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 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
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
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's conflict withUkraine 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 inRussia orUkraine , 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 endedDecember 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 ofJanuary 1, 2023 throughApril 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). 19
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 expensesSelling, 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
23 %
Total Revenue
Total revenue increased by$809,368 , or 99%, in the year endedDecember 31, 2022 as compared to the year endedDecember 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 endedDecember 31, 2022 as compared to the year endedDecember 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 endedDecember 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 endedDecember 31, 2022 as compared to the year endedDecember 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
Other income We reported other income of$1,585 in the year endedDecember 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 endedDecember 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 underTexas law. Interest expense Interest expense decreased by$30,970 , or 53%, in the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The overall decrease resulted from decreases related to forgiveness of the First PPP Note and a reduction in advances pursuant to the New VPEG Note. See Note 6, Notes Payable, to the consolidated financial statements for more information. Tax benefit There is no material provision for income tax expenses recorded for the twelve months endedDecember 31, 2022 and 2021 due to the net operating losses, ("NOL") in each of the respective years. The realization of future tax benefits is dependent on our ability to generate taxable income within the NOL carry forward period. Given our history of net operating losses, management has determined that it is more-likely-than-not we will not be able to realize the tax benefit of our NOL carry forwards. Current standards require that a valuation allowance thus be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.
Loss Applicable to Common Stockholders
As a result of the foregoing, loss applicable to common stockholders for the year endedDecember 31, 2022 was$(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 endedDecember 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. 22 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 endedDecember 31, 2022 , we obtained$152,000 from VPEG through the New VPEG Note. OnSeptember 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 ofApril 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 followingDecember 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$20,000 per month during the twelve months followingDecember 31, 2022 .
Our long-term material cash requirements from currently known obligations consist of repayment of outstanding borrowings and interest payment obligations.
The following table summarizes our estimated material cash requirements for known obligations as ofApril 11, 2023 . This table does not include amounts payable under obligations where we cannot forecast with certainty the amount and timing of such payments. The following table does not include any cash requirements related to our office space inTexas or the Pro-Tech facility inOklahoma because the office space inTexas is leased on a month-to-month basis, and the lease agreement for the Pro-Tech facility inOklahoma is cancellable at any time by giving notice of 90 days. ($ 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 - 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
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 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 endedJune 30, 2020 . 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, 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 program 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 inDecember 2022 through the maturity date ofJune 11, 2050 . The EIDL Note may be prepaid in part or in full, at any time, without penalty.
We made interest-only payments of
We recorded interest expense of
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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 endedJune 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 atDecember 31, 2022 and 2021, respectively. We recorded interest expense of$15,200 and$42,600 related to the New VPEG Note for the twelve months endedDecember 31, 2022 and 2021, respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current of future effect on our financial condition.
Cash Flow
The following table provides detailed information about our net cash flows for
the years ended
Years Ended December 31,
($ in thousands) 2022 2021Net 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 endedDecember 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 endedDecember 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 endedDecember 31, 2022 was$70,992 due to fixed asset purchases. This compares to$32,998 of cash used by investing activities for the year endedDecember 31, 2021 due to fixed asset purchases. Net cash provided by financing activities for the year endedDecember 31, 2022 was$190,559 compared to$551,595 in net cash provided by financing activities during the year endedDecember 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. 25
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. 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 atDecember 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
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. AtDecember 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 atDecember 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. 27
As ofDecember 31, 2022 and 2021, three and three customers comprised 78.2% and 64.9% of our gross accounts receivables, respectively. For the years endedDecember 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 endedDecember 31 ,
2022 or 2021.
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 atDecember 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 endedDecember 31, 2022 , 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 . 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
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 atDecember 31, 2022 and 2021, respectively. The weighted average number of common shares outstanding was 28,037,713 at each ofDecember 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 EndedDecember 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 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 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. InJune 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, beginningJanuary 1, 2023 . The adoption of ASU 2016-13 is not expected to have a material impact on our consolidated financial statements. 29 InFebruary 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 afterDecember 15, 2018 , with early adoption permitted. We adopted ASU No. 2016-02 in our fiscal year beginningJanuary 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
InSeptember 2022 , theFinancial 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 afterDecember 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 itsEmerging Issues Task Force , theAmerican Institute of Certified Public Accountants , and theSecurities 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 itsEmerging Issues Task Force , theAmerican Institute of Certified Public Accountants , and theSecurities and Exchange Commission do not have a material impact on our present or near future financial statements.
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