.5% per annum, subject to change in accordance with the Variable Rate (as defined in the Promissory Note and Security Agreement), the calculation for which is the Wall Street JournalU.S. Prime Rate plus 0.75%. Pursuant to the terms of the Arvest Loan, Pro-Tech is required to make monthly payments beginning onAugust 11, 2022 and until the maturity date, at which time all unpaid principal and interest will be due. Pro-Tech may prepay the loan in full or in part at any time without penalty. The Arvest Loan contains customary representations, warranties, affirmative and negative covenants and events of default for a loan of this type. The Arvest Loan is secured by Pro-Tech's inventory and equipment, accounts and other rights of payments, and general intangibles, as such terms are defined in the Uniform Commercial Code. As ofSeptember 30, 2022 andNovember 14, 2022 , Pro-Tech had not requested any advances pursuant to the Arvest Loan and accordingly the principal balance
was$0 . 27 Cash Flow
The following table provides detailed information about our net cash flow for
the nine months ended
Nine Months Ended
September 30,
2022 2021
Net cash used in operating activities $ (62,797 ) $ (516,300 )
Net cash used in investing activities (70,993 ) (32,998 )
Net cash provided by financing activities 182,035 394,622
Net increase (decrease) in cash and cash equivalents 48,245 (154,676 ) Cash and cash equivalents at beginning of period 52,908 192,337 Cash and cash equivalents at end of period$ 101,153 $ 37,661 Net cash used in operating activities for the nine months endedSeptember 30, 2022 was$62,797 . Net loss adjusted for non-cash items (depreciation and amortization) used cash of$76,943 . Changes in operating assets and liabilities provided cash of$14,146 . The most significant uses of cash were increases in inventory and prepaids and other current assets. These changes were offset by cash provided by increases in accounts payable and accrued and other short-term liabilities and a decrease in accounts receivable. This compares to net cash used in operating activities for the nine months endedSeptember 30, 2021 of$516,300 . Net loss adjusted for non-cash items (depreciation, amortization, and Paycheck Protection Program loan forgiveness) used cash of$413,050 . Changes in operating assets and liabilities used cash of$103,250 . 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 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 nine months endedSeptember 30, 2022 was$70,993 resulting from fixed asset purchases. This compares to$32,998 used by investing activities for the nine months endedSeptember 30, 2021 due to fixed asset purchases. Net cash provided by financing activities for the nine months endedSeptember 30, 2022 was$182,035 and resulted from debt financing proceeds from an affiliate and a new vehicle loan, net of vehicle loan repayments. This compares to$394,622 in net cash provided by financing activities during the nine months endedSeptember 30, 2021 resulting from debt financing proceeds from affiliates in addition to debt financing proceeds from the Second PPP Note. 28
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity withU.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: 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 three and nine months ended
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.
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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 atSeptember 30, 2022 andDecember 31, 2021 , respectively. We suffered no bad debt losses in the nine months endedSeptember 30, 2022 and 2021, respectively. 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. As ofSeptember 30, 2022 andDecember 31, 2021 , three and three customers comprised 50% and 65% of our gross accounts receivables, respectively. For the three months endedSeptember 30, 2022 and 2021, three and four customers comprised 45% and 71% of our total revenue, respectively. For the nine months endedSeptember 30, 2022 and 2021, three and four customers comprised 54% and 71% of our total revenue, respectively.
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.
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
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 atSeptember 30, 2022 andDecember 31, 2021 , and the goodwill balances of$145,149 at the end of each period are included in the single reporting unit. To date, an impairment of goodwill has not been recorded. For the year endedDecember 31, 2021 , we bypassed the qualitative assessment, and proceeded directly to the quantitative test for goodwill impairment. OurGoodwill 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 beginningAugust 2018 . 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 our 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. In the case of third-party suppliers, the
service period is the shorter of the period over which services are to be
received or the vesting period. For employees, directors, officers and
affiliates, the service period is typically the vesting period. Share-based
compensation is included in general and administrative expenses in the
consolidated statements of operations. See Note 6, Stockholder's Equity, for
further information.
Income Taxes
We account 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, if any, 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 atSeptember 30, 2022 and 2021, respectively. The weighted average number of common shares outstanding was 28,037,713 and 28,037,713, respectively, atSeptember 30, 2022 andSeptember 30, 2021 . Diluted earnings per share reflect the potential dilutive effects of common stock equivalents such as options, warrants and convertible securities. Given the historical and projected future losses, all potentially dilutive common stock equivalents are considered anti-dilutive.
Recently Adopted Accounting Standards
EffectiveJanuary 1, 2021 , we adopted ASU 2019-12, "Simplifying the Accounting for Income Taxes" which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The adoption of ASU 2019-12 did not have a material impact on our financial statements. InMay 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 afterDecember 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 effectiveJanuary 1, 2022 . The adoption of ASU 2021-04 did not have any impact on our consolidated financial statement presentation or disclosures.
Recently Issued Accounting Standards
InMarch 2020 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) (ASU 2020-04), in response to the risk of cessation of the London Interbank Offered Rate (LIBOR). This amendment provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging arrangements, and other transactions that reference LIBOR. We are currently evaluating ASU 2020-04 and the impact it may have on our operating results, financial position and disclosures. 31
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