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EX-32.1 - CERTIFICATION - VICTORY OILFIELD TECH, INC.f10k2018ex32-1_victoryoil.htm
EX-31.1 - CERTIFICATION - VICTORY OILFIELD TECH, INC.f10k2018ex31-1_victoryoil.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2018

 

OR

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                            to                          

 

Commission file number: 002-76219-NY 

 

VICTORY OILFIELD TECH, INC.
(Exact name of registrant as specified in its charter)

 

Nevada   87-0564472
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
3355 Bee Caves Road, Suite 608, Austin, Texas   78746
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: 512-347-7300

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☒

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large Accelerated Filer   Accelerated Filer
Non-Accelerated Filer   Smaller Reporting Company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant, computed by reference to the closing price of such stock on December 31, 2018 was approximately $178,464 based on the closing price of such stock and such date of $0.30.

 

The number of shares outstanding of the Registrant’s common stock, $0.001 par value, as of January 27, 2020 was 28,037,713.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

 

 

 

VICTORY OILFIELD TECH, INC.

 

ANNUAL REPORT ON

FORM 10-K

For the year ended December 31, 2018

 

TABLE OF CONTENTS

 

PART I  
     
Item 1. Business 1
     
Item1A. Risk Factors 9
     
Item 1B. Unresolved Staff Comments 20
     
Item 2. Properties 20
     
Item 3. Legal Proceedings 20
     
Item 4. Mine Safety Disclosure 20
     
PART II  
     
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 21
     
Item 6. Selected Financial Data 21
     
Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
     
Item 8. Financial Statements and Supplementary Data 30
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 30
     
Item 9A. Controls and Procedures 30
     
Item 9B. Other Information 31
     
PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 32
     
Item 11. Executive Compensation 38
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 39
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 41
     
Item 14. Principal Accounting Fees and Services 43
     
PART IV  
     
Item 15. Exhibits, Financial Statement Schedules 43
   
Item 16. Form 10-K Summary 48

 

i

 

  

INTRODUCTORY NOTE

 

Use of Terms

 

In this report, unless otherwise specified or the context otherwise requires, references to “we,” “us,” “our,” and “Company” refer to Victory Oilfield Tech, Inc., a Nevada corporation.

 

Cautionary Notice Regarding Forward Looking Statements

 

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This report contains a number of forward-looking statements that reflect management’s current views and expectations with respect to business, strategies, future results and events and financial performance. All statements made in this Annual Report on Form 10-K other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to revenues, cash flow, profitability, adequacy of funds from operations, statements expressing general optimism about future operating results and non- historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” variations of such words, and 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.

 

Potential investors should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions and apply only as of the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements, including, without limitation, the risks outlined under “Item 1A. Risk Factors” and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur.

 

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 Company’s projections, estimates or expectations.

 

In particular, our business, including our financial condition and results of operations and our ability to continue as a going concern may be impacted by a number of factors, including, but not limited to, the following:

 

continued operating losses;

 

the competitive nature of our industry;

 

downturns in the oil and gas industry, including the oilfield services business;

 

hazards inherent in the oil and natural gas industry;

 

our ability to realize the anticipated benefits of acquisitions or divestitures;

 

our ability to successfully integrate and manage businesses that we plan to acquire in the future;

 

our ability to grow our oilfield services business;

 

our dependence on key management personnel and technical experts;

 

the impact of severe weather;

 

our compliance with complex laws governing our business;

 

our failure to comply with environmental laws and regulations;

 

the impact of oilfield anti-indemnity provisions enacted by many states;

 

delays in obtaining permits by our future customers or acquisition targets for their operations;

 

our ability to obtain patents, licenses and other intellectual property rights covering our services and products;

 

our ability to develop or acquire new products;

 

our dependence on third parties; and

 

the results of pending litigation.

 

Stock Split

 

On December 19, 2017, we completed a 1-for-38 reverse stock split of our outstanding common stock. As a result of this stock split, our issued and outstanding common stock decreased from 197,769,460 to 5,206,150 shares. Accordingly, all share and per share information contained in this report has been restated to retroactively show the effect of this stock split. As of January 27, 2020 there were 28,037,713 shares of common stock outstanding.

 

ii

 

 

PART I

 

Item 1. Business

 

Overview

 

We are an Austin, Texas based publicly held oilfield energy technology products company focused on improving well performance and extending the lifespan of the industry’s most sophisticated and expensive equipment. America’s resurgence in oil and gas production is largely driven by new innovative technologies and processes as most dramatically and recently demonstrated by fracking. We exclusively license intellectual property related to amorphous metal alloys for use in the global oilfield services industry. Amorphous alloys 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 patented and licensed products utilize amorphous coatings designed to reduce drill-string torque, friction, wear and corrosion in a cost-effective manner, while protecting the integrity of the base metal. Our industry leading Armacor brand of hardbanding products have coated millions of tool joints across a variety of geologic basins. The Company is also testing a revolutionary amorphous technology-based drill pipe mid-section coating product and ruggedized RFID enclosure that will allow tracking and optimization of production tubing in harsh environments and enable the provision of related data services to our customers. These products should help substantially scale our business when they become commercially available in the near future. These products will be sold directly by Victory and through authorized distributors.

 

This intellectual property-based technology platform provides significant opportunity for us to continue an expansion of our product line as we meet additional needs of our exploration and production customers. With further development, we anticipate our amorphous alloy coating technology will be extendible to hundreds of other metal components such as frac pump plunger rods, mud pump extension rods, gate valves, drill string torque reducers, pump impellers, stabilizers, wear sleeves and a host of other items used in the drilling and completion process.

 

We plan to continue our U.S. oilfield services company acquisition initiative, aimed at companies which are already using one or more of the Armacor brand of Liquidmetal coating products and/or which are 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 amorphous alloy technology 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, with ownership of a worldwide, perpetual, royalty free, fully paid up and exclusive license and rights to all future Liquidmetal oil and gas product innovations, will provide the basis for more accessible financing to grow the Company and execute our oilfield services company acquisitions strategy. This patent protected intellectual property helps create a meaningfully differentiated oilfield services business, with little effective competition. The combination of friction reduction, torque reduction, reduced corrosion, wear and better data collection from the deployment of our ruggedized RFID enclosures, only represent our initial product line. We anticipate new innovative products will come to market as we collaborate with drillers to solve their other down-hole needs.

 

Recent Developments

 

On July 31, 2018, the Company entered into a stock purchase agreement to purchase 100% of the issued and outstanding common stock of Pro-Tech Hardbanding Services, Inc., or Pro-Tech, an Oklahoma corporation which is a hardbanding company servicing Oklahoma, Texas, Kansas, Arkansas, Louisiana, and New Mexico. The Company believes that the acquisition of Pro-Tech will create opportunities to leverage its existing portfolio of intellectual property to fulfill its mission of operating as a technology-focused oilfield services company. The stock purchase agreement was included as Exhibit 10.1 on the form 8-K filed by us on August 2, 2018.

 

1

 

 

On July 31, 2018, the Company entered into a loan agreement to fund the acquisition of Pro-Tech with Kodak Brothers Real Estate Cash Flow Fund, LLC, or Kodak, a Texas limited liability company, pursuant to which the Company borrowed from Kodak $375,000 under a 10% secured convertible promissory note maturing March 31, 2019, or the Kodak Note. Pursuant to the terms of the Kodak Note, we elected to extend the maturity date to June 30, 2019. Under the loan agreement with Kodak, the Company issued to an affiliate of Kodak a five-year warrant to purchase 375,000 shares of the Company’s 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 on August 2, 2018.

 

On July 11, 2019, the Company, Kodak and Pro-Tech entered into an Extension and Modification Agreement, effective June 30, 2019, pursuant to which, the maturity date of the Kodak Note was extended from June 30, 2019 to September 30, 2019 and the interest rate was increased from 10% to 15%. Upon the execution of the extension agreement, we paid to Kodak interest on the Loan for the third quarter of 2019 in the amount of $14,062.50, and an extension fee in the amount of $14,062.50.

 

On October 21, 2019, the Company, Kodak and Pro-Tech entered into a Second Extension and Modification Agreement, effective September 30, 2019, pursuant to which the maturity date of the Kodak Note was extended from September 30, 2019 to December 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. The Company 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 before October 31, 2019, pay to Kodak the sum of $125,000, as a payment of principal, and the Company will incur a late of $5,000 for every seven (7) days (or portion thereof) that the balance remains unpaid after October 31, 2019; (iv) on or before November 29, 2019, pay to Kodak the sum of $125,000, as a payment of principal, and the Company will incur a late of $5,000 for every seven (7) days (or portion thereof) that the balance remains unpaid after November 29, 2019; and (v) on or before December 30, 2019, Victory 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 by December 30, 2019, Victory will pay to Kodak $25,000 as liquidated damages. As of January 10, 2020, VPEG, on behalf of the Company, has paid in full all amounts due in connection the Kodak Note. The November 29, 2019 payment was not paid timely and therefore Victory incurred a $5,000 penalty. The December 30, 2019 payment was not paid timely and accordingly Victory incurred penalties of $45,000 and interest of $9,076.

 

Transaction Agreement

 

On August 21, 2017, we entered into a Transaction Agreement with Armacor Victory Ventures, LLC, or AVV, a Delaware limited liability company, pursuant to which AVV (i) granted to us a worldwide, perpetual, royalty free, fully paid up and exclusive sublicense, or the License, to all of AVV’s owned and licensed intellectual property for use in the oilfield services industry, except for a tubular solutions company headquartered in France, and (ii) agreed to contribute to us $5,000,000, or the Cash Contribution, in exchange for which we issued 800,000 shares of our newly designated Series B Convertible Preferred Stock, constituting approximately 90% of our issued and outstanding common stock on a fully-diluted basis and after giving effect to the issuance of the shares and other securities being issued as contemplated by the Transaction Agreement. The closing of the Transaction Agreement also occurred on August 21, 2017.

 

In connection with the Transaction Agreement, on August 21, 2017 we entered into (i) an exclusive sublicense agreement with AVV, or the AVV Sublicense, pursuant to which AVV granted the License to us, and (ii) a trademark license agreement, or the Trademark License, with Liquidmetal Coatings Enterprises, LLC, or LMCE, an affiliate of AVV, pursuant to which LCME granted a license for the Liquidmetal® Coatings Products and Armacor® trademarks and service marks to us in accordance with a mutually agreeable supply agreement. The Liquidmetal - Armacor product line has been widely tested and down-hole validated by several large U.S. based oil and gas companies, which are currently using the product. On September 6, 2019, we entered into a supply and services agreement with LMC, pursuant to which we will purchase from LMC metal powders and wire including the Liquidmetal® Armacor coating materials, coating formulations (whether existing formulations or formations hereafter created), and related wire products (whether existing products or those hereafter created). The prices paid by the Company for such products shall be no greater than the lowest prices charged by LMC, or any of its affiliates or designated or contracted partners, for the same products to any current or future purchasers during any period covered by the supply and services agreement. The supply and services agreement constitutes the mutually agreeable supply agreement contemplated in the exclusive sublicense agreement. Pursuant to the Transaction Agreement, payment of the entire Cash Contribution was to be made by AVV within three (3) business days following stockholder approval of certain amendments to our articles of incorporation and our satisfaction of certain other conditions specified in the Transaction Agreement. These conditions were satisfied by our Company effective November 24, 2017. To date, AVV has contributed a total of $255,000 to our Company, but has yet to make the entire Cash Contribution.

 

2

 

 

Pursuant to the Transaction Agreement, since AVV failed to make the full Cash Contribution when due, we may, in our sole discretion, seek up to $5 million of equity capital from other sources, including, without limitation, from Visionary Private Equity Group I, LP, a Missouri limited partnership, or VPEG, its affiliates and designees under the option granted to VPEG pursuant to the loan agreement described below. Also, since AVV failed to make the entire Cash Contribution when due, we may (upon notice described below) cancel a number of the shares issued to AVV in accordance with the following formula:

 

Cancelled Shares = X% of 213,333

 

For purposes of the foregoing formula:

 

X= (A - B)/A

A= 5,000,000

B= the amount of the Cash Contribution funded by AVV

 

Notwithstanding the foregoing, under no circumstances shall the number of shares be reduced to less than 586,667 shares without AVV’s prior written consent.

 

The above cancellation shall be made at such time as we have reasonably determined that AVV will not be able to fund any additional amounts under the Cash Contribution and we notify AVV of the same in writing upon thirty (30) days prior written notice.

 

VPEG Private Placement

 

On February 3, 2017, the Company completed a private placement (the “VPEG Private Placement”) with Visionary Private Equity Group I, LP, a Missouri limited partnership (“VPEG”), pursuant to which VPEG purchased a unit comprised of $320,000 principal amount of a 12% unsecured six-month promissory note and a common stock purchase warrant to purchase 136,928 shares of common stock at an exercise price of $3.5074 per share. Visionary PE GP I, LLC is the general partner of VPEG and Dr. Ronald Zamber, a director of the Company, is the Managing Director of Visionary PE GP I, LLC.

 

The value attributed to the warrants issued in connection with the VPEG Private Placement was amortized over the life of the underlying promissory note using a method consistent with the interest method and reported in interest expense. Interest expense related to this amortization was $210,000 for the twelve months ended December 31, 2017. No interest expense was recorded on the VPEG Private Placement for the twelve months ended December 31, 2018.

 

Settlement and Loan Agreements

 

Navitus Settlement Agreement

 

On August 21, 2017, in connection with the Transaction Agreement, the Company entered into a settlement agreement and mutual release (the “Navitus Settlement Agreement”) with Dr. Ronald Zamber and Mr. Greg Johnson, an affiliate of Navitus Energy Group, or Navitus, pursuant to which all obligations of the Company to Dr. Zamber and Mr. Johnson to repay indebtedness for borrowed money, which totaled approximately $520,800, was converted into approximately 65,591 shares of Series C Preferred Stock, approximately 46,700 shares of which were issued to Dr. Zamber and approximately 18,891 shares of which were issued to Mr. Johnson. On January 24, 2018, these shares of Series C Preferred Stock were automatically converted into 342,633 shares of common stock, with 243,948 shares issued to Dr. Zamber and 98,685 shares issued to Mr. Johnson.

 

3

 

 

Insider Settlement Agreement

 

On August 21, 2017, in connection with the Transaction Agreement, the Company entered into a settlement agreement and mutual release (the “Insider Settlement Agreement”) with Dr. Ronald Zamber and Mrs. Kim Rubin Hill, the wife of Kenneth Hill, the Company’s Chief Executive Officer and Chief Financial Officer, pursuant to which all obligations of the Company to Dr. Zamber and Mrs. Hill to repay indebtedness for borrowed money, which totaled approximately $35,000, was converted into approximately 4,408 shares of Series C Preferred Stock, approximately 1,889 shares of which were issued to Dr. Zamber and approximately 2,519 shares of which were issued to Mrs. Hill. On January 24, 2018, these shares of Series C Preferred Stock were automatically converted into 23,027 shares of common stock, with 9,869 shares issued to Dr. Zamber and 13,158 shares issued to Mrs. Hill.

 

VPEG Note

 

On August 21, 2017, the Company entered into a secured convertible original issue discount promissory note issued by the Company to VPEG (the “VPEG Note”). The VPEG Note reflects an original issue discount of $50,000 such that the principal amount of the VPEG Note is $550,000, notwithstanding the fact that the loan is in the amount of $500,000. The VPEG Note does not bear any interest in addition to the original issue discount, matures on September 1, 2017, and is secured by a security interest in all of the Company’s assets.

 

On October 11, 2017, the Company and VPEG entered into an amendment to the VPEG Note, pursuant to which the parties agreed to (i) increase the loan amount to $565,000, (ii) increase the principal amount of the VPEG Note to $621,500, reflecting an original issue discount of $56,500 and (iii) extend the maturity date to November 30, 2017.

 

On January 17, 2018, the Company and VPEG entered into a second amendment to the VPEG Note, pursuant to which the parties agreed (i) to extend the maturity date to a date that is five business days following VPEG’s written demand for payment on the VPEG Note; (ii) that VPEG will have the option but not the obligation to loan the Company additional amounts under the VPEG Note; and (iii) that, in the event that VPEG exercises its option to convert the note into shares of common stock at any time after the maturity date and prior to payment in full of the principal amount of the VPEG Note, the Company shall issue to VPEG a five year warrant to purchase a number of additional shares of common stock equal to the number of shares issuable upon such conversion, at an exercise price of $1.52 per share.

 

VPEG Settlement Agreement

 

On August 21, 2017, in connection with the Transaction Agreement, the Company entered into a settlement agreement and mutual release (the “VPEG Settlement Agreement”) with VPEG, pursuant to which all obligations of the Company to VPEG to repay indebtedness for borrowed money (other than the VPEG Note), which totaled approximately $873,409.64, was converted into approximately 110,000 shares of Series C Preferred Stock. Pursuant to the VPEG Settlement Agreement, the 12% unsecured six-month promissory note was repaid in full and terminated, but VPEG retained the common stock purchase warrant. On January 24, 2018, these shares of Series C Preferred Stock were automatically converted into 940,272 shares of common stock.

 

McCall Settlement Agreement

 

On August 21, 2017, in connection with the Transaction Agreement, the Company entered into a settlement agreement and mutual release with David McCall, the former general counsel and former director of Victory (the “McCall Settlement Agreement”), pursuant to which all obligations of the Company to David McCall to repay indebtedness related to payment for legal services rendered by David McCall, which totaled $380,323 including accrued interest, was converted into 20,000 shares of the Company’s newly designated Series D Preferred Stock. During the twelve months ended December 31, 2017, the Company did not redeem any shares of Series D Preferred Stock. During the twelve months ended December 31, 2018, the Company redeemed 16,666 shares of Series D Preferred Stock for cash payments of $316,942.

 

4

 

 

Supplementary Agreement

 

On April 10, 2018, the Company and AVV entered into a supplementary agreement (the “Supplementary Agreement”) to address breaches or potential breaches under the Transaction Agreement, including AVV’s failure to contribute the full amount of the Cash Contribution. Pursuant to the Supplementary Agreement, the Series B Convertible Preferred Stock issued under the Transaction Agreement was canceled and, in lieu thereof, the Company issued to AVV 20,000,000 shares of its common stock (the “AVV Shares”). The Supplementary Agreement contains certain covenants by AVV, including a covenant that AVV will use its best efforts to help facilitate approval of a proposed $7 million private placement of the Company’s common stock at a price per share of $0.75, which will include 50% warrant coverage at an exercise price of $0.75 per share (the “Proposed Private Placement”), and that AVV will invest a minimum of $500,000 in the Proposed Private Placement.

 

On April 23, 2018, the Company filed a Certificate of Withdrawal with the Nevada Secretary of State to withdraw the designation of the Series B Convertible Preferred Stock and return such shares to undesignated preferred stock of the Company.

 

Settlement Agreement

 

On April 10, 2018, the Company and VPEG entered into a settlement agreement and mutual release (the “Settlement Agreement”), pursuant to which VPEG agreed to release and discharge the Company from its obligations under the VPEG Note. Pursuant to the Settlement Agreement, and in consideration and full satisfaction of the outstanding indebtedness of $1,410,200 under the VPEG Note, the Company issued to VPEG 1,880,267 shares of its common stock and a five-year warrant to purchase 1,880,267 shares of its common stock at an exercise price of $0.75 per share, to be reduced to the extent the actual price per share in the Proposed Private Placement is less than $0.75.

 

On April 10, 2018, in connection with the Settlement Agreement, the Company and VPEG entered into a loan Agreement (the “New Debt Agreement”), pursuant to which VPEG may, at is discretion, loan to VPEG up to $2,000,000 under a secured convertible original issue discount promissory note (the “New VPEG Note”). Any loan made pursuant to the New VPEG Note will reflect a 10% original issue discount, will not bear interest in addition to the original issue discount, will be secured by a security interest in all of the Company’s assets, and at the option of VPEG will be convertible into shares of the Company’s common stock at a conversion price equal to $0.75 per share or, such lower price as shares of Common Stock are sold to investors in the Proposed Private Placement. The balance of the New VPEG Note was $1,115,400 and $0 as of December 31, 2018 and December 31, 2017, respectively (see Note 8, Notes Payable, for further information).

 

Divestiture of Aurora

 

On August 21, 2017, we entered into the Divestiture Agreement with Navitus, and on September 14, 2017, we entered into Amendment No. 1 to the Divestiture Agreement. Pursuant to the Divestiture Agreement, as amended, we agreed to divest and transfer our 50% ownership interest in Aurora to Navitus, which owned the remaining 50% interest, in consideration for a release from Navitus of all of our obligations under the second amended partnership agreement, dated October 1, 2011, between us and Navitus, including, without limitation, obligations to return to Navitus investors their accumulated deferred capital, deferred interest and related allocations of equity. We also agreed to (i) issue 4,382,872 shares of our common stock to Navitus and (ii) pay off or otherwise satisfy all indebtedness and other material liabilities of Aurora at or prior to closing of the Divestiture Agreement. Closing of the Divestiture Agreement was completed on December 13, 2017.

 

The Divestiture Agreement contained usual pre- and post-closing representations, warranties and covenants. In addition, Navitus agreed that our Company may take any steps necessary to amend the exercise price of warrants issued to Navitus Partners, LLC to reflect an exercise price of $1.52. We also agreed to provide Navitus with demand registration rights with respect to the shares to be issued to it under the Divestiture Agreement, whereby we agreed to, upon Navitus’ request, file a registration statement on an appropriate form with the Securities and Exchange Commission, or the SEC, covering the resale of such shares and use our commercially reasonable efforts to cause such registration statement to be declared effective within one hundred twenty (120) days following such filing.

 

5

 

 

Closing of the Divestiture Agreement was subject to customary closing conditions and certain other specific conditions, including the following: (i) the issuance of 4,382,872 shares of our common stock to Navitus; (ii) the payment or satisfaction by our Company of all indebtedness or other liabilities of Aurora, which total approximately $1.2 million; (iii) the receipt of any authorizations, consents and approvals of all governmental authorities or agencies and of any third parties; (iv) the execution of a mutual release by the parties; and (v) the execution of customary officer certificates by our Company and Navitus regarding the representations, warrants and covenants contained in the Divestiture Agreement.

 

In connection with the Divestiture Agreement, Navitus also entered into a Lock-Up and Resale Restriction Agreement with us pursuant to which it agreed not to sell the shares issued to until the first anniversary of the closing date, December 13, 2018; provided, however, that such transfer restrictions do not apply to transfers to an affiliate if such transfer is not for value and or transfers in an amount that does not exceed five percent (5%) of the total shares received by Navitus under the Divestiture Agreement per calendar month.

 

Our Industry and Market

 

The following information excerpts were sourced from a March 2017 Analysis Report published by Grand View Research, for the Oil and Gas Corrosion Protection Market (REPORT ID: GVR-1-68038-713-1). The full report can be purchased by visiting www.grandviewresearch.com.

 

The global oil & gas corrosion protection market size was estimated at USD 8.01 billion in 2015 and is expected to experience significant growth over the forecast period, primarily owing to the rising need for transportation and supply infrastructure in oil and gas industry. The global market is projected to grow at a compound annual growth rate, or CAGR, of 4.3% from 2016 - 2025 to reach $12.22 billion by 2025. This growth can be attributed to the additional benefits such as durability and toughness offered by epoxy based coatings. North America and the Middle East and Africa together account for more than half of the global market size. Rapid infrastructural development and technological advancements in the oil and gas sector are expected to further fuel the demand over the forecast period.

 

The market has been segmented into different types such as coatings, paints, inhibitors and others. The coatings segment accounted for the highest share globally with revenue of $2.86 billion in 2015 and is expected to remain the largest segment by 2025. Coatings made from various materials including epoxy, alkyd, polyurethanes and acrylic are used on pipelines and other components. Various factors considered in the formulation of epoxy resin based coatings include metal type, rate of flow, viscosity, flammability and physical location.

 

The regional market is mainly dominated by North America and the Middle East and Africa, with the presence of major oil and gas exploration markets such as the U.S. and Saudi Arabia. Government initiatives coupled with infrastructural developments in these countries are further propelling the growth of the market in these regions.

 

Sector Insights

 

The upstream sector of the oil and gas industry involves activities such as exploration and production of crude oil and natural gas. These activities primarily include drilling of exploratory wells, making requisite operations and bringing natural gas and other products to the ground surface. For these activities, various components require protection as they get older. Carbon steel is extensively used in this industry especially for pipelines and it freely corrodes when it comes into contact with water, which is produced with the natural gas and crude oil from underwater reservoirs.

 

The midstream sector consists of transportation activity of crude oil and natural gas. These products are transported by various medium including pipelines, tankers, tank cars, and trucks. The outer surface of the tanks or pipelines is prevented from the atmospheric corrosion with the help of coatings and cathodic protection.

 

In the downstream sector, during the refinery operations, most of the corrosion occurs due to the presence of water, H2S, CO2 , sodium chloride and sulfuric acid. In downstream, deterioration occurs due to curing agents those are present in crude oil or feedstock and are associated with process or control. To prevent such corrosion, various products including coatings, inhibitors, cathodic protection and paints are used.

 

Regional Insights

 

North America and the Middle East and African regions are projected to contribute to market growth in coming years primarily fueled by the need for transportation/supply infrastructure and technological innovations for the corrosion detection in various countries including the U.S., Canada, Saudi Arabia, UAE, and others. The applications in oil & gas sector such upstream, midstream and downstream have been experiencing significant growth in these countries over the past few years.

 

Our Products and Services

 

In today’s harsher drilling environment, exploration and productions companies are seeking new methods and technologies for reducing drill-string torque and down-hole friction when drilling long laterals. Without a comprehensive solution, drill pipe, tubing, tool joints and drill string mid-sections will suffer from aggressive wear that will negatively impact drilling torque, friction, time to complete and total drilling costs. Our Armacor® line of products will solve these problems with revolutionary amorphous alloys. Our alloys are mechanically much stronger, harder and corrosion resistant than crystalline structure alloys found in in the market today. Our goal is to help drillers across the major oil and gas basins of North America create better oil and gas well outcomes and lower total well costs when drilling long laterals. Our initial product line will be focused on tubing and drill-pipe metal coating products, RFID enclosure products and other services that provide protection and friction reduction for nearly every metal component of a drilling operation.

 

With hardness that can range from 900 to 1500 Vickers, our coatings products will be 3 to 5 times harder than normal metals such as titanium and steel. Oilfield products protected by these Armacor® coatings are lasting two to ten times longer than other coated products in field applications. Additionally, our coatings products will deliver a friction coefficient of 0.05 to 0.12, similar to the smoothness of Teflon.

 

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With the acquisition of Pro-Tech, a hardbanding service provider servicing Oklahoma Texas, Kansas, Arkansas, Louisiana, and New Mexico, we believe we will create opportunities to leverage our existing portfolio of intellectual property to fulfill our mission of operating as a technology-focused oilfield services company.

 

Our Competitors

 

The key players in the global market include The 3M Company, AkzoNobel N.V, Jotun A/S, Hempel A/S, Axalta Coating System Ltd., The Sherwin-Williams Company, Kansai Paints Co. Ltd., RPM International, Inc., Aegion Corporation, Ashland Inc., and BASF SE. The industry is characterized by merger and acquisitions as the players are focusing on increasing their market presence. In December 2016, AkzoNobel completed its acquisition of BASF India’s industrial coatings business which helped the company to focus on its coating businesses and decorative paints business.

 

Our Competitive Strengths

 

We believe that the following competitive strengths enable us to compete effectively.

 

AVV, a Liquidmetal Coatings related company, has granted us a worldwide, perpetual, royalty free, fully paid up sublicense to all intellectual property related to oil and gas sector products. We have the right to develop our own “use patents” under the license. Liquidmetal Coatings’ advanced material technology is providing solutions to decades-old problems across a wide range of industries and products.

 

Our product development partner Liquidmetal Coatings has been working with major oil and gas upstream companies for several years to develop the right products for their current needs. Liquidmetal Coatings is a private U.S. based company with over 20 years of leading-edge materials innovation. We believe that we have developed the most advanced family of metal coatings for protection against wear and corrosion.

 

Our patented oil and gas technology drilling products will be designed to reduce torque, friction, wear resistance, corrosion and other well drilling and completion needs. Our core products will be developed around patented amorphous alloy technology originally invented by NASA. Amorphous alloys are mechanically stronger and less susceptible to corrosion and wear, because they do not have naturally occurring weak regions or break points of crystalline atomic structure. Metals lacking a crystalline structure possess superior corrosion resistance, hardness, strength and a lower friction coefficient.

 

Our Growth Strategies

 

Our goal is to continue to expand the range of oil and gas product solutions provided to us as exclusive license holder of this patented technology.

 

Our Company will initially embark on a U.S. oilfield services company acquisition initiative, aimed at companies who are already using one or more of the Armacor® brand of Liquidmetal® Coatings Products and/or who are recognized as a high-quality services provider to strategic customers in the major north American oil and gas basins. When completed, each of these oilfield services company acquisitions will provide immediate revenue from their current regional customer base, while also providing us with a foundation for channel distribution and product development of our amorphous alloy technology 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, with ownership of a worldwide, perpetual, royalty free, fully paid up and exclusive license and rights to all future Liquidmetal® Coatings oil and gas product innovations, will provide the basis for more accessible financing to grow our Company and execute our oilfield services company acquisitions strategy. This patented protected intellectual property also creates a meaningfully differentiated oilfield services business, with little effective competition. The combination of friction reduction, torque reduction, reduced corrosion, wear and better data collection from the deployment of our RFID enclosures, only represent our initial product line. We anticipate new innovative products will come to market as we collaborate with drillers to solve their other down-hole needs.

 

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Much like the relationship that Dell Computer has with Intel and other strategic vendors, Liquidmetal Coatings and our Company will work together to establish a customer-focused “needs set” for research and development, our core product line, and value added product features and optimize well performance and customer satisfaction. We intend to further strengthen our market position by implementing the following growth strategies.

 

Metal Products – we plan to establish full service facilities in each major geographic area of drilling with products and services such as RFID enclosures, pipe coating services, hardbanding, inspection services, and machining and thread repair.

 

Software – we plan to develop life cycle management services, providing drill pipe asset tracking from cradle to grave, predictive maintenance modeling, collection and maintenance of all service history and delivery of this data-driven software tool to customers via cloud-based systems.

 

Intellectual Property

 

Our success will be dependent, in part, upon our proprietary rights to our products. The following consists of a description of our intellectual property rights.

 

As noted above, on August 21, 2017, AVV granted to us a worldwide, perpetual, royalty free, fully paid up and exclusive sublicense to all of AVV’s owned and licensed intellectual property for use in the oilfield services industry, except for a tubular solutions company headquartered in France.

 

In addition, LCME granted a license to us for the Liquidmetal® Coatings Products and Armacor® trademarks and service marks.

 

Governmental Regulation

 

Our business is impacted by federal, state and local laws and other regulations relating to the oil and natural gas industry, as well as laws and regulations relating to worker safety and environmental protection. We cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on us, our business or financial condition.

 

In addition, our customers are impacted by laws and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we currently operate. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services.

 

Environmental Matters

 

Our operations, and those of our customers, will be subject to extensive laws, regulations and treaties relating to air and water quality, generation, storage and handling of hazardous materials, and emission and discharge of materials into the environment. We believe we are in substantial compliance with all regulations affecting our business. Historically, our expenditures in furtherance of our compliance with these laws, regulations and treaties have not been material, and we do not expect the cost of compliance to be material in the future.

 

Employees

 

We have 14 full-time employees as of December 31, 2018. We believe that our relationships with our employees are satisfactory. We utilize the services of independent contractors to perform various daily operational and administrative duties.

 

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Available Information

 

We make available free of charge through our “INVESTORS – SEC FILINGS” section of our webs-site at www.vyey.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and the amendments to such filings, as soon as reasonably practicable after each are electronically filed with, or furnished to the SEC.

 

Our Corporate History

 

Our Company was organized under the laws of the State of Nevada on January 7, 1982 under the name All Things Inc. On March 21, 1985, our Company’s name was changed to New Environmental Technologies Corporation. On April 28, 2003, our Company’s name was changed to Victory Capital Holdings Corporation. On May 3, 2006, our Company’s name was changed to Victory Energy Corporation. On May 29, 2018, our Company’s name was changed to Victory Oilfield Tech, Inc.

From inception until 2004, we had no material business operations. In 2004, we began the search for the acquisition of assets, property or businesses that could benefit our Company and its stockholders. In 2005, management determined that we should focus on projects in the oil and gas industry.

 

In January 2008, we and Navitus established Aurora. Prior to the Divesture of Aurora described below, our Company was the managing partner of Aurora and held a 50% partnership interest in Aurora. All of our oil and natural gas operations were conducted through Aurora.

 

Item 1A. Risk Factors

 

Our business is subject to a number of risks including, but not limited to, those described below:

 

Risks Related to Our Business, Industry, and Strategy

 

We have substantial liabilities that will require that we raise additional financing to continue operations. Such financing may be available on less advantageous terms, if at all. Additional financing may result in substantial dilution.

 

As of December 31, 2018, we had $76,746 of cash, current assets of $646,006, current liabilities of $2,801,248 and a working capital deficit of $2,155,242. Our current liabilities mainly include accounts payable and short-term notes payable. We are currently unable to pay our accounts payable. If any material creditor decides to commence legal action to collect from us, it could jeopardize our ability to continue in business.

 

We will be required to seek additional debt or equity financing in order to pay our current liabilities and to support our anticipated operations. We may not be able to obtain additional financing on satisfactory terms, or at all, and any new equity financing could have a substantial dilutive effect on our existing stockholders. If our cash on hand, cash flows from operating activities, and borrowings under our credit facility are not sufficient to fund our capital expenditures, we may be required to refinance or restructure our debt, if possible, sell assets, or reduce or delay acquisitions or capital investments, even if publicly announced. If we cannot obtain additional financing, we will not be able to conduct the operating activities that we need to generate revenue to cover our costs, and our results of operations would be negatively affected.

 

There is substantial uncertainty we will continue operations in which case you could lose your investment.

 

We have determined that there is substantial doubt that we can continue as an ongoing business for the next 12 months. The financial statements do not include any adjustments that might result from the uncertainty about our ability to continue in business. As such we may have to cease operations and you could lose your entire investment.

 

The accompanying financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As presented in the financial statements, we have incurred losses of $27,309,510 and $20,720,286 for the twelve months ended December 31, 2018 and 2017, respectively.

 

The cash proceeds from new contributions to the Aurora partnership by Navitus, and loans from affiliates have allowed us to continue operations. We anticipate that operating losses will continue in the near term until we begin to operate as a technology focused oilfield services business.

 

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Our ability to achieve and maintain profitability and positive cash flow is dependent upon:

 

Our ability to raise capital to fund our operations, working capital needs, capital expenses and potential acquisitions;

 

The success of our oilfield services acquisition initiative;

 

Our ability to leverage our intellectual property, including our License;

 

Our ability to establish full service facilities in each major geographic area of drilling with products and services such are RFID enclosures, pipe coating services, hardbanding, inspection services, and machining and thread repair; and

 

Our ability to develop life cycle management services, providing drill pipe asset tracking from cradle to grave, predictive maintenance modeling, collection and maintenance of all service history and delivery of this data-driven software tool to customers via cloud-based systems.

 

Based upon current plans, we expect to incur operating losses in future periods as we will be incurring expenses and not generating significant revenues. We cannot guarantee that we will be successful in generating significant revenues in the future. Failure to generate revenues that are greater than our expenses could result in the loss of all or a portion of your investment.

 

We plan to operate in a highly competitive industry, with intense price competition, which may intensify as our competitors expand their operations.

 

The market for oilfield services in which we plan to operate is highly competitive and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial resources than we do. Contracts are traditionally awarded on the basis of competitive bids or direct negotiations with customers. The principal competitive factors in our markets are product and service quality and availability, responsiveness, experience, equipment quality, reputation for safety and price. The competitive environment has intensified as recent mergers among exploration and production companies have reduced the number of available customers. The fact that drilling rigs and other vehicles and oilfield services equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry. We may be competing for work against competitors that may be better able to withstand industry downturns and may be better suited to compete on the basis of price, retain skilled personnel and acquire new equipment and technologies, all of which could affect our revenue and profitability.

 

Downturns in the oil and gas industry, including the oilfield services business, may have a material adverse effect on our financial condition or results of operations.

 

The oil and gas industry is highly cyclical and demand for most our future oilfield services and products will be substantially dependent on the level of expenditures by the oil and gas industry for the exploration, development and production of crude oil and natural gas reserves, which are sensitive to oil and natural gas prices and generally dependent on the industry’s view of future oil and gas prices. There are numerous factors affecting the supply of and demand for our future services and products, which are summarized as:

 

general and economic business conditions;

 

market prices of oil and gas and expectations about future prices;

 

cost of producing and the ability to deliver oil and natural gas;

 

the level of drilling and production activity;

 

mergers, consolidations and downsizing among our future clients or acquisition targets;

 

coordination by OPEC;

 

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the impact of commodity prices on the expenditure levels of our future clients or acquisition targets;

 

financial condition of our client base and their ability to fund capital expenditures;

 

the physical effects of climatic change, including adverse weather, such as increased frequency or severity of storms, droughts and floods, or geologic/geophysical conditions;

 

the adoption of legal requirements or taxation, including, for example, a carbon tax, relating to climate change that lowers the demand for petroleum-based fuels;

 

civil unrest or political uncertainty in oil producing or consuming countries;

 

level of consumption of oil, gas and petrochemicals by consumers;

 

changes in existing laws, regulations, or other governmental actions, including temporary or permanent moratoria on hydraulic fracturing or offshore drilling, or shareholder activism or governmental rulemakings or agreements to restrict greenhouse gas emissions, or GHGs, which developments could have an adverse impact on the oil and gas industry and/or demand for our future services;

 

the business opportunities (or lack thereof) that may be presented to and pursued by us;

 

availability of services and materials for our future clients or acquisition targets to grow their capital expenditures;

 

ability of our future clients or acquisition targets to deliver product to market;

 

availability of materials and equipment from key suppliers; and

 

cyber-attacks on our network that disrupt operations or result in lost or compromised critical data.

 

The oil and gas industry has historically experienced periodic downturns, which have been characterized by diminished demand for oilfield services and products and downward pressure on pricing. A significant downturn in the oil and gas industry could result in a reduction in demand for oilfield services and could adversely affect our future operating results.

 

Our oilfield services business depends on domestic drilling activity and spending by the oil and natural gas industry in the United States. The level of oil and natural gas exploration and production activity in the United States is volatile and we may be adversely affected by industry conditions that are beyond our control.

 

We depend on our future customers’ willingness to make expenditures to explore for and to develop and produce oil and natural gas in the United States. We cannot accurately predict which or what level of our future services and products our clients will need in the future. Our future customers’ willingness to undertake these activities depends largely upon prevailing industry conditions that are influenced by numerous factors over which management has no control, such as:

 

domestic and worldwide economic conditions;

 

the supply and demand for oil and natural gas;

 

the level of prices, and expectations about future prices, of oil and natural gas;

 

the cost of exploring for, developing, producing and delivering oil and natural gas;

 

the expected rates of declining current production;

 

the discovery rates of new oil and natural gas reserves;

 

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available pipeline, storage and other transportation capacity;

 

federal, state and local regulation of exploration and drilling activities;

 

weather conditions, including hurricanes that can affect oil and natural gas operations over a wide area;

 

political instability in oil and natural gas producing countries;

 

technical advances affecting energy consumption;

 

the price and availability of alternative fuels;

 

the ability of oil and natural gas producers to raise equity capital and debt financing; and

 

merger and divestiture activity among oil and natural gas producers.

 

We expect that our revenues will be generated from customers or acquisition targets who are engaged in drilling for and producing oil and natural gas. Developments that adversely affect oil and natural gas drilling and production services could adversely affect our customers’ demand for our products and services, resulting in a material adverse effect on our business, financial condition and results of operations. Current and anticipated oil and natural gas prices, the related level of drilling activity, and general production spending in the areas in which we plan to have operations are the primary drivers of demand for our future services. The level of oil and natural gas exploration and production activity in the United States is volatile and this volatility could have a material adverse effect on the level of activity by our future customers. Any reduction by our future customers of activity levels may adversely affect the prices that we can charge or collect for our services. In addition, any prolonged substantial reduction in oil and natural gas prices would likely affect oil and natural gas production levels and, therefore, affect demand for the services we plan to provide. Moreover, a decrease in the development rate of oil and natural gas reserves in our acquisition targets’ market areas, whether due to increased governmental regulation of or limitations on exploration and drilling activity or other factors, may also have an adverse impact on our business, even in an environment of stronger oil and natural gas prices.

 

Our planned operations are subject to hazards inherent in the oil and natural gas industry.

 

The operational risks inherent in our industry could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to retain our future services if they view our safety record as unacceptable, which could cause us to lose substantial revenue. We do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. We evaluate certain of our risks and insurance coverage annually. After carefully weighing the costs, risks, and benefits of retaining versus insuring various risks, we occasionally opt to retain certain risks not covered by our insurance policies. The occurrence of an event not fully insured against, or the failure of an insurer to meet its insurance obligations, could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and there can be no assurance that insurance will be available to cover any or all of these risks, or, even if available, that it will be adequate or that insurance premiums or other costs will not rise significantly in the future, so as to make such insurance costs prohibitive. In addition, our insurance is subject to coverage limits and some policies exclude coverage for damages resulting from environmental contamination.

 

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We may not realize the anticipated benefits of acquisitions or divestitures.

 

We continually seek opportunities to increase efficiency and value through various transactions, including purchases or sales of assets or businesses. We intend to pursue our U.S. oilfield services company acquisition initiative, aimed at companies who are already using one or more of the Armacor® brand of Liquidmetal® Coatings Products and/or who are recognized as a high- quality services provider to strategic customers in the major North American oil and gas basins. These transactions are intended to result in the offering of new services or products, the entry into new markets, the generation of income or cash, the creation of efficiencies or the reduction of risk. Whether we realize the anticipated benefits from an acquisition or any other transactions depends, in part, upon our ability to timely and efficiently integrate the operations of the acquired business, the performance of the underlying product and service portfolio, and the management team and other personnel of the acquired operations. Accordingly, our financial results could be adversely affected from unanticipated performance issues, legacy liabilities, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets, credit guarantees, partner performance and indemnifications. In addition, the financing of any future acquisition completed by us could adversely impact our capital structure or increase our leverage. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful. We also may make strategic divestitures from time to time. These transactions may result in continued financial involvement in the divested businesses, such as guarantees or other financial arrangements, following the transaction. Nonperformance by those divested businesses could affect our future financial results through additional payment obligations, higher costs or asset write- downs. Except as required by law or applicable securities exchange listing standards, which would only apply when, and if, we are listed on a national securities exchange, we do not expect to ask our shareholders to vote on any proposed acquisition or divestiture. Moreover, we generally do not announce our acquisitions or divestitures until we have entered into a definitive agreement for an acquisition or divestiture.

 

There are risks relating to our acquisition strategy. If we are unable to successfully integrate and manage businesses that we plan to acquire in the future, our results of operations and financial condition could be adversely affected.

 

One of our key business strategies is to acquire technologies, operations and assets that are complementary to our existing businesses. There are financial, operational and legal risks inherent in any acquisition strategy, including:

 

increased financial leverage;

 

ability to obtain additional financing;

 

increased interest expense; and

 

difficulties involved in combining disparate company cultures and facilities.

 

The success of any completed acquisition will depend on our ability to effectively integrate the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. No assurance can be given that we will be able to continue to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to incorporate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operation.

 

If we are not successful in continuing to grow our oilfield services business, then we may have to scale back or even cease our ongoing business operations.

 

Our success is significantly dependent on our U.S. oilfield services company acquisition initiative, aimed at service companies who are already using one or more of the Armacor® brand of Liquidmetal® Coatings Products to service their customers and/or who are recognized as a high-quality services provider to strategic customers in the major North American oil and gas basins. When and if completed, these oilfield services company acquisitions are expected to provide immediate revenue from their current regional customer base, while also providing us with a foundation for channel distribution and product development of our amorphous alloy technology products. We may be unable to locate suitable companies or operate on a profitable basis. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our Company.

 

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We depend on key management personnel and technical experts. The loss of key employees or access to third party technical expertise could impact our ability to execute our business.

 

If we lose the services of the senior management, or access to independent land men, geologists and reservoir engineers with whom we have strategic relationships during our transition period, our ability to function and grow could suffer, in turn, negatively affecting our business, financial condition and results of operations.

 

Effective April 17, 2019, Mr. Kenneth Hill resigned as the Company’s Chief Executive Officer, interim Chief Financial Officer, Secretary, Treasurer and member of the Board of Directors. On April 23, 2019, the Company’s Board of Directors appointed Mr. Kevin DeLeon as interim Chief Executive Officer and interim Secretary of the Company until a permanent replacement is appointed. Mr. DeLeon has assumed the duties of these positions effective immediately. If we are not able to find a qualified permanent replacement for these positions, it could have a material adverse effect on our ability to effectively pursue our business strategy and our relationships with advertisers and content partners. Leadership transitions can be inherently difficult to manage and may cause uncertainty or a disruption to our business or may increase the likelihood of turnover of other key officers and employees.

 

Severe weather could have a material adverse effect on our future business.

 

Our business could be materially and adversely affected by severe weather. Our future clients or acquisition targets with oil and natural gas operations located in various parts of the United States may be adversely affected by hurricanes and storms, resulting in reduced demand for our future services. Furthermore, our future clients or acquisition targets may be adversely affected by seasonal weather conditions. Adverse weather can also directly impede our own future operations. Repercussions of severe weather conditions may include:

 

curtailment of services;

 

weather-related damage to facilities and equipment, resulting in suspension of operations;

 

inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and

 

loss of productivity.

 

These constraints could delay our future operations and materially increase our operating and capital costs. Unusually warm winters may also adversely affect the demand for our services by decreasing the demand for natural gas.

 

We are subject to federal, state and local regulation regarding issues of health, safety and protection of the environment. Under these regulations, we may become liable for penalties, damages or costs of remediation. Any changes in laws and government regulations could increase our costs of doing business.

 

Our operations and the operations of our customers are subject to extensive and frequently changing regulation. More stringent legislation, regulation or taxation of drilling activity could directly curtail such activity or increase the cost of drilling, resulting in reduced levels of drilling activity and therefore reduced demand for our services. Numerous federal, state and local departments and agencies are authorized by statute to issue, and have issued, rules and regulations binding upon participants in the oil and gas industry. Our operations and the markets in which we participate are affected by these laws and regulations and may be affected by changes to such laws and regulations in the future, which may cause us to incur materially increased operating costs or realize materially lower revenue, or both.

 

Laws protecting the environment generally have become more stringent over time and are expected to continue to do so, which could lead to material increases in costs for future environmental compliance and remediation. The modification or interpretation of existing laws or regulations, or the adoption of new laws or regulations, could curtail exploratory or developmental drilling for oil and natural gas and could limit well site services opportunities. Additionally, environmental groups have advocated increased regulation in certain areas in which we currently operate or in which we may operate in the future. These initiatives could lead to more stringent permitting requirements, increased regulation, possible enforcement actions against the regulated community, and a moratorium or delays on permitting, which could adversely affect our well site service opportunities.

 

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Some environmental laws and regulations may impose strict liability, which means that in some situations we could be exposed to liability as a result of our conduct that was lawful at the time it occurred as a result of conduct of, or conditions caused by, prior operators or other third parties. Clean-up costs and other damages, arising as a result of environmental laws, and costs associated with changes in environmental laws and regulations could be substantial and could have a material adverse effect on our financial condition. In addition, the occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on our financial condition and operations.

 

Increased regulation of hydraulic fracturing could result in reductions or delays in oil and gas production by our customers, which could adversely impact our revenue.

 

We anticipate that a significant portion of our customers’ oil and gas production will be developed from unconventional sources, such as shales, that require hydraulic fracturing as part of the completion process. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate production. We do not engage in any hydraulic fracturing activities ourselves although many of our customers may do so. If additional levels of regulation and permits were required through the adoption of new laws and regulations at the federal or state level that could lead to delays, increased operating costs and prohibitions for our customers, such regulations could reduce demand for our services and materially adversely affect our results of operations.

 

Climate change legislation, regulatory initiatives and litigation could result in increased operating costs and reduced demand for the services we provide.

 

In recent years, the U.S. Congress has considered legislation to restrict or regulate greenhouse gases (“GHGs”), such as carbon dioxide and methane that may be contributing to global warming. In addition, almost half of the states, either individually or through multi-state regional initiatives, have begun to address GHGs, primarily through the planned development of emission inventories or regional GHG cap and trade programs.

 

Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing GHGs would impact our business, either directly or indirectly, any future federal or state laws or implementing regulations that may be adopted to address GHGs could require us to incur increased operating costs and could adversely affect demand for the natural gas our customers extract using our services. Moreover, incentives to conserve energy or use alternative energy sources could reduce demand for oil and natural gas, resulting in a decrease in demand for our services. We cannot predict with any certainty at this time how these possibilities may affect our operations.

 

Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us.

 

We plan to enter into agreements with our customers governing the provision of our services, which usually will include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition and results of operations.

 

Delays in obtaining permits by our future customers or acquisition targets for their operations could impair our business.

 

Our future customers or acquisition targets are required to obtain permits from one or more governmental agencies in order to perform drilling and/or completion activities. Such permits are typically required by state agencies but can also be required by federal and local governmental agencies. The requirements for such permits vary depending on the location where such drilling and completion activities will be conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued and the conditions, which may be imposed in connection with the granting of the permit. Certain regulatory authorities have delayed or suspended the issuance of permits while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. Permitting delays, an inability to obtain new permits or revocation of our future customers’ or acquisition targets’ current permits could cause a loss of revenue and could materially and adversely affect our business, financial condition and results of operations.

 

Gas drilling and production operations require adequate sources of water to facilitate the fracturing process and the disposal of that water when it flows back to the wellbore. If our future customers or acquisition targets are unable to obtain adequate water supplies and dispose of the water we use or remove at a reasonable cost and within applicable environmental rules, it may have an adverse impact on our business.

 

New environmental regulations governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells may increase our customers’ operating costs and cause delays, interruptions or termination of operations, the extent of which cannot be predicted, all of which could have an adverse effect on our operations and financial performance. Water that is used to fracture gas wells must be removed when it flows back to the wellbore. Our future customers’ or acquisition targets’ ability to remove and dispose of water will affect production and the cost of water treatment and disposal and may affect their profitability. The imposition of new environmental initiatives and regulations could include restrictions on our customers’ ability to conduct hydraulic fracturing or disposal of waste, including produced water, drilling fluids and other wastes associated with the exploration, development and production of hydrocarbons. This may have an adverse impact on our business.

 

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If we are unable to obtain patents, licenses and other intellectual property rights covering our services and products, our operating results may be adversely affected.

 

Our success depends, in part, on our ability to obtain patents, licenses and other intellectual property rights covering our services and products. On August 21, 2017, we entered into the Transaction Agreement with AVV, pursuant to which AVV granted to us a worldwide, perpetual, royalty free, fully paid up and exclusive sublicense to all of AVV’s owned and licensed intellectual property for use in the oilfield services industry, except for a tubular solutions company headquartered in France. In connection with the Transaction Agreement, we also entered into a trademark license agreement with LMCE, pursuant to which LMCE granted a license for the Liquidmetal® Coatings Products and Armacor® trademarks and service marks to us. To that end, we have obtained certain patents and intend to continue to seek patents on some of our inventions, services and products. While we have patented some of our key technologies, we do not patent all of our proprietary technology, even when regarded as patentable. The process of seeking patent protection can be long and expensive. There can be no assurance that patents will be issued from currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. In addition, effective copyright and trade secret protection may be unavailable or limited in certain countries. Litigation, which could demand significant financial and management resources, may be necessary to enforce our patents or other intellectual property rights. Also, there can be no assurance that we can obtain licenses or other rights to necessary intellectual property on acceptable terms.

 

If we are not able to develop or acquire new products or our products become technologically obsolete, our results of operations may be adversely affected.

 

The market for our future services and products is characterized by changing technology and product introduction. As a result, our success is dependent upon our ability to develop or acquire new services and products on a cost-effective basis and to introduce them into the marketplace in a timely manner. While we intend to continue committing substantial financial resources and effort to the development of new services and products, we may not be able to successfully differentiate our future services and products from those of our competitors. Our future clients may not consider our proposed services and products to be of value to them; or if the proposed services and products are of a competitive nature, our clients may not view them as superior to our competitors’ services and products. In addition, we may not be able to adapt to evolving markets and technologies, develop new products, or achieve and maintain technological advantages.

 

If we are unable to continue developing competitive products in a timely manner in response to changes in technology, our future business and operating results may be materially and adversely affected. In addition, continuing development of new products inherently carries the risk of inventory obsolescence with respect to our older products.

 

Our ability to conduct our business might be negatively impacted if we experience difficulties with outsourcing and similar third-party relationships.

 

We plan to outsource certain business and administrative functions and rely on third parties to perform certain services on our behalf. We may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies, such strategies prove to be ineffective or fail to provide expected cost savings, or our third-party providers fail to perform as anticipated, we may experience operational difficulties, increased costs, reputational damage and a loss of business that may have a material adverse effect on our business, financial condition and results of operations.

 

We have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential stockholders could lose confidence in our financial statements, which would harm the trading price of our common stock.

 

Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting.

 

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Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated filers or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies, like us, are not required to include an attestation report of their auditors in annual reports.

 

A report of our management is included under Item 9A “Controls and Procedures.” We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in our annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive a positive attestation from our independent auditors.

 

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2018, management identified material weaknesses. These material weaknesses were associated with our lack of sufficient segregation of duties within accounting functions. We are undertaking remedial measures, which measures will take time to implement and test, to address these material weaknesses. There can be no assurance that such measures will be sufficient to remedy the material weaknesses identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. See Item 9A “Controls and Procedures” for more information.

 

Risks Related to Our Common Stock

 

Because we did not timely comply with our SEC filing obligations, our common stock was dropped to the OTC Pink Market and is currently designated with a “stop sign,” which may limit our trading market and may adversely affected the liquidity of our common stock.

 

We did not timely file with the SEC this Annual Report on Form 10-K for the year ended December 31, 2018, and we have not yet filed our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019, June 30, 2019 and September 30, 2019.  As a consequence, our common stock has been moved from the OTCQB Venture Market to the OTC Pink Market, which is a more limited market than the OTCQB marketplace. Securities on the Pink Market are more volatile, and the risk to investors is greater.  Furthermore, our common stock is currently designated with a Pink Market “stop sign,” indicating that current public information about our Company is not available due to “delinquent SEC reporting.” The quotation of our common stock on such marketplace may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have an adverse impact on our ability to raise capital in the future.

 

Once we are current with our SEC filing obligations and the “stop sign” is removed, we will need to reapply to the OTC Markets Group before our common stock can trade on the OTCQB, which application may or may not be approved. There can be no assurance that there will be a more active market for our shares of common stock either now or in the future or that stockholders will be able to liquidate their investment or liquidate it at a price that reflects the value of the business. As a result, our stockholders may not find purchasers for our securities should they to desire to sell them.

 

The price of our common stock could experience significant volatility.

 

The market price for our common stock could fluctuate due to various factors. In addition to other factors described in this section, these factors may include, among others:

 

conversion of outstanding stock options or warrants;

 

announcements by us or our competitors of new investments;

 

17

 

 

developments in existing or new litigation;

 

changes in government regulations;

 

fluctuations in our quarterly and annual operating results; and

 

general market and economic conditions.

 

In addition, the stock markets have, in recent years, experienced significant volume and price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stock is traded. Market prices and the trading volume of our stock may continue to experience significant fluctuations due to the matters described above, as well as economic and political conditions in the United States and worldwide, investors’ attitudes towards our business prospects, and changes in the interests of the investing community. As a result, the market price of our common stock has been and may continue to be adversely affected and our stockholders may not be able to sell their shares or to sell them at desired prices.

 

We may be subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.

 

The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.

 

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

There can be no assurance that our common stock will qualify for exemption from this rule. In any event, even if our common stock were exempt from this rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.

 

Future sales or perceived sales of our common stock could depress our stock price.

 

If the holders of shares of our common stock were to attempt to sell a substantial amount of their holdings at once, our stock price could decline. Moreover, the perceived risk of this potential dilution could cause stockholders to attempt to sell their shares and investors to short the shares, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of shares being offered for sale to increase, our stock price would likely further decline. All of these events could combine to make it very difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

 

Issuance of shares of our common stock upon the exercise of options or warrants will dilute the ownership interest of our existing stockholders and could adversely affect the market price of our common stock.

 

As of December 31, 2018, we had outstanding stock options to purchase an aggregate of 221,713 shares of common stock and warrants to purchase an aggregate of 2,713,103 shares of common stock. The exercise of the stock options and warrants and the sales of stock issuable pursuant to them would further reduce a stockholder’s percentage voting and ownership interest. Further, the stock options and warrants are likely to be exercised when our common stock is trading at a price that is higher than the exercise price of these options and warrants and we would be able to obtain a higher price for our common stock than we would receive under such options and warrants. The exercise, or potential exercise, of these options and warrants could adversely affect the market price of our common stock and the terms on which we could obtain additional financing. The ownership interest of our existing stockholders may be further diluted through adjustments to certain outstanding warrants under the terms of their anti-dilution provisions.

 

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Concentration of ownership of management and directors may reduce the control by other stockholders over our Company.

 

Our executive officers and directors own or exercise full or partial control over approximately 89% of our outstanding common stock. Thus, other investors in our common stock may not have much influence on corporate decision-making. In addition, the concentration of control over our common stock in the executive officers and directors could prevent a change in control of our Company.

 

Our future capital needs could result in dilution of your investment.

 

Our Board of Directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of our common stock or other securities. These issuances would likely dilute the ownership interests of our current investors and may dilute the net tangible book value per share of our common stock. Investors in subsequent offerings may also have rights, preferences and privileges senior to our current stockholders, which may adversely impact our current stockholders.

 

We have not paid dividends in the past and our Board of Directors does not expect to pay dividends in the future.

 

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future.

 

The payment of dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payments of dividends present in any of our future debt agreements and other factors our Board of Directors may deem relevant. If we do not pay dividends, a return on your investment will only occur if our stock price appreciates.

 

Securities analysts may not initiate coverage for our common stock or may issue negative reports and this may have a negative impact on the market price of our common stock.

 

The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. It may be difficult for companies such as us, with smaller market capitalizations, to attract a sufficient number of securities analysts that will cover our common stock. If one or more of the analysts who elect to cover our Company downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our Company, we could lose visibility in the market, which in turn could cause our stock price to decline. This could have a negative effect on the market price of our stock.

 

Nevada law and our charter documents contain provisions that could delay or prevent actual and potential changes in control, even if they would benefit stockholders.

 

Our articles of incorporation authorize the issuance of preferred shares, which may be issued with dividend, liquidation, voting and redemption rights senior to our common stock without prior approval by the stockholders. The preferred stock may be issued for such consideration as may be fixed from time to time by our Board of Directors. Our Board may issue such shares of preferred stock in one or more series, with such designations, preferences and rights or qualifications, limitations or restrictions thereof as shall be stated in the resolution of resolutions.

 

The issuance of preferred stock could adversely affect the voting power and other rights of the holders of common stock. Preferred stock may be issued quickly with terms calculated to discourage, make more difficult, delay or prevent a change in control of our Company or make removal of management more difficult. As a result, our Board of Directors’ ability to issue preferred stock may discourage the potential hostile acquirer, possibly resulting in beneficial negotiations. Negotiating with an unfriendly acquirer may result in, among other things, terms more favorable to us and our stockholders. Conversely, the issuance of preferred stock may adversely affect any market price of, and the voting and other rights of the holders of the common stock.

 

These and other provisions in the Nevada corporate statutes and our charter documents could delay or prevent actual and potential changes in control, even if they would benefit our stockholders.

 

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Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

Our executive office space lease is month to month and is for approximately 1,200 square feet at 3355 Bee Caves Road, Suite 608, Austin, Texas 78746. The monthly lease cost is $2,500.

 

We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

 

Item 3. LEGAL PROCEEDINGS

 

Cause No. CV-47,230; James Capital Energy, LLC and Victory Energy Corporation v. Jim Dial, et al.; In the 142nd District Court of Midland County, Texas.

 

This is a lawsuit filed on or about January 19, 2010, by James Capital Energy, LLC and our Company against numerous parties for fraud, fraudulent inducement, negligent misrepresentation, breach of contract, breach of fiduciary duty, trespass, conversion and a few other related causes of action. This lawsuit stems from an investment our Company entered into for the purchase of six wells on the Adams Baggett Ranch with the right of first refusal on option acreage.

 

On December 9, 2010, our Company was granted an interlocutory Default Judgment against Defendants Jim Dial, 1st Texas Natural Gas Company, Inc., Universal Energy Resources, Inc., Grifco International, Inc., and Precision Drilling & Exploration, Inc. The total judgment amounted to approximately $17,183,987.

 

Our Company has added a few more parties to this lawsuit. Discovery is ongoing in this case and no trial date has been set at this time.

 

We believe they will be victorious against all the remaining Defendants in this case.

 

On October 20, 2011, Defendant Remuda filed a Motion to Consolidate and a Counterclaim against our Company. Remuda is seeking to consolidate this case with two other cases wherein Remuda is the named Defendant. An objection to this motion was filed and the cases have not been consolidated. Additionally, we do not believe that the counterclaim made by Remuda has any legal merit.

 

There was no further activity related to this case during the years ended December 31, 2018 and 2017, respectively.

 

Item 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

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PART II

 

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is currently quoted on the OTC Pink Market operated by OTC Markets Group under the symbol “VYEY.” The following table sets forth the high and low bid information for each quarter for the years ended December 31, 2018 and 2017 during which time our common stock was quoted on the OTCQB Venture Market. The information reflects prices between dealers, and does not include retail markup, markdown, or commission, and may not represent actual transactions.

 

On December 19, 2017, we completed a 1-for-38 reverse stock split of our outstanding common stock. As a result of this stock split, our issued and outstanding common stock decreased from 197,769,460 to 5,206,150 shares. Accordingly, the bid prices in the following table have been adjusted to show the effect of this stock split.

 

      Bid Prices 
Fiscal Year Ended December 31,  Period  High   Low 
2018  First Quarter  $4.00   $3.01 
   Second Quarter  $3.05   $1.90 
   Third Quarter  $1.92   $1.01 
   Fourth Quarter  $1.15   $0.30 
2017  First Quarter  $5.32   $1.90 
   Second Quarter  $3.04   $1.14 
   Third Quarter  $9.12   $1.14 
   Fourth Quarter  $9.50   $3.80 

 

Holders

 

On December 31, 2018, there were approximately, 1,424 holders of record of our common stock. This number excludes the shares owned by shareholders holding shares under nominee security position listings.

 

The transfer agent for our common stock is Transfer Online, Inc., 512 SE Salmon Street, Portland, Oregon 97214.

 

Dividend Policy

 

We have not paid any cash dividends on our common stock and do not expect to do so in the foreseeable future. We intend to apply our earnings, if any, in expanding our operations and related activities. The payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend upon such factors as earnings levels, capital requirements, our financial condition and other factors deemed relevant by the Board of Directors.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

 

Recent Sales of Unregistered Securities

 

We have not sold any equity securities during the 2018 fiscal year that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the 2018 fiscal year.

 

Purchases of Equity Securities

 

We did not purchase any of our own common stock during the fourth quarter of 2018.

 

Item 6. SELECTED FINANCIAL DATA

 

Not applicable

 

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Item 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this report. 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, including those set forth under Item 1A “Risk Factors” and elsewhere in this report.

 

General Overview

 

We are an Austin, Texas based publicly held oilfield energy technology products company focused on improving well performance and extending the lifespan of the industry’s most sophisticated and expensive equipment. America’s resurgence in oil and gas production is largely driven by new innovative technologies and processes as most dramatically and recently demonstrated by fracking. We exclusively license intellectual property related to amorphous metal alloys for use in the global oilfield services industry. Amorphous alloys 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 patented and licensed products utilize amorphous coatings designed to reduce drill-string torque, friction, wear and corrosion in a cost-effective manner, while protecting the integrity of the base metal. Our industry leading Armacor brand of hardbanding products have coated millions of tool joints across a variety of geologic basins. The Company is also testing a revolutionary amorphous technology based drill pipe mid-section coating product and ruggedized RFID enclosure that will allow tracking and optimization of production tubing in harsh environments and enable the provision of related data services to our customers. These products should help substantially scale our business when they become commercially available in the near future. These products will be sold directly by Victory and through authorized distributors.

 

This intellectual property-based technology platform provides significant opportunity for us to continue an expansion of our product line as we meet additional needs of our exploration and production customers. With further development, we anticipate our amorphous alloy coating technology will be extendible to hundreds of other metal components such as frac pump plunger rods, mud pump extension rods, gate valves, drill string torque reducers, pump impellers, stabilizers, wear sleeves and a host of other items used in the drilling and completion process.

 

We plan to continue our U.S. oilfield services company acquisition initiative, aimed at companies which are already using one or more of the Armacor brand of Liquidmetal coating products and/or which are 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 amorphous alloy technology 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, with ownership of a worldwide, perpetual, royalty free, fully paid up and exclusive license and rights to all future Liquidmetal oil and gas product innovations, will provide the basis for more accessible financing to grow the Company and execute our oilfield services company acquisitions strategy. This patent protected intellectual property helps create a meaningfully differentiated oilfield services business, with little effective competition. The combination of friction reduction, torque reduction, reduced corrosion, wear and better data collection from the deployment of our ruggedized RFID enclosures, only represent our initial product line. We anticipate new innovative products will come to market as we collaborate with drillers to solve their other down-hole needs.

 

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Recent Developments

 

On July 31, 2018, the Company entered into a stock purchase agreement to purchase 100% of the issued and outstanding common stock of Pro-Tech, a hardbanding company servicing Oklahoma, Texas, Kansas, Arkansas, Louisiana, and New Mexico. The Company believes that the acquisition of Pro-Tech will create opportunities to leverage its existing portfolio of intellectual property to fulfill its mission of operating as a technology-focused oilfield services company. The stock purchase agreement was included as Exhibit 10-1 on the form 8-K filed by us on August 2, 2018.

 

On July 31, 2018, the Company entered into a loan agreement to fund the acquisition of Pro-Tech with Kodak, pursuant to which the Company borrowed from Kodak $375,000 under the Kodak Note. Under the loan agreement with Kodak, the Company issued to an affiliate of Kodak a five-year warrant to purchase 375,000 shares of the Company’s 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 on August 2, 2018.

 

Results of Operations

 

The following summarizes key components of our results of operations during the years ended December 31, 2018 and 2017.

 

General and Administrative Expense: General and administrative expenses increased $11,510,924, or 526%, to $13,701,391 for the year ended December 31, 2018 from $2,190,467 for the year ending December 31, 2017. The increase is primarily due to share based compensation of $11,281,602 recorded in connection with a settlement agreement and mutual release entered into by the Company with VPEG. See Note 13, Related Party Transactions, for further information.

 

Depreciation and Amortization: Depreciation and amortization expenses increased $666,486 or 4,299% to $681,988 for the twelve months ended December 31, 2018 from $15,502 for the twelve months ended December 31, 2017 mainly due to the amortization of intangible assets acquired in connection with the Transaction Agreement described in Item 1 under the header Transaction Agreement. Also see Note 6, Goodwill and Other Intangible Assets, for further information.

 

Interest Expense: Interest expense decreased $92,201, or 27%, to $246,035 for the twelve months ended December 31, 2018 from $338,236 for the twelve months ended December 31, 2017. The decrease is primarily due to the restructuring of notes payable to affiliates under the Settlement Agreement and the restructuring of the Rogers note payable under the New Rogers Settlement Agreement. See Note 8, Notes Payable, for further information.

 

Income Taxes: There is no provision for income tax expenses recorded for either the twelve months ended December 31, 2018 or December 31, 2017 due to the net operating losses, (“NOL”) for both 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 the 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.

 

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Loss from Continuing Operations: Loss from continuing operations increased $24,949,601, or 987%, to $27,478,304 for the twelve months ended December 31, 2018 from $2,528,703 for the twelve months ended December 31, 2017. The increase is primarily due to impairment of intangible assets of $14,165,833 and share-based compensation expense of $11,281,602 incurred associated with the Settlement Agreement and the Divestiture Agreement. See Note 6, Goodwill and Other Intangible Assets and Note 13, Related Party Transactions, for further information.

 

Income/(Loss) from Discontinued Operations: Income from discontinued operations was $168,794 for the twelve months ended December 31, 2018, which represents an increase of $18,360,377, or 101%, from a loss of $18,191,583 for the twelve months ended December 31, 2017. The loss from discontinued operations in 2017 is due to the divestiture of our 50% interest in the Aurora partnership. Income from discontinued operations in 2018 is due to trailing activity managed by the Company on behalf of the Aurora partnership.

 

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. The accompanying 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. In addition to increasing cashflow 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, including the Proposed Private Placement, which 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 the anticipated Proposed Private Placement, and ongoing near-term funding provided through the New VPEG Note, we believe we will have enough capital to cover expenses through at least the next twelve months. We will continue to monitor liquidity carefully, and in the event we do not have enough capital to cover expenses, we will make the necessary and appropriate reductions in spending to remain cash flow positive.

 

Capital Resources

 

During 2018 and 2017, we converted several related party debt instruments to equity, including the McCall Settlement Agreement, the Navitus Settlement Agreement, the Insider Settlement Agreement, the VPEG Private Placement, the VPEG Settlement Agreement, the VPEG Note and the Settlement Agreement. Cash proceeds from loans and new contributions to the Aurora partnership by Navitus have allowed the Company to continue operations and enter into agreements including the Purchase Agreement, the Transaction Agreement, the AVV Sublicense and the Trademark License. We currently rely on financing obtained from VPEG through the New VPEG Note to fund operations while we enact our strategy to become a technology-focused oilfield services company and seek to close the Proposed Private Placement.

 

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See Note 13, Related Party Transactions, to the consolidated financial statements for further information on these agreements.

 

The following table provides detailed information about our net cash flow for all financial statement periods presented in this report:

 

   Cash Flow 
   Fiscal Year Ended
December 31,
 
   2018   2017 
Net cash used in operating activities  $(1,401,685)  $(1,938,140)
Net cash provided by (used in) investing activities   (563,633)   3,261 
Net cash provided by financing activities   2,017,684    1,902,806 
Net increase (decrease) in cash and cash equivalents   52,366    (32,073)
Cash and cash equivalents at beginning of year   24,383    56,456 
Cash and cash equivalent at end of year  $76,749   $24,383 

  

Net cash used in operating activities for the year ended December 31, 2018 was $1,401,685 after the net loss of $27,309,510 was decreased by impairment of intangible assets of $14,165,533 and $11,414,952 in share based compensation expense. This compares to cash used in operating activities for the year ended December 31, 2017 of $1,938,140 after the net loss for that period of $20,720,286 was decreased by loss on disposal of discontinued operations of $18,205,884 and $312,351 in share based compensation expense.

 

Net cash used in investing activities for the year ended December 31, 2018 was $563,633, due to the acquisition of Pro-Tech. This compares to $3,261 of cash provided by investing activities for the year ended December 31, 2017 due to the revision of furniture and fixtures.

 

Net cash provided by financing activities for the year ended December 31, 2018 was $2,017,684, primarily due to debt financing proceeds from an affiliate. This compares to $1,902,806 in net cash provided by financing activities during the year ended December 31, 2017, which includes $1,135,000 of debt financing proceeds from an affiliate, $1,170,000 of contributions from Navitus and others, which were partially offset by $570,500 in principal payments on debt financing.

 

We will be required 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 with U.S. generally accepted accounting principles, or GAAP, requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.

 

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Cash and Cash Equivalents:

 

We consider all liquid investments with original maturities of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents. We had no cash equivalents at December 31, 2018 and 2017.

 

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

 

See Note 5, Property, plant and equipment, to our consolidated financial statements, for further information.

 

Other Property and Equipment:

 

Our office equipment in Austin, Texas is being depreciated on the straight-line method over the estimated useful life of three to seven years. 

 

Fair Value:

 

At December 31, 2018 and December 31, 2017, the carrying value of our financial instruments such as prepaid expenses and payables approximated their fair values based on the short-term maturities of these instruments. The carrying value of other liabilities approximated their fair values because the underlying interest rates approximated market rates at the balance sheet dates. Management believes that due to our current credit worthiness, the fair value of debt could be less than the book 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;

 

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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).

 

Concentration of Credit Risk, Accounts Receivable and Allowance for Doubtful Accounts

 

Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents placed with high credit quality institutions and accounts receivable due from Pro-Tech’s customers. Management evaluates the collectability of accounts receivable based on a combination of factors. If management becomes aware of a customer’s inability to meet its financial obligations after a sale has occurred, the Company records an allowance to reduce the net receivable to the amount that it reasonably believes to be collectable from the customer. Accounts receivable are written off at the point they are considered uncollectible. Due to historically very low uncollectible balances and no specific indications of current uncollectibility, the Company has not recorded an allowance for doubtful accounts at December 31, 2018. 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. 

 

Inventory

 

The Company’s inventory balances are stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventory consists of products purchased by Pro-Tech for use in the process of providing hardbanding services. No impairment losses on inventory were recorded for the twelve months ended December 31, 2018 or 2017.

 

Goodwill and Other Intangible Assets

 

Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis or the pattern in which economic benefits are consumed, if reliably determinable. We review our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

We perform an impairment test of goodwill annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To date, an impairment of goodwill has not been recorded.

 

The Company’s Goodwill balance consists of the amount recognized in connection with the acquisition of Pro-Tech. See Note 4, Pro-Tech Acquisition, for further information. The Company’s other intangible assets are comprised of contract-based and marketing-related intangible assets, as well as acquisition-related intangibles. Acquisition-related intangibles include the value of Pro-Tech’s trademark and customer relationships, both of which are being amortized over their expected useful lives of 10 years beginning August 2018.

 

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The Company’s contract-based intangible assets include an agreement to sublicense certain patents belonging to AVV (the “AVV Sublicense”), a license (the “Trademark License”) to the trademark of Liquidmetal Coatings Enterprises LLC (“Liquidmetal”), and several non-compete agreements made in connection with the acquisition of the AVV Sublicense and the Trademark License (the “Non-Compete Agreements”). 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 the Company’s existing intellectual property, the Company has begun to use the economic benefits of its intangible assets, and therefore began amortization of its intangible assets on a straight-line basis over the useful lives indicated above beginning July 31, 2018, the effective date of the Pro-Tech acquisition.

 

During the year ended December 31, 2018, we recorded impairment of the AVV Sublicense, the Trademark License and the Non-Compete Agreements totaling $14,165,833. See Note 6, Goodwill and Other Intangible Assets, for further information.

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”), on a modified retrospective basis. The Company recognizes revenue as it satisfies contractual performance obligations by transferring promised goods or services to the customers. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for those promised goods or services A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. All performance obligations of the Company’s contracts with customers are satisfied over the duration of the contract as customer-owned equipment is serviced and then made available for immediate use as completed during the service period. The Company has reviewed its contracts with customers, all of which relate to Pro-Tech, and determined that due to their short-term nature, with durations of several days of service at the customer’s location, it is only those contracts that occur near the end of a financial reporting period that will potentially require allocation to ensure revenue is recognized in the proper period. The Company has reviewed all such transactions and recorded revenue accordingly. No unearned revenue has been recognized as a result of the adoption of ASC 606.

 

Business combinations

 

Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date in the Company’s consolidated financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill.

 

Share-Based Compensation

 

The Company from time to time may issue stock options, warrants and restricted stock as compensation to employees, directors, officers and affiliates, as well as to acquire goods or services from third parties. In all cases, the Company calculates share-based compensation using the Black-Scholes option pricing model and expenses awards based on fair value at the grant date on a straight-line basis over the requisite service period, which in the case of third party suppliers is the shorter of the period over which services are to be received or the vesting period, and for employees, directors, officers and affiliates is typically the vesting period. Share-based compensation is included in general and administrative expenses in the consolidated statements of operations. See Note 11, 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.

 

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Earnings per Share:

 

Basic earnings per share are computed using the weighted average number of common shares outstanding at December 31, 2018 and 2017, respectively. The weighted average number of common shares outstanding was 21,290,933 at December 31, 2018. Diluted earnings per share reflect the potential dilutive effects of common stock equivalents such as options, warrants and convertible securities.

  

The following table outlines outstanding common stock shares and common stock equivalents.

 

   Years Ended December 31, 
   2018   2017 
Common Stock Shares Outstanding   28,037,713    5,206,174 
Common Stock Equivalents Outstanding          
Warrants   2,713,103    527,367 
Stock Options   221,713    223,556 
Unconverted Preferred A Shares  68,966   137,932 
Total Common Stock Equivalents Outstanding   3,003,782    888,855 

 

Recently Adopted Accounting Standards

 

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, on a modified retrospective basis. See Summary of Critical Accounting Policies

above under the header Revenue Recognition for further information.

 

On May 17, 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Scope of Modification Accounting (clarifies Topic 718) Compensation – Stock Compensation, (“ASU 2017-09), which states that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless certain criteria are met. ASU 2017-09 is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company adopted ASU 2017-09 on January 1, 2018 with no impact to its condensed consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies when a set of transferred assets and activities is deemed to be a business. ASU 2017-01 is effective for interim and annual periods beginning after December 15, 2017 and shall be applied prospectively. The Company adopted ASU 2017-01 on January 1, 2018 with no impact to its condensed consolidated financial statements.

 

Recently Issued Accounting Standards

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which amends the guidance for the accounting and disclosure of leases. This new standard requires that lessees recognize on the balance sheet the assets and liabilities that arise from leases, including leases classified as operating leases under current GAAP, and disclose qualitative and quantitative information about leasing arrangements. The new standard requires a modified-retrospective approach to adoption and is effective for interim and annual periods beginning on January 1, 2019, but may be adopted earlier. The Company expects to adopt this standard beginning in the first quarter of 2019. The Company does not expect that this standard will have a material impact on its condensed consolidated financial statements.

 

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In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands the scope of ASC 718 to include all share-based payments arrangements related to the acquisition of goods and services from both employees and nonemployees. For public companies, the amendments are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but no earlier than a company’s adoption date of ASC 606. The Company is currently assessing the impact that adopting this new accounting guidance will have on its condensed consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data

 

The information required by this Item 8 is incorporated by reference to the Financial Statements beginning at page F-1 of this Annual Report on Form 10-K. 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None. 

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of December 31, 2018. Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer determined that, because of the material weaknesses described below, our disclosure controls and procedures were not effective.

 

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Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial and accounting officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that:

 

(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
   
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
   
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this evaluation, management used the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on our evaluation, we determined that, as of December 31, 2018, our internal control over financial reporting was not effective due to the following material weaknesses.

 

We lack sufficient segregation of duties within accounting functions, which is a basic internal control. In addition, we currently do not have any full-time accounting personnel. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency represents a material weakness.

 

In order to cure the foregoing material weakness, the initiation of transactions, the custody of assets and the recording of transactions are performed by separate individuals to the extent possible. In addition, we will look to hire additional personnel with technical accounting expertise. As necessary, we will continue to engage consultants or outside accounting firms in order to ensure proper accounting for our consolidated financial statements.

 

We intend to complete the remediation of the material weaknesses discussed above as soon as practicable but we can give no assurance that we will be able to do so. Designing and implementing an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weaknesses that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Changes in Internal Controls

 

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

 

Except for the matters described above, there have been no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

We have no information to disclose that was required to be disclosed in a report on Form 8-K during the fourth quarter of fiscal year 2018, that was not reported.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Directors and Executive Officers

 

The following table sets forth information regarding the names, ages (as of January 27, 2020) and positions held by each of our executive officers.

 

Name   Age   Positions Held
Kevin DeLeon   51   Chief Executive Officer, President, Principal Financial and Accounting Officer and Director  
Ronald W. Zamber   57   Chairman of the Board of Directors
Robert Grenley   60   Director
Ricardo A. Salas   55   Director

 

Effective March 1, 2019, Mr. Julio C. Herrera resigned as a member of the Board of Directors.

Effective April 17, 2019, Mr. Kenneth Hill resigned as the Chief Executive Officer, interim Chief Financial Officer, Secretary, Treasurer and member of the Board of Directors.

Effective November 6, 2019, Mr. Eric Eilertsen resigned as a member of the Board of Directors.

 

Kevin DeLeon – Chief Executive Officer, President, Principal Financial and Accounting Officer and Director

 

Mr. DeLeon has served as a member of our Board of Directors since August 21, 2017. He has served as a General Partner and Director of Corporate Strategy for Visionary Private Equity Group, a private equity firm that invests in early stage, high growth companies, since 2015. Mr. DeLeon has spent more than twenty-five years in global finance, both on the buy and sell side, in New York, London, and Tokyo. For the past decade, his focus has been in natural resources, most recently as Senior Advisor to our Company since February, 2015. Prior to joining our Company, he served in the same capacity at Miller Energy, a NYSE-listed Alaska focused oil and gas exploration and production company, from June 2013 to February 2015. At Miller, Mr. DeLeon was responsible for overseeing corporate strategy, with particular focus on financing the company’s drilling program and acquisitions, as well as investor relations and corporate governance. Prior to Miller, Mr. DeLeon spent approximately six years spearheading the U.S. operations for a boutique U.K. investment bank, with a strong focus in E&P and metals & mining. Early in his career, he worked for Yamaichi, one of the Big Four Japanese securities houses, where he received the Chairman’s award for his consistent revenue contributions. Mr. DeLeon was also a founding partner of Bracken Partners, a London-based corporate finance advisory and fund management firm with particular focus on the U.K. private equity markets. He has served as both a senior executive and non-executive director of numerous public and private U.K. and U.S. companies. Mr. DeLeon is a 1990 graduate of Yale University, with a B.A in Economics. Mr. DeLeon was selected to serve on our Board of Directors due to his extensive global finance experience.

 

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Ronald W. Zamber, M.D. Director – Chairman of the Board

 

Dr. Zamber has served as a member of our Board of Directors since January 24, 2009. Dr. Zamber is founder, Managing Director and Chairman of Visionary Private Equity Group since 2010, and a Managing Director of Navitus since 2011, Navitus Partners since 2011 and James Capital Energy since 2007. He brings more than 20 years of experience in corporate management and business development extending across the public, private and non-profit arenas. Dr. Zamber has helped build profitable companies in healthcare, private and public petroleum E&P, consumer products and Internet technology industries. Dr. Zamber is a Board Certified Ophthalmologist and founder of International Vision Quest, a non-profit organization that performs humanitarian medical and surgical missions, builds water treatment facilities and supports food delivery programs to impoverished communities around the world. He has served as an examiner with the American Board of Ophthalmologists and Secretariat for State Affairs with the American Academy of Ophthalmology. Dr. Zamber is the 2009 recipient of Notre Dame’s prestigious Harvey Foster Humanitarian Award. He now serves on the advisory board of Feed My Starving Children, one of the highest rated and fastest growing charities in the country. Dr. Zamber received his Bachelor’s degree with high honors from the University of Notre Dame and his medical degree with honors from the University of Washington. Dr. Zamber was selected to serve on our Board of Directors due to his over 20 years of experience in corporate management and business development extending across the public, private and non-profit arenas.

 

Robert Grenley – Director

 

Mr. Grenley has served as a member of our Board of Directors since June 1, 2010. Mr. Grenley has over 25 years of experience in financial management, business development and entrepreneurial experience. This financial experience includes 12 years managing early stage organizations with equity capital. Mr. Grenley’s broader financial management experience includes over 10 years of direct portfolio management and investment expertise including common and preferred stock, stock options, corporate and municipal bonds as well as syndicated investments and private placements. Recently, Mr. Grenley has been associated with the Visionary Private Equity Group since 2012, and is currently its Director of Capital Development, as well as the Chief Financial Officer of the Visionary Media Group, a wholly owned subsidiary. Mr. Grenley served as the Chief Financial Officer of POP Gourmet, a fast growing Seattle-based snack food company, since early 2013, where he was responsible for the creation, production, and execution of POP Gourmet’s first equity financing ($2.5 million in 2013), its second equity financing ($8.5 million in 2015), and its first credit facility ($2 million in 2015). As the company has matured, it has been able to attract a consumer product group specialist as Chief Financial Officer, and Mr. Grenley currently retains the Director, Corporate Finance title, focusing on credit facilities, investor relations, and other related matters. Mr. Grenley holds a BA in Economics from Duke University. Mr. Grenley was selected to serve on our Board of Directors due to his over 25 years of experience in financial management, business development and entrepreneurial experience.

 

Ricardo A. Salas – Director

 

Mr. Salas has served as a member of our Board of Directors since August 21, 2017. He has served as the President of Armacor Holdings, LLC, an investment holding company for Liquidmetal Coatings, LLC, which develops, supplies and provides application service of leading metallic coatings which protect against wear and corrosion in oil & gas, power, pulp & paper and other industrial environments, since May of 2012. He has served as a Director of Liquidmetal Coatings, LLC since June 2007. Between 2008 and 2015, Mr. Salas served as Executive Vice President and a Director of Liquidmetal Technologies, Inc., a pioneer in developing and commercializing a family of amorphous metal alloys. In 2001, he founded and became CEO of iLIANT Corporation, a health care information technology and outsourcing service provider. Following iLIANT’s merger with MED3000 Group, Inc., he continued to serve as a Director of MED3000 Group, Inc. and on its Special Committee leading up to its sale to McKesson Corporation in December of 2012. He serves as a Director of Advantum Health, a private equity backed healthcare IT enabled services company. Mr. Salas received an Economics degree from Harvard College in 1986. Mr. Salas was selected to serve on our Board of Directors due to his extensive management experience.

 

Our directors currently have terms which will end at our next annual meeting of the stockholders or until their successors are elected and qualify, subject to their prior death, resignation or removal.

 

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Family Relationships

 

There are no family relationships among any of our officers or directors.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

 

  been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
     
  had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
     
  been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
     
  been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
     
  been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
     
  been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self- regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Corporate Governance

 

Governance Structure

 

We chose to appoint a separate chairman of our Board of Directors who is not our Chief Executive Officer. Our Board of Directors has made this decision based on their belief that an independent Chairman of the Board can act as a balance to the Chief Executive Officer, who also serves as a non-independent director.

 

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The Board’s Role in Risk Oversight

 

Our Board of Directors administers its risk oversight function as a whole by making risk oversight a matter of collective consideration. While management is responsible for identifying risks, our Board of Directors has charged the Audit Committee of the Board of Directors with evaluating financial and accounting risk and the Compensation Committee of the Board of Directors with evaluating risks associated with employees and compensation. Investor- related risks are usually addressed by the Board of Directors as a whole. We believe an independent Chairman of the Board adds an additional layer of insight to our Board of Directors’ risk oversight process.

 

Independent Directors

 

In considering and making decisions as to the independence of each of the directors of our Company, the Board considered transactions and relationships between our Company and each director (and each member of such director’s immediate family and any entity with which the director or family member has an affiliation such that the director or family member may have a material indirect interest in a transaction or relationship with such entity). For the year ended December 31, 2018, the Board has determined that the following directors and director nominees are independent as defined in applicable SEC and Nasdaq Stock Market rules and regulations, and that each constitutes an “Independent Director” as defined in Nasdaq Marketplace Rule 5605: Ron Zamber, Rob Grenley, and Ricardo A. Salas. Mr. Herrera resigned as a member of the Board of Directors effective March 1, 2019. Mr. Eilertsen resigned as a member of the Board of Directors effective November 6, 2019.

 

Audit Committee

 

Our Board of Directors has established an Audit Committee to assist it in fulfilling its responsibilities for general oversight of our accounting and financial reporting processes, audits of our financial statements, and internal control and audit functions. The Audit Committee is responsible for, among other things:

 

  appointing, evaluating and determining the compensation of our independent auditors;
     
  establishing policies and procedures for the review and pre-approval by the Audit Committee of all auditing services and permissible non-audit services (including the fees and terms thereof) to be performed by the independent auditor;
     
  reviewing with our independent auditors any audit problems or difficulties and management’s response;
     
  reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the Securities Act of 1933, as amended;
     
  discussing our financial statements with management and our independent auditors;
     
  reviewing and discussing reports from the independent auditor on critical accounting policies and practices used by our Company and alternative accounting treatments;
     
  reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant internal control deficiencies;
     
  reviewing and discussing with management our major financial risk exposures and the steps management has taken to monitor and control such exposures;
     
  meeting separately and periodically with management and our internal and independent auditors;
     
  reviewing matters related to the corporate compliance activities of our Company;

 

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  reviewing and approving our code of ethics, as it may be amended and updated from time to time, and reviewing reported violations of the code of ethics;
     
  annually reviewing and reassessing the adequacy of our Audit Committee charter; and
     
  such other matters that are specifically delegated to our Audit Committee by our Board from time to time.

 

The Audit Committee works closely with management as well as our independent auditors. The Audit Committee has the authority to obtain advice and assistance from, and receive appropriate funding from us for, outside legal, accounting or other advisors as the Audit Committee deems necessary to carry out its duties.

 

Our Board of Directors has adopted a written charter for the Audit Committee that meets the applicable standards of the SEC and The Nasdaq Stock Market. The members of the Audit Committee are Ronald W. Zamber, Robert Grenley and Ricardo A. Salas. Ricardo A. Salas serves as the chair of the Audit Committee.

 

Our Board has determined that Ricardo A. Salas qualifies as an “audit committee financial expert” under Item 407(d)(5) of Regulation S-K and has the requisite accounting or related financial expertise required by applicable Nasdaq Stock Market rules.

 

Compensation Committee

 

Our Board of Directors has established a Compensation Committee to discharge our Board’s responsibilities relating to compensation of our Chief Executive Officer and other executive officers and to provide general oversight of compensation structure. Other specific duties and responsibilities of the Compensation Committee include:

 

  reviewing and approving objectives relevant to executive officer compensation;
     
  evaluating performance and recommending to the Board of Directors the compensation, including any incentive compensation, of our Chief Executive Officer and other executive officers in accordance with such objectives;
     
  reviewing and approving compensation packages for new executive officers and termination packages for executive officers;
     
  recommending to the Board of Directors the compensation for our directors;
     
  administering our equity compensation plans and other employee benefit plans;
     
  reviewing periodic reports from management on matters relating to our personnel appointments and practices;
     
  evaluating periodically the Compensation Committee charter;
     
  such other matters that are specifically delegated to our Compensation Committee by our Board from time to time.

 

Our Board of Directors has adopted a written charter for the Compensation Committee. The members of the Compensation Committee are Ronald W. Zamber and Ricardo A. Salas. Dr. Zamber serves as the chair of the Compensation Committee. Our Board of Directors determined that each member of the Compensation Committee satisfies the independence requirements of The Nasdaq Stock Market.

 

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The Compensation Committee reviews executive compensation from time to time and reports to the Board of Directors, which makes all final decisions with respect to executive compensation. 

 

Director Nominations

 

We currently do not have a standing nominating committee or committee performing similar functions. Our entire Board of Directors undertakes the functions that would otherwise be undertaken by a nominating committee.

 

Our Board utilizes a variety of methods for identifying and evaluating nominees for our directors. Our Board regularly assesses the appropriate size of our Board and whether any vacancies on the Board are expected due to retirement or other circumstances.

 

When considering potential director nominees, the Board considers the candidate’s character, judgment, diversity, age, skills, including financial literacy and experience in the context of the needs of our Company and of our existing directors. The Board also seeks director nominees who are from diverse backgrounds and who possess a range of experiences as well as a reputation for integrity. The Board considers all of these factors to ensure that our Board as a whole possesses a broad range of skills, knowledge and experience useful to the effective oversight and leadership of our Company.

 

Our Board does not have a specific policy with regard to the consideration of candidates recommended by stockholders, however any nominees proposed by our stockholders will be considered on the same basis as nominees proposed by the Board. If you or another stockholder want to submit a candidate for consideration to the Board, you may submit your proposal to our interim Corporate Secretary, Kevin DeLeon, in with the stockholder communication procedures set forth below.

 

Stockholder Communications with the Board of Directors

 

Our Board of Directors has established a process for stockholders to communicate with the Board of Directors or with individual directors. Stockholders who wish to communicate with our Board of Directors or with individual directors should direct written correspondence to Kevin DeLeon, Corporate Secretary, at kdeleon@vpeg.net, or to the following address (our principal executive offices): Board of Directors, c/o Corporate Secretary, 3355 Bee Caves Road, Suite 608, Austin, Texas 78746.

 

The Corporate Secretary will forward such communications to our Board of Directors or the specified individual director to whom the communication is directed unless such communication is unduly hostile, threatening, illegal or similarly inappropriate, in which case the Corporate Secretary has the authority to discard the communication or to take appropriate legal action regarding such communication.

 

Code of Ethics

 

We have adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Such code of ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, and reporting of violations of the code.

 

We are required to disclose any amendment to, or waiver from, a provision of our code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions. We intend to use our website as a method of disseminating this disclosure, as permitted by applicable SEC rules. Any such disclosure will be posted to our website within four business days following the date of any such amendment to, or waiver from, a provision of our code of ethics.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

 

Our directors, executive officers and any persons holding more than 10% of our common stock are required to report their ownership of our common stock and any changes in that ownership to the SEC. Specific due dates for these reports have been established by rules adopted by the SEC and we are required to report in this Annual Report on Form 10-K any failure to file by those deadlines.

 

Based solely upon a review of Forms 3, 4, and 5, and amendments to these forms furnished to us, except as provided below, all parties subject to the reporting requirements of Section 16(a) of the Exchange Act filed all such required reports during and with respect to our 2017 fiscal year.

 

During and with respect to our 2018 fiscal year, the following forms were filed past their respective deadlines: Form 3 for Armacor Victory Ventures LLC.

 

Item 11. Executive Compensation

 

Summary Compensation Table - Fiscal Years Ended December 31, 2018 and 2017

 

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officers received total annual salary and bonus compensation in excess of $100,000. 

 

Name and Principal Position  Year  Salary ($)   Option Awards ($)(1)   Total ($) 
Kenneth Hill, Chief Executive Officer and Chief Financial Officer (2)  2018   250,000        250,000 
   2017   230,809    300,000    530,809 

  

(1)These amounts shown represent the aggregate grant date fair value for options granted to the named executive officers computed in accordance with FASB ASC Topic 718.

 

(2)On August 21, 2017, we entered into an amended and restated employment agreement with Mr. Kenneth Hill. Under the amended and restated employment agreement, we agreed to pay Mr. Hill a salary of $250,000 per year, and he will be eligible for annual bonuses at the discretion of our Board. In addition, we agreed to grant Mr. Hill an option to purchase 197,369 shares of our common stock, which option has an exercise price of $1.52 per share and vests in 36 equal monthly installments. Mr. Hill will also be eligible to participate in the standard benefits plans offered to similarly situated employees by us from time to time, subject to plan terms and our generally applicable policies. The term of the amended and restated employment agreement is for three (3) years and automatically renews for additional one-year periods unless terminated. Either party may terminate the amended and restated employment agreement at any time upon at least 30 days written notice (other than a termination by us for Cause).

 

Mr. Hill’s employment with the Company was terminated in April 2019, at which time Mr. Kevin DeLeon assumed the role of Chief Executive Officer of the Company.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table includes certain information with respect to the value of all unexercised options and unvested shares of restricted stock previously awarded to the executive officers named above at the fiscal year ended December 31, 2018. 

  

OPTION AWARDS
Name  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
   Option Exercise
Price ($)
   Option
Expiration Date
    3,948           $13.30   4/23/2024
    9,869           $10.26   8/28/2025
Kenneth Hill   87,720    109,649       $1.52   8/21/2027

 

Director Compensation

 

No member of our Board of Directors received any compensation for services as a director during the fiscal year ended December 31, 2018.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth information regarding beneficial ownership of our voting stock as of January 27, 2020 (i) by each person who is known by us to beneficially own more than 5% of our voting stock; (ii) by each of our officers, directors and director nominees; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of our Company, 3355 Bee Caves Road, Suite 608, Austin, Texas 78746.

 

               Amount of Beneficial Ownership(1)         
Name and Address of Beneficial Owner  Shares   Options   Warrants   Common Stock   Series D PS
Converted to CS
   Percent of
Common
Stock(2)
   Percent of
Total Voting
Stock(3)
 
Ronald Zamber, Director (4)   7,261,501    -    2,205,868    9,467,369    -    31.30%   31.30%
Robert Grenley, Director (5)   3,357    -    10,000    13,357    -    0.05%   0.05%
Ricardo A. Salas, Director (6)   20,000,000    -    -    20,000,000    -    71.33%   71.33%
All directors and officers as a group (4 persons named above)   27,264,858    -    2,215,868    29,480,726    -    97.45%   97.45%
David McCall (7)   23,171    -    8,948    32,119    145,958    0.11%   0.63%

 

*Less than 1%

 

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(1)Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.

 

(2)Based on 28,037,713 shares of our common stock outstanding as of January 27, 2020.

 

(3)There were no shares of voting stock other than common stock outstanding as of January 27, 2020.

 

(4)Includes 291,866 shares of common stock and warrants for the purchase of 23,158 shares of common stock exercisable within 60 days held by Dr. Zamber; 4,382,872 shares of common stock owned by Navitus Energy Group, of which Mr. Zamber is the managing member of its managing partner, James Capital Consulting, LLC; 2,787 shares of common stock and warrants for the purchase of 2,343 shares of common stock exercisable within 60 days owned by James Capital Consulting, LLC; 64,951 shares of common stock owned by Visionary Investments, LLC, of which Dr. Zamber is sole member; 2,519,025 shares of common stock and warrants for the purchase of 2,090,223 shares of common stock exercisable within 60 days owned by Visionary Private Equity Group I, LP, of which Dr. Zamber is senior managing director of its general partner, Visionary PE GP I, LLC; and warrants for the purchase of 90,144 shares of common stock exercisable within 60 days owned by Navitus Partners, LLC, of which Dr. Zamber is a Director.

 

(5)Includes 3,357 shares of common stock and warrants for the purchase of 10,000 shares of common stock exercisable within 60 days.

 

(6)Represents 20,000,000 shares issued to Armacor Victory Ventures, LLC, pursuant to the Supplementary Agreement, dated April 10, 2018 among the Company and Armacor Victory Ventures, LLC. Mr. Salas is the managing member of Armacor Victory Ventures, LLC.

 

(7)Includes 19,348 shares of common stock and warrants for the purchase of 8,948 shares of common stock exercisable within 60 days owned by Mr. McCall, and 3,823 shares of common stock owned by 1519 Partners LLC, of which Mr. McCall is the controlling partner.

  

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth certain information about the securities authorized for issuance under our incentive plans as of December 31, 2018.

 

Equity Compensation Plan Information
Plan category  Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
   Weighted-average
exercise price of
outstanding options,
warrants and rights
   Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
 
   (a)   (b)   (c) 
             
Equity compensation plans approved by security holders  15,660      $11.38   15,000,000 
                     
Equity compensation plans not approved by security holders                 
                     
Total   15,660        $11.38    15,000,000 

 

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In 2014, our Board of Directors and stockholders approved our 2014 Long Term Incentive Plan. As of December 31, 2018, 3,367,500 shares of unrestricted common stock and 595,000 options were issued under our 2014 Long Term Incentive Plan. As of December 31, 2018, no shares remain available under the 2014 Long Term Incentive Plan.

 

In 2017, our Board of Directors and stockholders approved our 2017 Equity Incentive Plan. As of December 31, 2018, no shares have been granted under our 2017 Equity Incentive Plan.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

Transactions with Related Persons

 

The following includes a summary of transactions since the beginning of our 2018 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions

 

On August 21, 2017, we entered into a settlement agreement and mutual release with Messrs. Ronald Zamber and Greg Johnson (affiliate of Navitus), pursuant to which all obligations of our Company to Messrs. Zamber and Johnson to repay indebtedness for borrowed money, which totaled approximately $520,800, was converted into 65,591.4971298402 shares of our Series C Preferred Stock, 46,699.9368965913 shares of which were issued to Dr. Zamber and 18,891.5602332489 shares of which were issued to Mr. Johnson. On January 24, 2018, these shares of Series C Preferred Stock were automatically converted into 342,633 shares of our common stock, with 243,948 shares issued to Ron Zamber and 98,685 shares issued to Greg Johnson.

 

On August 21, 2017, we entered into a settlement agreement and mutual release with Dr. Zamber and Mrs. Kim Rubin Hill, the wife of Kenneth Hill, our Chief Executive Officer, pursuant to which all obligations of our Company to Dr. Zamber and Mrs. Hill to repay indebtedness for borrowed money, which totaled approximately $35,000, was converted into 4,408.03072109141 shares of our Series C Preferred Stock, 1,889.1560233248900 shares of which were issued to Dr. Zamber and 2,518.8746977665200 shares of which were issued to Mrs. Hill. On January 24, 2018, these shares of Series C Preferred Stock were automatically converted into 23,027 shares of our common stock, with 9,869 shares issued to Dr. Zamber and 13,158 shares issued to Ms. Hill.

 

On August 21, 2017, we entered into a settlement agreement and mutual release with VPEG, pursuant to which all obligations of our Company to VPEG to repay indebtedness for borrowed money (other than the VPEG Note), which totaled approximately $873,409.64, was converted into 110,000.472149068 shares of our Series C Preferred Stock. Some of the obligations to VPEG arose pursuant to the private placement note described above. Pursuant to the settlement agreement and mutual release, the 12% unsecured six-month promissory note was repaid in full and terminated, but VPEG retained the common stock purchase warrant. On January 24, 2018, these shares of Series C Preferred Stock were automatically converted into 940,272 shares of our common stock.

 

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On January 17, 2018, the Company and VPEG entered into a second amendment to the VPEG Note, pursuant to which the parties agreed (i) to extend the maturity date to a date that is five business days following VPEG’s written demand for payment on the VPEG Note; (ii) that VPEG will have the option but not the obligation to loan the Company additional amounts under the VPEG Note; and (iii) that, in the event that VPEG exercises its option to convert the note into shares of common stock at any time after the maturity date and prior to payment in full of the principal amount of the VPEG Note, the Company shall issue to VPEG a five year warrant to purchase a number of additional shares of common stock equal to the number of shares issuable upon such conversion, at an exercise price of $1.52 per share.

 

On April 10, 2018, the Company and AVV entered into a supplementary agreement (the “Supplementary Agreement”) to address breaches or potential breaches under the Transaction Agreement, including AVV’s failure to contribute the full amount of the Cash Contribution. Pursuant to the Supplementary Agreement, the Series B Convertible Preferred Stock issued under the Transaction Agreement was canceled and, in lieu thereof, the Company issued to AVV 20,000,000 shares of its common stock (the “AVV Shares”). The Supplementary Agreement contains certain covenants by AVV, including a covenant that AVV will use its best efforts to help facilitate approval of a proposed $7 million private placement of the Company’s common stock at a price per share of $0.75, which will include 50% warrant coverage at an exercise price of $0.75 per share (the “Proposed Private Placement”), and that AVV will invest a minimum of $500,000 in the Proposed Private Placement.

 

On April 10, 2018, the Company and VPEG entered into a settlement agreement and mutual release (the “Settlement Agreement”), pursuant to which VPEG agreed to release and discharge the Company from its obligations under the VPEG Note. Pursuant to the Settlement Agreement, and in consideration and full satisfaction of the outstanding indebtedness of $1,410,200 under the VPEG Note, the Company issued to VPEG 1,880,267 shares of its common stock and a five-year warrant to purchase 1,880,267 shares of its common stock at an exercise price of $0.75 per share, to be reduced to the extent the actual price per share in the Proposed Private Placement is less than $0.75.

 

On April 10, 2018, in connection with the Settlement Agreement, the Company and VPEG entered into a loan Agreement (the “New Debt Agreement”), pursuant to which VPEG may, at is discretion, loan to VPEG up to $2,000,000 under a secured convertible original issue discount promissory note (the “New VPEG Note”). Any loan made pursuant to the New VPEG Note will reflect a 10% original issue discount, will not bear interest in addition to the original issue discount, will be secured by a security interest in all of the Company’s assets, and at the option of VPEG will be convertible into shares of the Company’s common stock at a conversion price equal to $0.75 per share or, such lower price as shares of Common Stock are sold to investors in the Proposed Private Placement. The balance of the New VPEG Note was $0 and $720,000 as of December 31, 2017 and September 30, 2018, respectively (see Note 8, Notes Payable, for further information).

 

On April 23, 2018, the Company filed a Certificate of Withdrawal with the Nevada Secretary of State to withdraw the designation of the Series B Convertible Preferred Stock and return such shares to undesignated preferred stock of the Company.

 

Promoters and Certain Control Persons

 

We did not have any promoters at any time during the past five fiscal years.

 

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Director Independence

 

Our board of directors has determined that Ron Zamber, Robert Grenley and Ricardo A. Salas are independent directors as that term is defined in the applicable rules of the Nasdaq Stock Market.

 

Item 14. Principal Accounting Fees and Services

 

Audit Fees

 

For the years ended December 31, 2018 and 2017, we paid $132,171 and $152,256, respectively, in fees to our principal accountants.

 

Tax Fees

 

For the years ended December 31, 2018 and 2017, we paid $2,375 and $5,000, respectively, in fees to our principal accountants for tax compliance, tax advice, and tax planning work.

 

All Other Fees

 

None.

 

All fees described above for the years ended December 31, 2018 and 2017, were approved by the Board of Directors.

 

Item 15. Exhibits, Financial Statement Schedules

 

(a) List of Documents Filed as a Part of This Report:

 

(1) Index to the Consolidated Financial Statements:

 

Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Balance Sheets as of December 31, 2018 and 2017   F-3
     
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017   F-4
     
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017   F-5
     
Consolidated Statement of Stockholders Equity for the Years Ended December 31, 2018 and 2017   F-6
     
Notes to Consolidated Financial Statements for the Years Ended December 31, 2018 and 2017   F-7

 

(2) Index to Consolidated Financial Statement Schedules:

 

All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or because it is not required.

 

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(3) Index to Exhibits:

 

See exhibits listed under Part (b) below.

 

(a) Exhibits:

 

Exhibit No.   Description
     
3.1   Amended and Restated Articles of Incorporation of Victory Energy Corporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on November 22, 2017)
     
3.2   Certificate of Amendment to Articles of Incorporation (Name Change) (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on June 4, 2018)
     
3.3   Certificate of Designation of Series D Preferred Stock of Victory Energy Corporation (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K filed on August 24, 2017)
     
3.4   Amended and Restated Bylaws of Victory Energy Corporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on September 20, 2017)
     
4.1   Form of Common Stock Certificate of Victory Energy Corporation (incorporated by reference to Exhibit 4.1 to the Annual Report on Form 10-K filed on April 8, 2016)
     
4.2   Common Stock Warrant issued by Victory Energy Corporation to Visionary Private Equity Group I, LP on February 3, 2017 (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on February 7, 2017)
     
4.3   Common Stock Warrant issued by Victory Oilfield Tech, Inc. to Visionary Private Equity Group I, LP on April 13, 2018 (incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q filed on November 14, 2018)
     
4.4   Common Stock Purchase Warrant issued by Victory Oilfield Tech, Inc. to Kodak Brothers All America Fund, LP on July 31, 2018 (incorporated by reference to Exhibit 4,1 to the Current Report on Form 8-K filed on August 2, 2018)
     
10.1   Transaction Agreement, dated August 21, 2017, between Victory Energy Corporation and Armacor Victory Ventures, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.2   Exclusive Sublicense Agreement, dated August 21, 2017, between Armacor Victory Ventures, LLC and Victory Energy Corporation (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.3   Trademark License Agreement, dated August 21, 2017, between Liquidmetal Coatings Enterprises, LLC and Victory Energy Corporation (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.4   Lock-Up and Resale Restriction Agreement, dated August 21, 2017, by and among Victory Energy Corporation and certain holders signatory thereto (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on August 24, 2017)

 

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10.5   Non-Competition and Non-Solicitation Agreement, dated August 21, 2017, between Armacor Victory Ventures, LLC and Victory Energy Corporation (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.6   Non-Competition and Non-Solicitation Agreement, dated August 21, 2017, between Armacor Holdings, LLC and Victory Energy Corporation (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.7   Non-Competition and Non-Solicitation Agreement, dated August 21, 2017, between LM Group Holdings, LLC and Victory Energy Corporation (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.8   Loan Agreement, dated August 21, 2017, between Visionary Private Equity Group I, LP and Victory Energy Corporation (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.9   Secured Convertible Original Issue Discount Promissory Note issued by Victory Energy Corporation to Visionary Private Equity Group I, LP on August 21, 2017 (incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.10   Amendment No. 1 to Secured Convertible Original Issue Discount Promissory Note and to Loan Agreement, dated October 11, 2017 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on October 17, 2017)
     
10.11   Amendment No. 2 to Secured Convertible Original Issue Discount Promissory Note and to Loan Agreement, dated January 17, 2018 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on January 17, 2018)
     
10.12   Settlement Agreement and Mutual Release, dated August 21, 2017, between Victory Energy Corporation and Visionary Private Equity Group I, LP (incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.13   Securities Purchase Agreement, dated as of February 1, 2017, among Victory Energy Corporation and Visionary Private Equity Group I, LP (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 7, 2017)
     
10.14   Registration Rights Agreement, dated February 3, 2017, between Victory Energy Corporation and Visionary Private Equity Group I, LP (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on February 7, 2017)
     
10.15   Unsecured Promissory Note issued by Victory Energy Corporation in favor of Visionary Private Equity Group I, LP on February 3, 2017 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on February 7, 2017)

 

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10.16   Divestiture Agreement, dated August 21, 2017, between Victory Energy Corporation and Navitus Energy Group (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.17   Amendment No. 1 to the Divestiture Agreement, dated September 14, 2017, between Victory Energy Corporation and Navitus Energy Group (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on September 20, 2017)
     
10.18   Lock-Up and Resale Restriction Agreement, dated September 14, 2017, by and between Victory Energy Corporation and Navitus Energy Group (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on September 20, 2017)
     
10.19   Mutual Release, dated December 13, 2017, between Victory Energy Corporation and Navitus Energy Group (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on December 19, 2017)
     
10.20   Settlement Agreement and Mutual Release, dated August 21, 2017, between Victory Energy Corporation and McCall Law Firm (incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.21   Settlement Agreement and Mutual Release, dated August 21, 2017, between Victory Energy Corporation and Ron Zamber and Greg Johnson (incorporated by reference to Exhibit 10.13 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.22   Settlement Agreement and Mutual Release, dated August 21, 2017, between Victory Energy Corporation and Ron Zamber and Kim Rubin Hill (incorporated by reference to Exhibit 10.14 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.23   Mutual Release and Settlement Agreement, effective December 9, 2016, by and among Tela Garwood Limited, LP, Aurora Energy Partners and Victory Energy Corporation (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 15, 2016)
     
10.24   Settlement and Forbearance Agreement, dated March 22, 2016, between Victory Energy Corporation and Oz Gas Corporation (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8- K filed on March 29, 2016)
     
10.25   Credit Agreement, dated as of February 20, 2014, between Aurora Energy Partners and Texas Capital Bank, National Association (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 26, 2014)
     
10.26   Forbearance Agreement, dated December 2, 2016, by and between Aurora Energy Partners and Texas Capital Bank, National Association (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 7, 2016)

 

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10.27 †   Amended and Restated Employment Agreement, dated August 21, 2017, between Victory Energy Corporation and Kenneth E. Hill (incorporated by reference to Exhibit 10.15 to the Current Report on Form 8-K filed on August 24, 2017)
     
10.28 †   Victory Energy Corporation 2014 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 28, 2014)
     
10.29 †   Victory Energy Corporation 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.28 to the Registration Statement on Form S-1 filed on February 5, 2018)
     
10.30   Supplementary Agreement dated April 10, 2018, between Victory Oilfield Tech, Inc. and Armacor Victory Ventures, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on April 12, 2018)
     
10.31   Settlement Agreement and Mutual Release dated April 10, 2018, between Victory Oilfield Tech, Inc. and Visionary Private Equity Group I, L.P. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on April 12, 2018)
     
10.32   Loan Agreement dated April 10, 2018, by and between Visionary Private Equity Group I, LP and Victory Oilfield Tech, Inc. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on April 12, 2018)
     
10.33   Loan Agreement dated as of July 31, 2018, by and between Kodak Brothers Real Estate Cash Flow Fund, LKLC and Victory Oilfield Tech, Inc. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed August 2, 2018)
     
10.34   Secured Convertible Promissory Note, issued by Victory Oilfield Tech, Inc. to Kodak Real Estate Cash Flow Fund, LLC on July 31, 2018 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed August 2, 2018)
     
10.35   Extension and Modification Agreement, dated as of July 11, 2019, among Victory Oilfield Tech, Inc., Kodak Brothers Real Estate Cash Flow Fund, LLC and Pro-Tech Hardbanding Services, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form  8-K filed July 17, 2019)
     
10.36   Second Extension and Modification Agreement, dated as of October 21, 2019, among Victory Oilfield Tech, Inc., Kodak Brothers Real Estate Cash Flow Fund, LLC and Pro-Tech Hardbanding Services, Inc. (incorporated by reference to Exhibit 10.4 to the Current Report on Form  8-K filed October 24, 2019)
     
10.37   Supply and Service Agreement, dated as of September 6, 2019, by and between Liquidmetal Coatings Enterprises, LLC and Victory Oilfield Tech, Inc. ((incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed September 10. 2019)
     
14.1   Code of Ethics and Business Conduct adopted on September 14, 2017 (incorporated by reference to Exhibit 14.1 to the Current Report on Form 8-K filed on September 20, 2017)
     
31.1*   Certifications of Principal Executive Officer and Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

47

 

 

32.1*   Certification of Principal Executive Officer and Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
99.1   Audit Committee Charter adopted on September 14, 2017 (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on September 20, 2017)
     
99.2   Compensation Committee Charter adopted on September 14, 2017 (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on September 20, 2017)
     
101.INS++   XBRL Instance Document
     
101.SCH++   XBRL Taxonomy Extension Schema Document
     
101.CAL++   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF++   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB++   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE++   XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

 

Executive Compensation Plan or Agreement.

 

++XBRL(Extensible Business Reporting Language) information is furnished and not filed or a part of a report for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

  

Item 16. Form 10-K Summary

 

None.

 

48

 

 

PART IV

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets as of December 31, 2018 and 2017 F-3
   
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017 F-4
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 F-5
   
Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2018 and 2017 F-6
   
Notes to Consolidated Financial Statements for the Years Ended December 31, 2018 and 2017 F-7

  

F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and

Stockholders of Victory Oilfield Tech, Inc.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Victory Oilfield Tech, Inc. and Subsidiary (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Change in Accounting Principle

 

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers effective January 1, 2018 due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

  

/s/ Weaver and Tidwell, L.L.P.

 

We have served as the Company’s auditor since 2013.

 

Austin, Texas

 

January 27, 2020 

  

F-2

 

 

VICTORY OILFIELD TECH, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2018 and 2017

  

   December 31, 
   2018   2017 
ASSETS        
Current Assets          
Cash and cash equivalents  $76,746   $24,383 
Accounts receivables, net   399,325    - 
Inventory   62,575    - 
Prepaid & other current assets   107,360    113,967 
Total current assets   646,006    138,350 
           
Property, plant and equipment   721,983    43,622 
Accumulated depreciation   (106,316)   (43,133)
Property, plant and equipment, net   615,667    489 
Goodwill   145,149    - 
Other intangible assets , net   3,027,860    17,630,000 
           
Total Assets  $4,434,682   $17,768,839 
LIABILITIES AND STOCKHOLDERS EQUITY          
Current Liabilities          
Accounts payable  $700,234   $590,870 
Accrued and other short term liabilities   118,130    383,564 
Short term notes payable, net   867,484    - 
Short term notes payable - affiliate, net   1,115,400    896,500 
Total current liabilities   2,801,248    1,870,934 
           
Long term notes payable, net   436,770    - 
Total long term liabilities   436,770    - 
Total Liabilities  $3,238,018   $1,870,934 
           
Stockholders’ Equity          
Preferred Series B stock, $0.001 par value, 0 shares authorized and 0 shares issued and outstanding at December 31, 2018; 800,000 shares authorized and 800,000 shares issued and outstanding at December 31, 2017  $-   $800 
Preferred Series C stock, $0.001 par value, 0 shares authorized and 0 shares issued and outstanding at December 31, 2018; 810,000 shares authorized and 180,000 shares issued and outstanding at December 31, 2017   -    180 
Preferred Series D stock, $0.001 par value, 20,000 shares authorized, 8,333 shares and 18,333 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively   8    18 
Common stock, $0.001 par value, 300,000,000 shares authorized, 28,037,713 shares and 5,206,174 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively   28,038    5,206 
Receivable for stock subscription   (245,000)   (4,800,000)
Additional paid-in capital   95,584,164    87,552,737 
Accumulated deficit   (94,170,546)   (66,861,036)
Total stockholders’ equity   1,196,664    15,897,905 
Total Liabilities and Stockholders’ Equity  $4,434,682   $17,768,839 

 

The accompanying notes are an integral part of these consolidated financial statements.

  

F-3

 

 

VICTORY OILFIELD TECH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2018 and 2017

 

   For the 12 Months Ended 
   December 31, 
   2018   2017 
Total revenue   1,034,317    - 
Total cost of revenue   504,091    - 
Gross profit   530,226    - 
Operating expenses          
Selling, general and administrative   13,701,391    2,190,467 
Impairment loss   14,165,833    - 
Total operating expenses   27,867,224    2,190,467 
Loss from operations   (27,336,998)   (2,190,467)
Other income/(expense)          
Other income   11,198    - 
Interest expense   (246,035)   (338,236)
Total other income/(expense)   (234,837)   (338,236)
Loss from continuing operations before tax benefit   (27,571,835)   (2,528,703)
Tax benefit   93,531    - 
Loss from continuing operations   (27,478,304)   (2,528,703)
Income/(loss) from discontinued operations   168,794    (18,191,583)
Loss applicable to common stockholders   (27,309,510)   (20,720,286)
Loss per share applicable to common stockholders          
Basic and diluted          
Loss per share from continuing operations  $(1.29)  $(2.43)
Income/(loss) per share from discontinued operations  $0.01   $(17.50)
Loss per share, basic and diluted  $(1.28)  $(19.93)
Weighted average shares, basic and diluted   21,290,933    1,039,420 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

 

 

VICTORY OILFIELD TECH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2018 and 2017  

  

   For the 12 Months Ended
December 31,
 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss  $(27,309,510)  $(20,720,286)
Adjustments to reconcile net loss to net cash used in operating activities          
Loss on disposal of discontinued operations, net of tax        18,205,884 
Accretion of asset retirement obligations   -    9,613 
Amortization of deferred financing costs   -    6,237 
Amortization of debt discount   41,060    210,000 
Amortization of intangible assets   611,355    - 
Provision for deferred taxes   (88,820)   - 
Impairment of intangible assets   14,165,833    - 
Warrants issued with note payable   37,109    - 
Depreciation   63,183    91,321 
Share-based compensation   11,413,072    312,351 
Change in operating assets and liabilities:   -      
Accounts receivable   (135,247)   (2,304)
Accounts receivable - affiliate   -    126,243 
Inventory   (8,211)   - 
Prepaid & Other Current Assets   16,541    (104,016)
Accounts payable   53,806    215,924 
Accrued liabilities - related parties   -    (58,435)
Accrued and other short term liabilities   (261,859)   (312,172)
Accrued interest on short term notes payable - affiliate   -    81,500 
Net cash used in operating activities   (1,401,688)   (1,938,140)
CASH FLOWS FROM INVESTING ACTIVITIES          
Revisions of furniture and fixtures   -    3,261 
Acquisition of Pro-Tech, net of cash acquired   (563,633)   - 
Net cash provided by (used in) investing activities   (563,633)   3,261 
CASH FLOWS FROM FINANCING ACTIVITIES          
Non-controlling interest contributions   -    1,170,000 
Debt financing proceeds - affiliate   1,729,100    1,135,000 
Repayment of debt - affiliate   (100,000)   - 
Proceeds from long-term notes payable   747,664    (570,500)
Payment of long-term notes payable   (87,500)   - 
Debt forgiveness   (11,196)   - 
Receivable for stock subscription   -    200,000 
Contributions - affiliate   (70,384)   - 
Redemption of preferred stock   (190,000)   (31,694)
Net cash provided by financing activities   2,017,684    1,902,806 
Net change in cash and cash equivalents   52,363    (32,073)
Beginning cash and cash equivalents   24,383    56,456 
Ending cash and cash equivalents  $76,746   $24,383 

  

   For the 12 Months Ended
December 31,
 
   2018   2017 
Supplemental cash flow information:        
Cash paid for:        
Interest  $22,625   $20,469 
Non-cash investing and financing activities:          
Accrued interest and amortization of debt discount  $224,656   $317,767 
Equity conversion of note payable  $1,410,200   $- 
Revisions to depreciation  $-   $6,086 
Intangible assets acquired  $172,519   $17,330,000 
Receivable for stock subscription  $-   $4,800,000 
Note payable to seller  $614,223   $- 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

The Consolidated Statements of Cash Flows include cash flows from continuing operations along with discontinued operations.  

F-5

 

 

VICTORY OILFIELD TECH, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

For the years ended December 31, 2018 and 2017

 

    Common Stock     Preferred B     Preferred C     Preferred D     Receivable      Additional                    
    $0.001 Par Value     $0.001 Par Value     $0.001 Par Value     $0.001 Par Value     for Stock     Paid      Accumulated     Noncontrolling        
    Number     Amount     Number     Amount     Number     Amount     Number     Amount     Subscription     In Capital     Deficit     Interest     Total Equity  
December 31, 2016 Balance     823,278     $ 823       -     $ -       -     $ -       -     $ -     $ -     $ 35,825,876     $ (46,140,750 )   $ 7,885,166     $ (2,428,885 )
Contributions from noncontrolling interest owners                                                                                             1,170,000       1,170,000  
Change in non-controlling interest                                                                                             (9,055,166 )     (9,055,166 )
Discount on note payable                                                                             210,000                       210,000  
Share based compensation                                                                             312,351                       312,351  
Receivable for stock subscription                                                                     (4,800,000 )                             (4,800,000 )
Preferred shares issued, net of redemptions                     800,000       800       180,000       180       18,333       18               99,907,100                       99,908,098  
Discount on preferred stock                                                                             (75,500,259 )                     (75,500,259 )
Issuance of common stock     4,382,896       4,383                                                               26,797,669                       26,802,052  
Loss attributable to common stockholders                                                                                     (20,720,286 )             (20,720,286 )
December 31, 2017 Balance     5,206,174     $ 5,206       800,000     $ 800       180,000     $ 180       18,333     $ 18     $ (4,800,000 )   $ 87,552,737     $ (66,861,036 )   $ -     $ 15,897,905  
Cancellation of Preferred Series B     20,000,000       20,000       (800,000 )     (800 )             -               -       (245,000 )     225,800       -               -  
Issuance of warrants     -       -               -               -               -       -       5,677,910       -               5,677,910  
Preferred Series C conversion     940,270       940               -       (180,000 )     (180 )             -       -       (760 )     -               -  
Preferred Series D redemptions     -       -               -               -       (10,000 )     (10 )     -       10       -               -  
ProTech acquisition     11,000       11               -               -               -       -       8,261       -               8,272  
Redemption of preferred stock     -       -               -               -               -       -       (317,265 )     -               (317,265 )
Settlement of Note payable - affiliate     1,880,269       1,881               -               -               -       -       1,410,200       -               1,412,081  
Share based compensation     -       -               -               -               -       -       133,350       -               133,350  
Stock grant per Settlement Agreement     -       -               -               -               -       -       5,638,921       -               5,638,921  
Stock subscription receivable receipt     -       -               -               -               -       55,000       -       -               55,000  
Stock subscription receivable write-off     -       -               -               -               -       4,745,000       (4,745,000 )     -               -  
Loss attributable to common stockholders     -       -               -               -               -       -       -       (27,309,510 )             (27,309,510 )
                                                                                                         
December 31, 2018 Balance   28,037,713   $28,038    -   $-    -   $-    8,333   $8   $(245,000)  $95,584,164   $(94,170,546)  $-   $1,196,664 

 

 The accompanying notes are an integral part of these consolidated financial statements.  

F-6

 

 

Victory Oilfield Tech, Inc.

Notes to the Consolidated Financial Statements

 

Note 1 – Organization and Summary of Significant Accounting Policies:

 

Organization and nature of operations

 

Victory Oilfield Tech, Inc. (“Victory”), a Nevada corporation, is an oilfield technology products company offering patented oil and gas drilling products designed to improve well performance and extend the lifespan of the industry’s most sophisticated and expensive equipment. On July 31, 2018, Victory entered into an agreement to acquire Pro-Tech Hardbanding Services, Inc., an Oklahoma corporation (“Pro-Tech”), which provides various hardbanding solutions to oilfield operators for drill pipe, weight pipe, tubing and drill collars. See Note 4, Pro-Tech Acquisition, for further information.

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Victory for all periods presented and the accounts of Pro-Tech for periods occurring after the date of acquisition. All significant intercompany transactions and accounts between Victory and Pro-Tech (together, the “Company”) have been eliminated.

 

The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the full year or any future periods.

 

Going Concern

 

Historically the Company has experienced, and continues to experience, net losses, net losses from operations, negative cash flow from operating activities, and working capital deficits. The Company has incurred an accumulated deficit of $94,170,546 through December 31, 2018 and has a working capital balance of $(2,155,242) at December 31, 2018. These conditions raise substantial doubt about the Company’s 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 the Company was unable to continue as a going concern.

 

The Company anticipates that operating losses will continue in the near term as Management continues efforts to leverage the Company’s intellectual property through the platform provided by the acquisition of Pro-Tech and, potentially, other acquisitions. The Company intends to meet near-term obligations through funding under the New VPEG Note (defined below in Note 13, Related Party Transactions) as it seeks to generate positive cashflow from operations.

 

In addition to increasing cashflow 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, including the Proposed Private Placement (defined below in Note 13, Related Party Transactions), which 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 the anticipated Proposed Private Placement, and ongoing near-term funding provided through the New VPEG Note, we believe we will have enough capital to cover expenses through at least the next twelve months. We will continue to monitor liquidity carefully, and in the event we do not have enough capital to cover expenses, we will make the necessary and appropriate reductions in spending to remain cash flow positive.

  

F-7

 

 

Capital Resources

 

During 2018 and 2017, we converted several related party debt instruments to equity, including the McCall Settlement Agreement, the Navitus Settlement Agreement, the Insider Settlement Agreement, the VPEG Private Placement, the VPEG Settlement Agreement, the VPEG Note and the Settlement Agreement. Cash proceeds from loans and new contributions to the Aurora partnership by Navitus have allowed the Company to continue operations and enter into agreements including the Purchase Agreement, the Transaction Agreement, the AVV Sublicense and the Trademark License. We currently rely on financing obtained from VPEG through the New VPEG Note to fund operations while we enact our strategy to become a technology-focused oilfield services company and seek to close the Proposed Private Placement.

 

Use of Estimates

 

The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used primarily when accounting for depreciation and amortization expense, property costs, estimated future net cash flows from proved reserves, assumptions related to abandonments and impairments of oil and natural gas properties, taxes and related valuation allowance, accruals of capitalized costs, operating costs and production revenue, general and administrative costs and interest, purchase price allocation on properties acquired, various common stock, warrants and option transactions, and loss contingencies.

 

Summary of Significant Accounting Policies

 

Cash and Cash Equivalents

 

The Company considers all liquid investments with original maturities of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents. The Company had no cash equivalents at December 31, 2018 and December 31, 2017.

 

Fair Value

 

At December 31, 2018 and 2017, the carrying value of our financial instruments such as prepaid expenses and payables approximated their fair values based on the short-term maturities of these instruments. The carrying value of other liabilities approximated their fair values because the underlying interest rates approximated market rates at the balance sheet dates. Management believes that due to our current credit worthiness, the fair value of debt could be less than the book 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).

  

F-8

 

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, on a modified retrospective basis. The Company recognizes revenue as it satisfies contractual performance obligations by transferring promised goods or services to the customers. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for those promised goods or services A good or service is transferred to a customer when, or as, the customer obtains control of that good or service.

 

The Company has one revenue stream, which relates to the provision of hardbanding services by its subsidiary Pro-Tech. All performance obligations of the Company’s contracts with customers are satisfied over the duration of the contract as customer-owned equipment is serviced and then made available for immediate use as completed during the service period. The Company has reviewed its contracts with Pro-Tech customers and determined that due to their short-term nature, with durations of several days of service at the customer’s location, it is only those contracts that occur near the end of a financial reporting period that will potentially require allocation to ensure revenue is recognized in the proper period. The Company has reviewed all such transactions and recorded revenue accordingly.

 

For the twelve months ended December 31, 2018, the Company recognized revenue of $1,034,317 from contracts with oilfield operators, and the Company did not recognize impairment losses on any receivables or contract assets. The Company had no revenue for the twelve months ended December 31, 2017.

 

Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Management evaluated, and determined that no disaggregation of revenue disclosure was appropriate.

 

Concentration of Credit Risk, Accounts Receivable and Allowance for Doubtful Accounts

 

Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents placed with high credit quality institutions and accounts receivable due from Pro-Tech’s customers. Management evaluates the collectability of accounts receivable based on a combination of factors. If management becomes aware of a customer’s inability to meet its financial obligations after a sale has occurred, the Company records an allowance to reduce the net receivable to the amount that it reasonably believes to be collectable from the customer. Accounts receivable are written off at the point they are considered uncollectible. Due to historically very low uncollectible balances and no specific indications of current uncollectibility, the Company has not recorded an allowance for doubtful accounts at December 31, 2018 and 2017. 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 December 31, 2018, one customer comprised 27%, one customer comprised 16% and a third customer comprised 13% of the Company’s gross accounts receivables. As of December 31, 2018, two customers comprised 36% of the Company’s revenues. The Company had no revenue or accounts receivable for the twelve months ended December 31, 2017.

 

Inventory

 

The Company’s inventory balances are stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventory consists of products purchased by Pro-Tech for use in the process of providing hardbanding services. No impairment losses on inventory were recorded for the twelve months ended December 31, 2018 and 2017.

  

F-9

 

 

Property, Plant and Equipment

 

Property, Plant and Equipment is stated at cost. Maintenance and repairs are charged to expense as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. When property, plant and equipment is disposed of, the cost and related accumulated depreciation are removed from the consolidated balance sheets and any gain or loss is included in Other income/(expense) in the consolidated statements of operations.

 

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 5, Property, Plant and Equipment, for further information.

 

Goodwill and Other Intangible Assets

 

Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis or the pattern in which economic benefits are consumed, if reliably determinable. The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

We perform an impairment test of goodwill annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To date, an impairment of goodwill has not been recorded.

 

The Company’s Goodwill balance consists of the amount recognized in connection with the acquisition of Pro-Tech. See Note 4, Pro-Tech Acquisition, for further information. The Company’s other intangible assets are comprised of contract-based and marketing-related intangible assets, as well as acquisition-related intangibles. Acquisition-related intangibles include the value of Pro-Tech’s trademark and customer relationships, both of which are being amortized over their expected useful lives of 10 years beginning August 2018.

 

The Company’s contract-based intangible assets include an agreement to sublicense certain patents belonging to AVV (the “AVV Sublicense”) and a license (the “Trademark License”) to the trademark of Liquidmetal Coatings Enterprises LLC (“Liquidmetal”). 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 the Company’s existing intellectual property, the Company has begun to use the economic benefits of its intangible assets, and therefore began amortization of its intangible assets on a straight-line basis over the useful lives indicated above beginning July 31, 2018, the effective date of the Pro-Tech acquisition.

 

See Note 6, 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 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.

  

F-10

 

 

Share-Based Compensation

 

The Company from time to time may issue stock options, warrants and restricted stock as compensation to employees, directors, officers and affiliates, as well as to acquire goods or services from third parties. In all cases, the Company calculates share-based compensation using the Black-Scholes option pricing model and expenses awards based on fair value at the grant date on a straight-line basis over the requisite service period, which in the case of third party suppliers is the shorter of the period over which services are to be received or the vesting period, and for employees, directors, officers and affiliates is typically the vesting period. Share-based compensation is included in general and administrative expenses in the consolidated statements of operations. See Note 11, Stock Options, for further information.

 

Income Taxes

 

The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires an asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Deferred tax assets include tax loss and credit carry forwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

Earnings per Share

 

Basic earnings per share are computed using the weighted average number of common shares outstanding at December 31, 2018 and 2017, respectively. The weighted average number of common shares outstanding was 21,290,933 and 1,039,420, respectively, at December 31, 2018 and 2017. 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 of the Company, all potentially dilutive common stock equivalents are considered anti-dilutive.

 

The following table outlines outstanding common stock shares and common stock equivalents.

  

   Years Ended December 31, 
   2018   2017 
Common Stock Shares Outstanding   28,037,713    5,206,174 
Common Stock Equivalents Outstanding          
Warrants   2,713,103    527,367 
Stock Options   221,713    223,556 
Unconverted Preferred A Shares   68,966    137,932 
Total Common Stock Equivalents Outstanding   3,003,782    888,855 

 

The presentation of loss per share and weighted average shares outstanding for the year ended December 31, 2017 has been restated from its previous presentation, as a result of erroneously including anti-dilutive shares in the calculation.

  

F-11

 

 

Note 2 – Recent Accounting Pronouncements

 

Recently Issued Accounting Standards

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which amends the guidance for the accounting and disclosure of leases. This new standard requires that lessees recognize on the balance sheet the assets and liabilities that arise from leases, including leases classified as operating leases under current GAAP, and disclose qualitative and quantitative information about leasing arrangements. The new standard requires a modified-retrospective approach to adoption and is effective for interim and annual periods beginning on January 1, 2019, but may be adopted earlier. The Company expects to adopt this standard beginning in the first quarter of 2019. The Company does not expect that this standard will have a material impact on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands the scope of ASC 718 to include all share-based payments arrangements related to the acquisition of goods and services from both employees and nonemployees. For public companies, the amendments are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but no earlier than a company’s adoption date of ASC 606. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements.

 

Recently Adopted Accounting Standards

 

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, on a modified retrospective basis. See Note 1, Organization and Summary of Significant Accounting Policies, under the header Revenue Recognition, for further information.

 

On May 17, 2017, FASB issued Accounting Standards Update (“ASU”) 2017-09, Scope of Modification Accounting (clarifies Topic 718) Compensation – Stock Compensation, such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the modification and the ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification; the ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted, including adoption in an interim period. The Company adopted this ASU on January 1, 2018. The Company expects the adoption of this ASU will only impact financial statements if and when there is a modification to share-based award agreements.

 

In January 2017, FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is deemed to be a business. Determining whether a transferred set constitutes a business is important because the accounting for a business combination differs from that of an asset acquisition. The definition of a business also affects the accounting for dispositions. Under ASU 2017-01, when substantially all of the fair value of assets acquired is concentrated in a single asset, or a group of similar assets, the assets acquired would not represent a business and business combination accounting would not be required. ASU 2017-01 may result in more transactions being accounted for as asset acquisitions rather than business combinations. ASU 2017-01 is effective for interim and annual periods beginning after December 15, 2017 and shall be applied prospectively. Early adoption is permitted. The Company adopted ASU 2017-01 on January 1, 2018 and will apply the new guidance to applicable transactions going forward.

  

F-12

 

 

Note 3 – Discontinued Operations

 

Divestiture of Aurora

 

On August 21, 2017, the Company entered into a divestiture agreement with Navitus, and on September 14, 2017, the Company entered into amendment no. 1 to the divestiture agreement (as amended, the “Divestiture Agreement”). Pursuant to the Divestiture Agreement, the Company agreed to divest and transfer its 50% ownership interest in Aurora to Navitus, which owned the remaining 50% interest, in consideration for a release from Navitus of all of the Company’s obligations under the second amended partnership agreement, dated October 1, 2011, between the Company and Navitus, including, without limitation, obligations to return to Navitus investors their accumulated deferred capital, deferred interest and related allocations of equity. The Company also agreed to (i) issue 4,382,872 shares of common stock to Navitus and (ii) pay off or otherwise satisfy all indebtedness and other material liabilities of Aurora at or prior to closing of the Divestiture Agreement. Closing of the Divestiture Agreement was completed on December 31, 2017.

 

The Divestiture Agreement contained usual pre- and post-closing representations, warranties and covenants. In addition, Navitus agreed that the Company may take any steps necessary to amend the exercise price of warrants issued to Navitus Partners, LLC to reflect an exercise price of $1.52. The Company also agreed to provide Navitus with demand registration rights with respect to the shares to be issued to it under the Divestiture Agreement, whereby the Company agreed to, upon Navitus’ request, file a registration statement on an appropriate form with the SEC covering the resale of such shares and use commercially reasonable efforts to cause such registration statement to be declared effective within one hundred twenty (120) days following such filing. The registration statement was filed on February 5, 2018 and amended on February 8, 2018. The Company has not yet amended the exercise price of warrants issued to Navitus Partners, LLC to reflect an exercise price of $1.52.

 

Closing of the Divestiture Agreement was subject to customary closing conditions and certain other specific conditions, including the following: (i) the issuance of 4,382,872 shares of common stock to Navitus; (ii) the payment or satisfaction by the Company of all indebtedness or other liabilities of Aurora, which total approximately $1.2 million; (iii) the receipt of any authorizations, consents and approvals of all governmental authorities or agencies and of any third parties; (iv) the execution of a mutual release by the parties; and (v) the execution of customary officer certificates by the Company and Navitus regarding the representations, warrants and covenants contained in the Divestiture Agreement. Consequently, the Company issued 4,382,872 shares of common stock to Navitus on December 14, 2017.

 

Aurora’s revenues, related expenses and loss on disposal are components of “income (loss) from discontinued operations” in the consolidated statements of operations. The consolidated statements of cash flows are reported on a consolidated basis without separately presenting cash flows from discontinued operations for all periods presented.

 

Results from discontinued operations were as follows:

 

   12 Months Ended 
   December 31, 
   2018   2017 
Revenues from discontinued operations  $284,397   $276,705 
Income from discontinued operations before tax benefit   168,794    14,301 
Tax benefit   -    - 
Net income from discontinued operations   168,794    14,301 
Loss on disposal of discontinued operations, net of tax   -    (18,205,884)
Income (loss) from discontinued operations, net of tax  $168,794   $(18,191,583)

 

Note 4 – Pro-Tech Acquisition

 

On July 31, 2018, the Company entered into a stock purchase agreement (the “Purchase Agreement”) to purchase 100% of the issued and outstanding common stock of Pro-Tech, a hardbanding service provider servicing Oklahoma Texas, Kansas, Arkansas, Louisiana, and New Mexico. The Company believes that the acquisition of Pro-Tech will create opportunities to leverage its existing portfolio of intellectual property to fulfill its mission of operating as a technology-focused oilfield services company.

  

F-13

 

 

In exchange for the outstanding common stock of Pro-Tech, Victory agreed to pay consideration of approximately $1,386,000, comprised of the following:

 

(i) a total of $500,000 in cash at closing, including $150,000 previously deposited into escrow;

 

(ii) 11,000 shares of the Company’s common stock valued at $0.75 per share;

 

(iii) $264,078 in cash on the 60th day following the closing date, and

 

(iv) a zero-coupon note payable with discounted value of $614,223 at the date of acquisition (for further information, see Note 8, Notes Payable)

 

The fair value of customer relationships and trademarks is provisional pending determination of final valuation of those assets. The Company believes the methodology and estimates utilized to determine the net tangible assets and intangible assets are reasonable.

  

Net tangible assets acquired, at fair value  $1,068,905 
Intangible assets acquired:   - 
Customer relationships   129,680 
Trademark   42,840 
Goodwill   145,148 
Total purchase price  $1,386,573 

 

The following table summarizes the components of the net tangible assets acquired, at fair value:

  

Cash and cash equivalents  $203,883 
Accounts receivable   264,078 
Inventories   54,364 
Property and equipment   678,361 
Deferred tax liability   (87,470)
Other assets and liabilities, net   (44,311)
Net tangible assets acquired  $1,068,905 

 

Pro-Tech’s results of operations subsequent to the July 31, 2018 acquisition date are included in the Company’s consolidated financial statements. The below unaudited combined pro-forma financial data of Victory and Pro-Tech reflects results of operations as though the companies had been combined as of the beginning of each of the periods presented.

  

   12 Months Ended 
   December 31, 
   2018   2017 
Pro forma net revenue  $2,224,031   $1,641,153 
Pro forma net loss  $(27,374,775)  $(20,698,319)
Pro forma net loss per share (basic)  $(1.29)  $(18.12)
Pro forma net loss per share (diluted)  $(1.29)  $(18.12)

 

This unaudited pro-forma combined financial data is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the merger had taken place at the beginning of each of the periods presented.

  

F-14

 

 

Note 5 – Property, plant and equipment

 

Property, plant and equipment, at cost, consisted of the following at December 31:

 

   2018   2017 
Trucks  $350,299   $- 
Welding equipment   285,991    - 
Office equipment   23,408    - 
Machinery and equipment   18,663    - 
Furniture and office equipment   12,768    12,768 
Computer hardware   8,663    8,663 
Computer software   22,191    22,191 
Total property, plant and equipment, at cost   721,983    43,622 
Less -- accumulated depreciation   (106,316)   (43,133)
Property, plant and equipment, net  $615,667   $489 

 

Depreciation expense for the twelve months ended December 31, 2018 and 2017 was $63,183 and $91,321, respectively.

 

Note 6 – Goodwill and Other Intangible Assets

 

The Company recorded $611,355 of amortization of intangible assets for the twelve months ended December 31, 2018, and no amortization of intangible assets for the twelve months ended December 31, 2017.

 

For the twelve months ended December 31, 2018, the Company recorded impairments to the AVV Sublicense, the Trademark License and the Non-Compete Agreements of $9,115,833, $4,847,500 and $202,500, respectively, for a total impairment loss of $14,165,833, based on a revision of estimated future net cash flows to be generated by these assets. The revaluation was performed by a third party business valuation firm. This loss was recorded to Impairment Loss on the Company’s consolidated statements of operations.

 

The following table shows intangible assets and related accumulated amortization as of December 31, 2018 and 2017.

  

   December 31,   December 31, 
   2018   2017 
AVV sublicense  $11,330,000   $11,330,000 
Trademark license   6,030,000    6,030,000 
Non-compete agreements   270,000    270,000 
Pro-Tech customer relationships   129,680    - 
Pro-Tech trademark   42,839    - 
Accumulated amortization and impairment   (14,777,188)   - 
Other intangible assets, net  $3,025,331   $17,630,000 

 

Note 7 – Income Taxes

 

There was no provision for (benefit of) income taxes for the years ended December 31, 2018 and 2017, after the application of ASC 740 “Income Taxes.” 

 

The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. There have been transactions that have changed the Company’s ownership structure since inception that may have resulted in one or more ownership changes as defined by the IRC Section 382. The Company’s transaction in 2017 has resulted in a limitation of pre-change in control net operating loss carry forwards to $8,163,281 over a 20-year period.

  

F-15

 

 

For the years ending December 31, 2018 and 2017, the Company incurred a net operating loss carry forward of $1,118,000 and $2,186,513, respectively. Combined with the Section 382 limitation, the Company has net operating losses available of approximately $10,369,000 as of December 31, 2018. The Federal net operating loss carry forwards begin to expire in 2028. Capital loss carryovers may only be used to offset capital gains.

 

Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the net operating loss carry forwards. ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Accordingly, the Company has recorded a full valuation allowance against its net deferred tax assets at December 31, 2018 and 2017, respectively. Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the deferred tax benefit associated with the use of the net operating loss carry forwards and will recognize a deferred tax asset at that time.

  

The Tax Cuts and Jobs Act (“TCJA”) reduced the corporate income tax rate from 34% to 21% effective January 1, 2018. All deferred income tax assets and liabilities, including NOL’s have been measured using the new rate under the TCJA and are reflected in the valuation of these assets as of December 31, 2018.

 

Significant components of the Company’s deferred income tax assets are as follows: 

  

   2018   2017 
Net operating loss carryforwards  $2,179,000   $1,880,000 
Depreciation and accretion   2,920,000    - 
Equity based expenses   192,000    119,000 
Other   (2,000)   - 
Deferred taxes   5,289,000    1,999,000 
Valuation allowance   (5,289,000)   (1,999,000)
Net deferred income tax assets  $-   $- 

 

Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:

  

   2018   2017 
Federal taxes at statutory rate   21.0%   34.0%
Noncompulsary stock warrants   -8.5%   0.0%
Rate reduction due to the TCJA   -0.1%   -49.2%
Net operating loss reduction due to IRC 382   0.0%   203.3%
Change in valuation allowance   -12.0%   218.5%
Effective income tax rate   0.4%   0.0%

 

ASC 740 provides guidance which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the current accounting guidelines, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2018 and 2017 the Company does not have a liability for unrecognized tax benefits.

  

F-16

 

 

The Company has elected to include interest and penalties related to uncertain tax positions as a component of income tax expense. To date, no penalties or interest has been accrued.

 

Tax years 2015 forward are open and subject to examination by the Federal taxing authority. The Company is not currently under examination and it has not been notified of a pending examination.

 

Note 8 – Notes Payable

 

Notes payable were comprised of the following at December 31:

  

   2018   2017 
Rogers Note  $398,576   $- 
Kodak Note   375,000    - 
Matheson Note   612,500    - 
VPEG Note   -    896,500 
New VPEG Note   1,115,400    - 
Total notes payable   2,501,476    896,500 
Less unamortized discount and issuance costs   (81,823)   - 
Total notes payable, net  $2,419,653   $896,500 
Current portion of notes payable   1,982,884    896,500 
Long term notes payable, net  $436,770   $- 

 

Amortization of discount and issuance costs during the year ended December 31, 2018 was $41,063. The Company did not record amortization of discount and issuance costs during the year ended December 31, 2017.

 

Future payments on notes payable at December 31, 2018 were:

 

2019  $2,039,688 
2020   461,788 
Total  $2,501,476 

 

Rogers Note

 

In February 2015, the Company entered into an 18% Contingent Promissory Note in the amount of $250,000 with Louise H. Rogers (the “Rogers Note”), in connection with a proposed business combination with Lucas Energy Inc. Subsequent to the issuance of the Rogers Note, the Company and Louise H. Rogers entered into an agreement (the “Rogers Settlement Agreement”) to terminate the Rogers Note with a lump sum payment of $258,125 to be made on or before July 15, 2015. The Company’s failure to make the required payment resulted in default interest on the amount due accruing at a rate of $129.0625 per day.

 

On October 17, 2018, the Company entered into a settlement agreement with Louise H. Rogers (the “New Rogers Settlement Agreement”), pursuant to which the amount owed by the Company under the Rogers Settlement Agreement was reduced to a $375,000 principal balance, which accrues interest at the rate of 5% per annum. A gain of $11,198, or $0.00 per share, was recorded in Other income on the Company’s consolidated statements of operations for the twelve months ended December 31, 2018 in connection with the New Rogers Settlement Agreement.

  

F-17

 

 

The New Rogers Settlement Agreement is being repaid through 24 equal monthly installments of approximately $16,607 per month beginning January 2019. The Company also agreed to reimburse Louise H. Rogers for attorney fees in the amount of $7,686, to be paid on or before November 10, 2018, and to reimburse Louise H. Rogers for additional attorney fees incurred in connection with the New Rogers Settlement Agreement.

 

In connection with the New Rogers Settlement Agreement, the Company agreed to pay Sharon E. Conway, the attorney for Louise H. Rogers, a total of $26,616 in three equal installment payments of $8,872, the first of which was paid in November 2018 and the last of which was paid in February 2019.

 

The amount due pursuant to the Rogers Settlement Agreement, including accrued interest, was $398,576 at December 31, 2018. Of this amount, $199,288 is reported in Short term notes payable, net and $199,288 is reported in Long term notes payable, net on the Company’s consolidated balance sheets. At December 31, 2017, the amount due pursuant to the Rogers Settlement Agreement, including accrued interest, was $374,281 and was included in Accrued liabilities in the consolidated balance sheets in the Company’s Annual Report on Form 10-K.

 

The Company recorded interest expense of $35,492 and $47,108 related to the Rogers Settlement Agreement for the twelve months ended December 31, 2018 and 2017, respectively.

 

Kodak Note

 

On July 31, 2018, the Company entered into a loan agreement to fund the acquisition of Pro-Tech with Kodak Brothers Real Estate Cash Flow Fund, LLC, a Texas limited liability company (“Kodak”), pursuant to which the Company borrowed $375,000 from Kodak under a 10% secured convertible promissory note maturing March 31, 2019, with an option to extend maturity to June 30, 2019 (the “Kodak Note”). See Note 17, Subsequent Events, for further information.

 

Pursuant to the issuance of the Kodak Note, the Company issued to an affiliate of Kodak a five-year warrant to purchase 375,000 shares of the Company’s common stock with an exercise price of $0.75 per share (the “Kodak Warrants”). The grant date fair value of the Kodak Warrants was recorded as a discount of approximately $37,000 on the Kodak Note and will be amortized into interest expense using a method consistent with the interest method. The Company amortized $23,193 related to the Kodak Note for the twelve months ended December 31, 2018.

 

Matheson Note

 

In connection with the Purchase Agreement (see Note 4, Pro-Tech Acquisition, for further information), the Company is required to make a series of eight quarterly payments of $87,500 each beginning October 31, 2018 and ending July 31, 2020 to Stewart Matheson, the seller of Pro-Tech (the “Matheson Note”). The Company is treating this obligation as a 12% zero-coupon note, with amounts falling due in less than one year included in Short-term notes payables and the remainder included in Long-term notes payable on the Company’s consolidated balance sheets. The discount is being amortized into interest expense on a method consistent with the interest method.

 

The Company recorded interest expense of $17,870 related to the Matheson Note for the twelve months ended December 31, 2018.

 

New VPEG Note

 

See Note 13, Related Party Transactions, for a definition and description of the VPEG Note and the New VPEG Note. The outstanding balance on the New VPEG Note was $1,115,400 at December 31, 2018, and the Company recorded interest expense of $101,400 related to the New VPEG Note for the twelve months ended December 31, 2018. The balance of the VPEG Note was $896,500 at December 31, 2017, and the Company recorded interest expense of $210,000 related to the VPEG Note for the twelve months ended December 31, 2017.

  

F-18

 

 

Note 9 – Stockholders Equity

 

Preferred Stock

 

On August 21, 2017, the Company designated 810,000 shares as Series C Preferred Stock and issued 180,000 shares. On January 24, 2018, all shares of Series C Preferred Stock were automatically converted into 940,272 shares of common stock. On February 5, 2018, the Company filed a Certificate of Withdrawal with the Nevada Secretary of State to withdraw the designation of the Series C Preferred Stock and return such shares to undesignated preferred stock of the Company.

 

On August 21, 2017, the Company designated 800,000 shares as Series B Preferred Stock and issued 800,000 shares. On April 10, 2018, all shares of Series B Preferred Stock were canceled. On April 23, 2018, the Company filed a Certificate of Withdrawal with the Nevada Secretary of State to withdraw the designation of the Series B Preferred Stock and return such shares to undesignated preferred stock of the Company.

 

Common Stock

 

On July 31, 2018, the Company issued 11,000 shares of its $0.001 par value common stock to Stewart Matheson, the seller of Pro-Tech, in connection with the acquisition. See Note 4, Pro-Tech Acquisition, for further information.

 

Note 10 – Warrants for Stock

 

At December 31, 2018 and 2017 warrants outstanding for common stock of the Company were as follows:

 

   Number of
Shares
Underlying
Warrants
   Weighted
Average
Exercise Price
 
Balance at January 1, 2018   527,367   $5.53 
Granted   2,255,267    0.75 
Exercised        
Canceled   69,531    10.90 
Balance at December 31, 2018   2,713,103   $1.42 

 

   Number of
Shares
Underlying
Warrants
   Weighted
Average
Exercise Price
 
Balance at January 1, 2017   292,308   $11.71 
Granted   291,011    2.74 
Exercised        
Canceled   (55,952)   23.27 
Balance at December 31, 2017   527,367   $5.53 

  

During the year ended December 31, 2018, the Company granted 375,000 warrants in connection with the Kodak Note. See Note 8, Notes Payable, for further information.

  

During the year ended December 31, 2017, the Company granted 30,799 warrants for $1,170,000 in capital contributions through Navitus Partners, LLC. The Company granted 53,808 warrants in exchange for services during the year ended December 31, 2017. The Company granted 69,476 warrants to purchase shares of common stock to directors, officers and employees for services related to fiscal year 2016 during the year ended December 31, 2017. The Company also issued 136,928 warrants to purchase shares of common stock to Visionary Private Equity Group I, LP in conjunction with a private placement during the year ended December 31, 2017. All warrants were valued using the Black Scholes pricing model.

 

F-19

 

 

The following table summarizes information about underlying outstanding warrants for common stock of the Company outstanding and exercisable as of December 31, 2018:

 

   Warrants Outstanding   Warrants Exercisable 
Range of Exercise Prices  Number of
Shares
Underlying
Warrants
   Weighted
Average
Exercise
Price
   Weighted Average
Remaining
Contractual
Life (in years)
  Number of
Shares
Underlying
Warrants
   Weighted
Average
Exercise
Price
 
$4.94 – $13.30   147,346   $8.92   1.45   147,346   $8.92 
$0.75 – $3.51   2,565,757   $0.99   4.19   2,565,757   $0.99 
    2,713,103            2,713,103      

 

The following table summarizes information about underlying outstanding warrants for common stock of the Company outstanding and exercisable as of December 31, 2017:

 

   Warrants Outstanding   Warrants Exercisable 
Range of Exercise Prices  Number of
Shares
Underlying
Warrants
   Weighted
Average
Exercise
Price
   Weighted Average
Remaining
Contractual
Life (in years)
  Number of
Shares
Underlying
Warrants
   Weighted
Average
Exercise
Price
 
$4.94 – $17.48   216,877   $9.56   1.81   216,877   $9.56 
$1.52 – $3.51   310,490   $2.72   4.19   310,490   $2.72 
    527,367            527,367      

 

These common stock purchase warrants do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants using the Black-Scholes Option Pricing Model using the following assumptions:

 

   2018  2017
Risk free interest rates  2.67% – 2.83%  1.19% – 2.13%
Expected life  5 years  5 years
Estimated volatility  1.0%  918.7% – 972.10%
Dividend yield  0%  0%

 

Expected volatility is based primarily on historical volatility. The schedule of fair value assumptions of warrant Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected term of the warrants. The Company believes this method produces an estimate that is representative of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected term of these warrants is likely to differ materially from historical volatility. The expected term is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities.

 

At December 31, 2018 and 2017 the aggregate intrinsic value of the warrants outstanding and exercisable was $0 and $408,938, respectively. The intrinsic value of a warrant is the amount by which the market value of the underlying warrant exercise price exceeds the market price of the stock at December 31 of each year.

 

Note 11 – Stock Options

 

The following table summarizes stock option activity in the Company’s stock-based compensation plans for the year ended December 31, 2018. All options issued were non-qualified stock options.

 

   Number of
Options
   Weighted
Average
Exercise
Price
   Aggregate
Intrinsic
Value (1)
   Number of
Options
Exercisable
   Weighted
Average
Fair Value
At Date of
Grant
 
Outstanding at December 31, 2016   27,766   $12.47        21,187   $13.16 
Granted at Fair Value   197,369    1.52             
Exercised                    
Canceled  (1,579)   38.00             
Outstanding at December 31, 2017   223,556   $2.62   $489,475    44,827   $13.49 
Granted at Fair Value                    
Exercised                    
Canceled   (12,370)   10.71             
Outstanding at December 31, 2018   211,186   $2.15   $    101,537   $2.83 

 

(1) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option at the balance sheet date. If the exercise price exceeds the market value, there is no intrinsic value. 

F-20

 

 

During the year ended December 31, 2018, the Company did not grant employee stock options or stock options for consulting services.

 

The fair value of the stock option grants is amortized over the respective vesting period using the straight-line method. Forfeitures and cancellations are recorded as they occur.

 

Compensation expense related to stock options included in general and administrative expense in the accompanying consolidated statements of operations for the years ended December 31, 2018 and 2017, was $133,350 and $312,351, respectively.

 

Stock options are granted at the fair market value of the Company’s common stock on the date of grant. Options granted to officers and other employees vest immediately or over 36 months as provided in the option agreements at the date of grant.

 

The fair value of each option granted in 2017 was estimated using the Black-Scholes Option Pricing Model. No options were granted in 2018. The following assumptions were used to compute the weighted average fair value of options granted during the periods presented.

 

   2018  2017
Expected term of option  N/A  10 Years
Risk free interest rates  N/A  2.18%
Estimated volatility  N/A  972.1
Dividend yield  N/A  0%

 

The following table summarizes information about stock options outstanding at December 31, 2018:

 

Range of Exercise Prices  Number of
Options
   Weighted
Average
Remaining
Contractual
Life (Years)
   Weighted
Average
Exercise
Price
   Aggregate
Intrinsic
Value (1)
   Number Exercisable   Weighted
Average
Exercise
Price of
Exercisable
Options
   Aggregate
Intrinsic
Value (1)
 
$1.52- $13.30   211,186    8.48   $2.15   $    101,537   $2.83   $ 

 

The following table summarizes information about options outstanding at December 31, 2017: 

 

Range of Exercise Prices  Number of
Options
   Weighted
Average
Remaining
Contractual
Life (Years)
   Weighted
Average
Exercise
Price
   Aggregate
Intrinsic
Value (1)
   Number Exercisable   Weighted
Average
Exercise
Price of
Exercisable
Options
   Aggregate
Intrinsic
Value (1)
 
$1.52- $13.30   223,556    9.04   $2.62   $489,475    44,827   $13.49   $54,386 

 

A summary of the Company’s non-vested stock options at December 31, 2018 and December 31, 2017 and changes during the years are presented below.

 

Non-Vested Stock Options  Options   Weighted
Average
Grant Date
Fair Value
 
Non-Vested at December 31, 2017   178,729   $1.68 
Granted      $ 
Vested   69,080   $ 
Forfeited   (12,370)  $ 
Non-Vested at December 31, 2018   109,649   $1.52 

 

F-21

 

 

Note 12 – Commitments and Contingencies

 

Leases

 

Rent expense for the years ended December 31, 2018 and 2017 was $30,000 for both years. The Company’s office space in Austin, Texas is leased on a month-to-month basis, and the lease agreement for the Pro-Tech facility in Oklahoma County, Oklahoma is cancellable at any time by giving 90 days notice. Therefore, future annual minimum payments under non-cancellable operating leases are $0 for the years ending December 31, 2018 and 2017.

 

We are subject to legal claims and litigation in the ordinary course of business, including but not limited to employment, commercial and intellectual property claims. The outcome of any such matters is currently not determinable, and the Company is not actively involved in any ongoing litigation as of the date of this report.

 

Note 13 – Related Party Transactions

 

VPEG Private Placement

 

On February 3, 2017, the Company completed a private placement (the “VPEG Private Placement”) with Visionary Private Equity Group I, LP, a Missouri limited partnership (“VPEG”), pursuant to which VPEG purchased a unit comprised of $320,000 principal amount of a 12% unsecured six-month promissory note and a common stock purchase warrant to purchase 136,928 shares of common stock at an exercise price of $3.5074 per share. Visionary PE GP I, LLC is the general partner of VPEG and Dr. Ronald Zamber, a director of the Company, is the Managing Director of Visionary PE GP I, LLC.

 

The value attributed to the warrants issued in connection with the VPEG Private Placement was amortized over the life of the underlying promissory note using a method consistent with the interest method and reported in interest expense. Interest expense related to this amortization was $160,000 for the twelve months ended December 31, 2017.

 

Settlement Agreement

 

On April 10, 2018, the Company and VPEG entered into a settlement agreement and mutual release (the “Settlement Agreement”), pursuant to which VPEG agreed to release and discharge the Company from its obligations under the VPEG Note. Pursuant to the Settlement Agreement, and in consideration and full satisfaction of the outstanding indebtedness of $1,410,200 under the VPEG Note, the Company issued to VPEG 1,880,267 shares of its common stock and a five-year warrant to purchase 1,880,267 shares of its common stock at an exercise price of $0.75 per share, to be reduced to the extent the actual price per share in the Proposed Private Placement is less than $0.75. The Company recorded share based compensation of $11,281,602 in connection with the Settlement Agreement.

 

On April 10, 2018, in connection with the Settlement Agreement, the Company and VPEG entered into a loan Agreement (the “New Debt Agreement”), pursuant to which VPEG may, at is discretion, loan to the Company up to $2,000,000 under a secured convertible original issue discount promissory note (the “New VPEG Note”). Any loan made pursuant to the New VPEG Note will reflect a 10% original issue discount, will not bear interest in addition to the original issue discount, will be secured by a security interest in all of the Company’s assets, and at the option of VPEG will be convertible into shares of the Company’s common stock at a conversion price equal to $0.75 per share or, such lower price as shares of Common Stock are sold to investors in the Proposed Private Placement. The balance of the New VPEG Note was $1,115,400 as of December 31, 2018 (see Note 8, Notes Payable, for further information).

 

VPEG Settlement Agreement

 

On August 21, 2017, the Company entered into a settlement agreement and mutual release (the “VPEG Settlement Agreement”) with VPEG, pursuant to which all obligations of the Company to VPEG to repay indebtedness for borrowed money (other than the VPEG Note), which totaled approximately $873,409.64, was converted into approximately 110,000 shares of Series C Preferred Stock. Pursuant to the VPEG Settlement Agreement, the 12% unsecured six-month promissory note was repaid in full and terminated, but VPEG retained the common stock purchase warrant. On January 24, 2018, these shares of Series C Preferred Stock were automatically converted into 940,272 shares of common stock.

 

VPEG Note

 

On August 21, 2017, the Company entered into a secured convertible original issue discount promissory note issued by the Company to VPEG (the “VPEG Note”). The VPEG Note reflects an original issue discount of $50,000 such that the principal amount of the VPEG Note is $550,000, notwithstanding the fact that the loan is in the amount of $500,000. The VPEG Note does not bear any interest in addition to the original issue discount, matures on September 1, 2017, and is secured by a security interest in all of the Company’s assets.

 

On October 11, 2017, the Company and VPEG entered into an amendment to the VPEG Note, pursuant to which the parties agreed (i) to increase the loan amount to $565,000, (ii) to increase the principal amount of the VPEG Note to $621,500, reflecting an original issue discount of $56,500, (iii) to extend the maturity date to November 30, 2017 and (iv) that VPEG will have the option, but not the obligation, to loan the Company up to an additional $250,000 under the VPEG Note. The balance of the VPEG Note was $896,500 at December 31, 2017.

 

F-22

 

 

On January 17, 2018, the Company and VPEG entered into a second amendment to the VPEG Note, pursuant to which the parties agreed (i) to extend the maturity date to a date that is five business days following VPEG’s written demand for payment on the VPEG Note; (ii) that VPEG will have the option but not the obligation to loan the Company additional amounts under the VPEG Note; and (iii) that, in the event that VPEG exercises its option to convert the note into shares of common stock at any time after the maturity date and prior to payment in full of the principal amount of the VPEG Note, the Company shall issue to VPEG a five year warrant to purchase a number of additional shares of common stock equal to the number of shares issuable upon such conversion, at an exercise price of $1.52 per share.

 

Navitus Settlement Agreement

 

On August 21, 2017, the Company entered into a settlement agreement and mutual release (the “Navitus Settlement Agreement”) with Dr. Ronald Zamber and Mr. Greg Johnson, an affiliate of Navitus, pursuant to which all obligations of the Company to Dr. Zamber and Mr. Johnson to repay indebtedness for borrowed money, which totaled approximately $520,800, was converted into approximately 65,591 shares of Series C Preferred Stock, approximately 46,700 shares of which were issued to Dr. Zamber and approximately 18,891 shares of which were issued to Mr. Johnson. On January 24, 2018, these shares of Series C Preferred Stock were automatically converted into 342,633 shares of common stock, with 243,948 shares issued to Dr. Zamber and 98,685 shares issued to Mr. Johnson.

 

Insider Settlement Agreement

 

On August 21, 2017, the Company entered into a settlement agreement and mutual release (the “Insider Settlement Agreement”) with Dr. Ronald Zamber and Mrs. Kim Rubin Hill, the wife of Kenneth Hill, the Company’s Chief Executive Officer and Chief Financial Officer, pursuant to which all obligations of the Company to Dr. Zamber and Mrs. Hill to repay indebtedness for borrowed money, which totaled approximately $35,000, was converted into approximately 4,408 shares of Series C Preferred Stock, approximately 1,889 shares of which were issued to Dr. Zamber and approximately 2,519 shares of which were issued to Mrs. Hill. On January 24, 2018, these shares of Series C Preferred Stock were automatically converted into 23,027 shares of common stock, with 9,869 shares issued to Dr. Zamber and 13,158 shares issued to Mrs. Hill. 

 

 Transaction Agreement

 

On August 21, 2017, the Company entered into a transaction agreement (the “Transaction Agreement”) with Armacor Victory Ventures, LLC, a Delaware limited liability company (“AVV”), pursuant to which AVV (i) granted to the Company a worldwide, perpetual, royalty free, fully paid up and exclusive sublicense to all of AVV’s owned and licensed intellectual property for use in the Oilfield Services industry, except for a tubular solutions company headquartered in France, and (ii) agreed to contribute to the Company $5,000,000 (the “Cash Contribution”), in exchange for which the Company issued 800,000 shares of its newly designated Series B Convertible Preferred Stock. To date, AVV has contributed a total of $255,000 to the Company. 

 

On August 21, 2017, in connection with the Transaction Agreement, the Company entered into a settlement agreement and mutual release with David McCall, the former general counsel and former director of Victory (the “McCall Settlement Agreement”), pursuant to which all obligations of the Company to David McCall to repay indebtedness related to payment for legal services rendered by David McCall, which totaled $380,323 including accrued interest, was converted into 20,000 shares of the Company’s newly designated Series D Preferred Stock. During the twelve months ended December 31, 2017, the Company did not redeem any shares of Series D Preferred Stock. During the twelve months ended December 31, 2018, the Company redeemed 16,666 shares of Series D Preferred Stock for cash payments of $316,942.

 

F-23

 

 

Supplementary Agreement

 

On April 10, 2018, the Company and AVV entered into a supplementary agreement (the “Supplementary Agreement”) to address breaches or potential breaches under the Transaction Agreement, including AVV’s failure to contribute the full amount of the Cash Contribution. Pursuant to the Supplementary Agreement, the Series B Convertible Preferred Stock issued under the Transaction Agreement was canceled and, in lieu thereof, the Company issued to AVV 20,000,000 shares of its common stock (the “AVV Shares”). The Supplementary Agreement contains certain covenants by AVV, including a covenant that AVV will use its best efforts to help facilitate approval of a proposed $7 million private placement of the Company’s common stock at a price per share of $0.75, which will include 50% warrant coverage at an exercise price of $0.75 per share (the “Proposed Private Placement”), and that AVV will invest a minimum of $500,000 in the Proposed Private Placement.

 

On April 23, 2018, the Company filed a Certificate of Withdrawal with the Nevada Secretary of State to withdraw the designation of the Series B Convertible Preferred Stock and return such shares to undesignated preferred stock of the Company.

 

Consulting Fees

 

During the twelve months ended December 31, 2018 and 2017, the Company paid $105,030 and $120,000, respectively, in consulting fees to Kevin DeLeon, a director of the Company.

 

Note 14 – Segment and Geographic Information

 

The Company has one reportable segment: Hardband Services. Hardband Services provides various hardbanding solutions to oilfield operators for drill pipe, weight pipe, tubing and drill collars. All Hardband Services revenue is generated in the United States, and all assets related to Hardband Services are located in the United States. Because the Company operates with only one reportable segment in one geographical area, there is no supplementary revenue or asset information to present.

 

Note 15 – Net Loss Per Share

 

Basic loss per share is computed using the weighted average number of common shares outstanding at December 31, 2018 and 2017, respectively. Diluted loss per share reflects the potential dilutive effects of common stock equivalents such as options, warrants and convertible securities.

 

The following table sets forth the computation of net loss per common share – basic and diluted:

 

   12 months ended 
   December 31, 
   2018   2017 
Numerator:        
Net loss   (27,309,510)   (20,720,286)
Denominator          
Basic weighted average common shares outstanding   21,290,933    1,039,420 
Net loss per common share          
Basic and diluted   (1.28)   (19.93)

 

For the years ended December 31, 2018 and 2017, potentially dilutive shares of 3,003,782 and 888,855, respectively, were excluded from the calculation of dilutive shares because the effect of including them would have been anti-dilutive.

 

F-24

 

 

Note 16 – Employee Benefit Plan

 

The Company sponsors a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code covering full-time employees of Pro-Tech (“Pro-Tech 401(k) Plan”). The Pro-Tech 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code. Participants meeting certain criteria, as defined in the plan document, are eligible for a matching contribution, in amounts determined at the discretion of the Company. Contributions to the Molecular Templates 401(k) Plan by the Company were $7,915 and $0 for the years ended December 31, 2018 and 2017, respectively.

 

Note 17 – Subsequent Events

 

On April 1, 2019, the Company elected to extend the maturity date of the Kodak Note from March 31, 2019 to June 30, 2019, and paid an extension fee of $9,375 in connection with this extension. On July 10, 2019, the Company entered into an Extension and Modification Agreement with Kodak (the “Kodak Extension”), under which the terms of the Kodak Note were amended as follows: (i) the maturity date was extended to September 30, 2019, (ii) the interest rate was increased to 15% beginning July 1, 2019, with a prepayment of interest in the amount of $14,063 for the period from July through September 2019 made upon execution of the Kodak Extension, and (iii) an extension fee of $14,063 was paid to Kodak upon execution of the Kodak Extension.

 

On October 21, 2019, the Company, Kodak and Pro-Tech entered into a Second Extension and Modification Agreement, effective September 30, 2019, pursuant to which the maturity date of the Kodak Note was extended from September 30, 2019 to December 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 q