VICTORY OILFIELD TECH, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed 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 endedDecember 31, 2018 . Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. General OverviewVictory Oilfield Tech, Inc. ("Victory", the "Company", "we"), aNevada corporation, is anAustin, 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 for use in the global oilfield services industry, which are mechanically stronger, harder and more corrosion resistant than typical crystalline structure alloys found in the market today. This combination of characteristics creates opportunities for drillers to dramatically improve lateral drilling lengths, well completion time and total well costs. Our wear-resistant alloys reduce drill-string torque, friction, wear and corrosion in a cost-effective manner, while protecting the integrity of the base metal. We apply our coatings using advanced welding techniques and thermal spray methods. We also utilize common materials, such as tungsten carbide to chromium carbide, to deliver the optimal solution to the customers. Some of our hardbanding processes protect wear in tubulars using materials that achieve a low coefficient of friction to protect the drillstring and casing from abrasion. We plan to continue ourU.S. oilfield services company acquisition initiative, aimed at companies which are already recognized as a high-quality service providers to strategic customers in the major North American oil and gas basins. When completed, we expect that each of these oilfield services company acquisitions will provide immediate revenue from their current regional customer base, while also providing us with a foundation for channel distribution and product development of our existing products. We intend to grow each of these established oilfield services companies by providing better access to capital, more disciplined sales and marketing development, integrated supply chain logistics and infrastructure build out that emphasizes outstanding customer service and customer collaboration, future product development and planning. We believe that a well-capitalized technology-enabled oilfield services business will provide the basis for more accessible financing to fund our growth and to 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. Although stay at home orders and lock downs on businesses in the areas where we operate have caused our staff to conduct business operations from their homes, this change has not resulted in a significant impact to our ability to operate. However, the spread of the coronavirus outbreak across the world has driven sharp demand destruction for crude oil as whole economies ordered curtailed activity. As a result, companies across the industry have responded with severe capital spending budget cuts, personnel layoffs, facility closures and bankruptcy filings. We expect industry activity levels and spending by customers to remain depressed throughout the remainder of 2020 and into 2021 as destruction of demand for oil and gas continues. As the coronavirus continues to spread throughout areas in which we operate, we believe the outbreak has the potential to have a material negative impact on our operating results and financial condition. The extent of the impact of the coronavirus on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our operators, employees and vendors, all of which are uncertain and cannot be predicted. The extent of the pandemic's continued effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, the pace at which jurisdictions across the country re-open and restrictions begin to lift, the availability of government financial support to our business and our customers, and whether a resurgence of the outbreak occurs. Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating results and financial condition, but it could be material. 15 Key Events OnJuly 31, 2018 , we entered into a stock purchase agreement to purchase 100% of the issued and outstanding common stock ofPro-Tech Hardbanding Services, Inc. , anOklahoma corporation ("Pro-Tech"), which provides various hardbanding solutions to oilfield operators for drill pipe, weight pipe, tubing and drill collars and servicingOklahoma ,Texas ,Kansas ,Arkansas ,Louisiana , andNew 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 us
onAugust 2, 2018 .
OnJuly 31, 2018 , we entered into a loan agreement to fund the acquisition of Pro-Tech withKodak Brothers Real Estate Cash Flow Fund, LLC , aTexas limited liability company ("Kodak"), pursuant to which the Company borrowed$375,000 from Kodak under a 10% secured convertible promissory note maturingMarch 31, 2019 , with an option to extend maturity toJune 30, 2019 (the "Kodak Note"). Under the loan agreement with Kodak, we issued to an affiliate of Kodak a five-year warrant to purchase 375,000 shares of our common stock with an exercise price of$0.75 per share. The loan agreement with Kodak was included as Exhibit 10-3 on the Form 8-K filed by us onAugust 2, 2018 . Subsequent Events
During the period of
OnOctober 21, 2019 , we, Kodak and Pro-Tech entered into a Second Extension and Modification Agreement, effectiveSeptember 30, 2019 , pursuant to which the maturity date of the Kodak Note was extended fromSeptember 30, 2019 toDecember 20, 2019 , and the interest rate was increased from 15% to 17.5%. Upon the execution of the Second Extension and Modification Agreement, we paid to Kodak interest on the Loan for the fourth quarter of 2019 in the amount of$11,059.03 , and an extension fee in the amount of$14,062.50 . We agreed to: (i) pay a total of$12,500.00 to Kodak and its manager, which represents due diligence fees; (ii) pay to Kodak and its manager a total of$27,500 , which represents$25,000 of loan monitoring fees and$2,500 of loan extension fees; (iii) on or beforeOctober 31, 2019 , pay to Kodak the sum of$125,000 , as a payment of principal, and we will incur a late of$5,000 for every seven (7) days (or portion thereof) that the balance remains unpaid afterOctober 31, 2019 ; (iv) on or beforeNovember 29, 2019 , pay to Kodak the sum of$125,000 , as a payment of principal, and we will incur a late fees of$5,000 for every seven (7) days (or portion thereof) that the balance remains unpaid afterNovember 29, 2019 ; and (v) on or beforeDecember 30, 2019 , we will pay to Kodak any unpaid and/or outstanding balances owed on the Note. If the Note and any late fees, other fees, interest, or principal is not paid in full byDecember 30, 2019 , we will pay to Kodak$25,000 as liquidated damages. As ofJanuary 10, 2020 , VPEG, on our behalf, has paid in full all amounts due in connection with the Kodak Note. TheNovember 29, 2019 payment was not paid timely and therefore we incurred a$5,000 penalty. TheDecember 30, 2019 payment was not paid timely and accordingly we incurred penalties of$45,000 and interest of$9,076 . EffectiveSeptember 1, 2020 , we and AVV have mutually agreed to terminate the AVV Sublicense Agreement and Trademark License. Since the date of the Transaction Agreement, we have not realized any revenue from products or services related to the AVV Sublicense Agreement or Trademark License. Also effectiveSeptember 1, 2020 , we and LMCE have agreed to terminate the supply and services agreement datedSeptember 6, 2019 although we continue to purchase and utilize the products of LMCE. We are evaluating our business strategy in light of the current conditions of the national and global oil and gas markets. OnOctober 30, 2020 , we and VPEG entered into an amendment to the New Debt Agreement (the "Amendment"), pursuant to which the parties agreed to increase the loan amount to up to$3,000,000 to cover advances from VPEG throughOctober 30, 2020 and our working capital needs. 16 Results of Operations
Three Months Ended
The condensed consolidated statements of operation for the three months endedSeptember 30, 2019 as compared to the three months endedSeptember 30, 2018
were
as follows:
For the
Three Months Ended
September 30, Percentage
2019 2018 Change Change
Total revenue $ 509,160 $ 399,000 $ 110,160 28 %
Total cost of revenue 240,638 215,286 25,352 12 %
Gross profit 268,522 183,714 84,808 46 %
Operating expensesSelling, general and administrative 413,507 525,976
(112,469 ) -21 % Depreciation and amortization 76,816 241,713 (164,896 ) -68 % Total operating expenses 490,323 767,689 (277,365 ) -36 % Loss from operations (221,801 ) (583,975 ) 362,173 -62 % Other expense Interest expense (36,274 ) (67,402 ) 31,128 -46 % Total other expense (36,274 ) (67,402 ) 31,128 -46 % Loss from continuing operations before tax benefit (258,075 ) (651,377 ) 393,302 -60 % Tax benefit - - - 0 % Loss from continuing operations (258,075 ) (651,377 ) 393,302 -60 % Income from discontinued operations - 41,582
(41,582 ) -100 %
Loss applicable to common stockholders
-58 %
Total revenue: Total revenue increased by $110,160 , or 28%, to $509,160 for the
three months ended September 30, 2019 from $399,000 for the three months ended
September 30, 2018 . The increase in the 2019 period is primarily due to
reporting three months of revenue from the provision of hardbanding services by
our subsidiary Pro-Tech, as compared to approximately two months of revenuein the 2018 period.
Total cost of revenue: Total cost of revenue increased by$25,352 , or 12%, to$240,638 for the three months endedSeptember 30, 2019 from$215,286 for the three months endedSeptember 30, 2018 , as a result costs associated with the revenue producing activities of our subsidiary Pro-Tech. Selling, general and administrative: Selling, general and administrative expenses decreased by$112,469 , or 21%, to$413,507 for the three months endedSeptember 30, 2019 from$525,976 for the three months endedSeptember 30, 2018 .$92,341 of this decrease is due to a reduction in consulting fees. The remaining decrease is due to decreases of$28,263 and$47,752 in Contractor fees and Payroll related expenses, partially offset by a$51,508 increase in Pro Tech costs. Depreciation and amortization: Depreciation and amortization decreased by$164,896 , or 21%, to$76,816 for the three months endedSeptember 30, 2019 from$241,713 for the three months endedSeptember 30, 2018 as a result of impairing the intangible assets at the end of 2018 lowering the amount to be amortized. Interest expense: Interest expense decreased by$31,128 , or 21%, to$36,274 for the three months endedSeptember 30, 2019 from$67,402 for the three months endedSeptember 30, 2018 . Interest expense was lower during 2019 period primarily due to the restructuring of the notes payable to affiliate (VPEG)
and Rogers note. Tax benefit: There is no tax benefit recorded for either the three months endedSeptember 30, 2019 or 2018 due to the net operating losses ("NOL") of both periods. 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 the carry forwards. Current standards require that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Income from discontinued operations: Income from discontinued operations decreased by$41,582 or 100%, to$0 for the three months endedSeptember 30, 2019 from$41,582 for the three months endedSeptember 30, 2018 as a result of trailing activity managed by Aurora Energy. Income from discontinued operations in the 2019 and 2018 periods was due to trailing activity managed by the Company on behalf ofAurora Energy Partners ("Aurora"). 17
Nine Months Ended
The condensed consolidated statements of operation for the nine months endedSeptember 30, 2019 as compared to the nine months endedSeptember 30, 2018
were
as follows:
For the
Nine Months Ended
September 30, Percentage
2019 2018 Change Change
Total revenue $ 1,638,299 $ 399,000 $ 1,239,299 311 %
Total cost of revenue 792,856 215,286 577,570 268 %
Gross profit 845,443 183,714 661,729 360 %
Operating expenses Selling, general and administrative 1,162,932 12,575,189 (11,412,257 )
-91 %
Depreciation and amortization 199,008 242,025 (43,017 ) -18 %
Total operating expenses 1,361,940 12,817,214 (11,455,274 ) -89 % Loss from operations (516,497 ) (12,633,500 ) 12,117,003 -96 % Other expense Interest expense (158,169 ) (189,462 ) 31,293 -17 % Total other expense (158,169 ) (189,462 ) 31,293 -17 % Loss from continuing operations before tax benefit (674,666 ) (12,822,962 ) 12,148,296 -95 % Tax benefit - - - 0 % Loss from continuing operations (674,666 ) (12,822,962 ) 12,148,296 -95 % Income from discontinued operations 66,494 127,029 (60,535 ) -48 % Loss applicable to common stockholders$ (608,172 ) $ (12,695,933 ) $
12,087,761 -95 % Total revenue: Total revenue increased by$1,239,299 , or 311%, to$1,638,299 for the nine months endedSeptember 30, 2019 from$399,000 for the nine months endedSeptember 30, 2018 . The increase in the 2019 period is primarily due to reporting nine months of revenue from the provision of hardbanding services by our subsidiary Pro-Tech, as compared to approximately two months of revenue
in the 2018 period. Total cost of revenue: Total cost of revenue increased by$577,570 , or 268%, to$792,856 for the nine months endedSeptember 30, 2019 from$215,286 for the nine months endedSeptember 30, 2018 , as a result costs associated with the revenue producing activities of our subsidiary Pro-Tech. Selling, general and administrative: Selling, general and administrative expenses decreased by$11,412,257 , or 91%, to$1,162,932 for the nine months endedSeptember 30, 2019 from$12,575,189 for the nine months endedSeptember 30, 2018 .$11,314,952 of this decrease is due to a reduction in Stock Compensation. The remaining decrease is due to a decreases of$243,341 in Consulting Fees., partially offset by a$51,508 increase in Pro Tech administrative costs.
Depreciation and amortization: Depreciation and amortization decreased by
Interest expense: Interest expense decreased by$31,293 to$158,169 for the nine months endedSeptember 30, 2019 from$189,462 for the nine months endedSeptember 30, 2018 . Interest expense was lower during 2019 period primarily due to the restructuring of the notes payable to affiliate (VPEG) and Rogers note. Tax benefit: There is no tax benefit recorded for either the nine months endedSeptember 30, 2019 or 2018 due to the net operating losses ("NOL") of both periods. 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 the carry forwards. Current standards require that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Income from discontinued operations: Income from discontinued operations decreased by$60,535 or 48%, to$66,494 for the nine months endedSeptember 30, 2019 from$127,029 for the nine months endedSeptember 30, 2018 as a result of trailing activity managed by the company on behalf ofAurora Energy Partners . Income from discontinued operations in the 2019 and 2018 periods was due to trailing activity managed by the Company on behalf of Aurora. 18
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 condensed consolidated financial statements. The condensed 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 8 "Notes Payable," and Note 13 "Related Party Transactions," to the accompanying condensed 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. Capital Resources
During the nine months endedSeptember 30, 2019 , we received loan proceeds of$517,000 from VPEG through the New VPEG Note, and advances of$175,000 fromRon Zamber ,who is a Director and shareholder, to provide funding for operations. As ofOctober 31, 2020 and for the foreseeable future we expect to cover operating shortfalls, if any, with funding through the New VPEG Note we enact our strategy to become a technology-focused oilfield services company and seek additional sources of capital. As ofOctober 31, 2020 the remaining amount available to us for additional borrowings on the New VPEG Note was approximately$315,900 . In addition, during 2019, we extended the maturity date of the Kodak Note. See Note 8, Notes Payable and Note 13, Subsequent Events, to the condensed consolidated financial statements for additional information regarding the
Kodak Note.
During 2018, we converted several related party debt instruments to equity. See Note 4, Related Party Transactions, to the accompanying condensed consolidated financial statements for further information on these agreements.
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 flow for
the nine months ended
Nine Months Ended
September 30,
2019 2018
Net cash used in operating activities $ (144,234 ) $ (11,441,010 )
Net cash provided by (used in) investing activities - (832,039 )
Net cash provided by financing activities 299,061 1,023,129
Net decrease in cash and cash equivalents 154,827 (11,249,920 ) Cash and cash equivalents at beginning of period 76,746
24,383
Cash and cash equivalents at end of period$ 231,573 $ (11,225,537 ) Net cash used in operating activities for the nine months endedSeptember 30, 2019 was$144,234 after cash flows from the net loss of ($608,172 ) were increased by adjustments to reconcile net loss to cash used in operating activities of$463,938 . This compares to cash used in operating activities for the nine months endedSeptember 30, 2018 of$(11,441,010) after the net loss for that period of ($12,695,933 ) was increased by adjustments to reconcile net loss to cash used in operating activities of$1,254,923 . 19 Net cash used in investing activities for the nine months endedSeptember 30, 2019 and 2018 was$0 and$832,039 respectively. The net cash used during the 2018 period resulted from cash used in the acquisition of Pro-Tech, net of
cash acquired. Net cash provided by financing activities for the nine months endedSeptember 30, 2019 was$299,061 compared to$1,023,129 in net cash provided by financing activities during the nine months endedSeptember 30, 2018 . In each of 2019 and 2018 nine month periods net cash provided by financing activities was primarily due to debt financing proceeds from affiliates, net of repayments and redemptions of preferred stock.
We believe it will be necessary to obtain additional liquidity resources in order to support our operations. We are addressing our liquidity needs by developing additional backup capital sources.
Summary of Critical Accounting Policies
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 EffectiveJanuary 1, 2018 , we adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, on a modified retrospective basis. 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.
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. Due to historically very low uncollectible balances and no specific indications of current uncollectibility, we have not recorded an allowance for doubtful accounts atJune 30, 2019 . 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 of
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 condensed consolidated balance sheets and any gain or loss is included in Other income/(expense) in the condensed consolidated statement
of
operations.
20
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. To date, an impairment of goodwill has not been recorded.
OurGoodwill balance consists of the amount recognized in connection with the acquisition of Pro-Tech. See Note 3, Pro-Tech Acquisition, for further information. 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 . Our contract-based intangible assets include an agreement to sublicense certain patents belonging toArmacor Victory Ventures, LLC (the "AVV Sublicense") and a license (the "Trademark License") to the trademark of a proprietary coating technology. The contract-based intangible assets have useful lives of approximately 11 years for the AVV Sublicense and 15 years for the Trademark License. With the initiation of a multi-year strategy plan involving synergies between the acquisition of Pro-Tech and our existing intellectual property, we have begun to use the economic benefits of our intangible assets, and therefore began amortization of our intangible assets on a straight-line basis over the useful lives indicated above beginningJuly 31, 2018 , the effective date of
the Pro-Tech acquisition.
See Note 7,Goodwill and Other Intangible Assets, for further information.
Business Combinations Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date our condensed consolidated financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is
recorded as goodwill. Share-Based Compensation
We from time to time may issue stock options, warrants and restricted stock as compensation to employees, directors, officers and affiliates, as well as to acquire goods or services from third parties. In all cases, 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 condensed consolidated statements of operations. See Note 12, Stock Options, 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 atSeptember 30, 2019 andDecember 31, 2018 , respectively. The weighted average number of common shares outstanding was 28,037,713 and 21,290,933, respectively, atSeptember 30, 2019 andDecember 31, 2018 . Diluted earnings per share reflect the potential dilutive effects of common stock equivalents such as options, warrants and convertible securities. Given our historical and projected future losses, all potentially dilutive common stock equivalents are considered anti-dilutive.
Recent Accounting Pronouncements
InDecember 2019 , the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes" as part of its initiative to reduce complexity in accounting standards. The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The new standard is effective for fiscal years beginning afterDecember 15, 2020 , and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of ASU 2019-12 on our financial statements. 21
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