VICTORY OILFIELD TECH: Management Discussion and Analysis of Financial Position and Operating Results (Form 10-Q)
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand
Victory Oilfield Tech, Inc.MD&A is presented in the following seven sections:
? Caution Regarding Forward-Looking Statements
? Business Overview ? Results of Operations
? Liquidity and capital resources
? Critical accounting conventions and estimates;
? Recently adopted accounting standards; and
? Recently published accounting standards.
MD&A is provided as a supplement to, and should be read in conjunction with, the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and Items 7 and 8 of our Annual Report on Form 10-K for the year ended
December 31, 2019. In MD&A, we use "we," "our," "us," "Victory" and "the Company" to refer to Victory Oilfield Tech.and its wholly-owned subsidiary, unless the context requires otherwise. Amounts and percentages in tables may not total due to rounding. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. We caution readers that important facts and factors described in MD&A and elsewhere in this document sometimes have affected, and in the future could affect our actual results, and could cause our actual results during 2020 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us.
As stated in the report of the independent accounting firm registered on our
Caution Regarding Forward-Looking Statements
Many statements made in the following discussion and analysis of our financial condition and results of operations and elsewhere in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations, are "forward-looking statements" within the meaning of federal securities laws and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan, strategies and capital structure. In particular, the words "anticipate," "expect," "suggests," "plan," "believe," "intend," "estimates," "targets," "projects," "should," "could," "would," "may," "will," "forecast," variations of such words, and other similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions, including, but not limited to, the risks and uncertainties described in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended
December 31, 2019and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include:
? continuing operating losses;
? the unfavorable development of economic conditions and, in particular, of the
the oil and gas industries;
? volatility in capital, credit and commodity markets;
? our inability to successfully execute our growth strategy;
? the competitive nature of our industry;
? our customers’ credit risk exposure;
? price increases or business disruptions in our supply of raw materials;
? the inability to develop and market new products and manage product lifecycles;
? business disruptions, security threats and security breaches, including
security risks to our IT systems;
? terrorist acts, conflicts, wars, natural disasters, pandemics and others
crises that could have a significant negative impact on our activities, our financial situation
and the results of operations;
? non-compliance with anti-terrorism and applicable trade laws and regulations
? the risks associated with the protection of data confidentiality;
? significant environmental liabilities and costs due to our
past transactions or products, including transactions or products related to our
permitted coating materials;
? the transport of certain inherently dangerous materials due to their toxicity
? litigation and other commitments and contingencies;
? ability to recruit and retain the experienced and qualified staff we need to
? work stoppages, labor disputes and other matters related to our work
? delays in obtaining permits by our future clients or acquisition targets for
? our ability to protect and enforce intellectual property rights;
? intellectual property infringement lawsuits against us by third parties;
? our ability to realize the expected benefits of any acquisition and
? risk that the insurance we purchase does not fully cover all
? risks associated with changes in tax rates or regulations, including unforeseen events
impacts of the new
regulatory guidance and changes in our current interpretations and assumptions;
? our substantial debt;
? the results of pending litigation;
? our ability to raise additional capital on commercially reasonable terms may
? any statement of belief and any statement of hypothesis underlying any of the
? other factors disclosed in this Quarterly Report on Form 10-Q and our other
? other factors beyond our control.
These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this Quarterly Report on Form 10-Q. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Potential investors should not make an investment decision based solely on our projections, estimates or expectations. 15 Business Overview General
Victory Oilfield Tech, Inc.("Victory", the "Company", "we"), a Nevadacorporation, is an Austin, Texasbased publicly held oilfield energy technology products company focused on improving well performance and extending the lifespan of the industry's most sophisticated and expensive equipment. America's resurgence in oil and gas production is largely driven by new innovative technologies and processes as most dramatically and recently demonstrated by fracking. We provide and apply wear-resistant alloys for use in the global oilfield services industry which are mechanically stronger, harder and more corrosion resistant than typical alloys found in the market today. This combination of characteristics creates opportunities for drillers to dramatically improve lateral drilling lengths, well completion time and total well costs. On July 31, 2018, we entered into a stock purchase agreement to purchase 100% of the issued and outstanding common stock of Pro-Tech Hardbanding Services, Inc., an Oklahomacorporation ("Pro-Tech"), which provides various hardbanding solutions to oilfield operators for drill pipe, weight pipe, tubing and drill collars and servicing Oklahoma, Texas, Kansas, Arkansas, Louisiana, and New Mexico. We believe that the acquisition of Pro-Tech will create opportunities to leverage its existing portfolio of intellectual property to fulfill its mission of operating as a technology-focused oilfield services company. The stock purchase agreement was included as Exhibit 10.1 on the Form 8-K filed by us
August 2, 2018. Our wear-resistant alloys reduce drill-string torque, friction, wear and corrosion in a cost-effective manner, while protecting the integrity of the base metal. We apply our coatings using advanced welding techniques and thermal spray methods. We also utilize common materials, such as tungsten carbide to chromium carbide, to deliver the optimal solution to the customers. Some of our hardbanding processes protect wear in tubulars using materials that achieve a low coefficient of friction to protect the drillstring and casing from abrasion. Growth Strategy We plan to continue our U.S.oilfield services company acquisition initiative, aimed at companies which are already recognized as a high-quality service providers to strategic customers in the major North American oil and gas basins. When completed, we expect that each of these oilfield services company acquisitions will provide immediate revenue from their current regional customer base, while also providing us with a foundation for channel distribution and product development of our existing products. We intend to grow each of these established oilfield services companies by providing better access to capital, more disciplined sales and marketing development, integrated supply chain logistics and infrastructure build out that emphasizes outstanding customer service and customer collaboration, future product development and planning. We believe that a well-capitalized technology-enabled oilfield services business will provide the basis for more accessible financing to grow the Company and execute our oilfield services company acquisitions strategy. We anticipate new innovative products will come to market as we collaborate with drillers to solve their other down-hole needs. Recent Developments
Impact of the coronavirus pandemic
December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The virus has since spread to over 150 countries and every state in the United States. On March 11, 2020, the World Health Organizationdeclared the outbreak a pandemic, and on March 13, 2020, the United Statesdeclared a national emergency. Most states and cities have reacted by instituting quarantines, restrictions on travel, "stay-at-home" rules and restrictions on the types of businesses that may continue to operate, as well as guidance in response to the pandemic and the need to contain it. Although stay at home orders and lock downs on businesses in the areas where we operate have caused our staff to conduct business operations from their homes, this change has not resulted in a significant impact to our ability to operate. However, the spread of the coronavirus outbreak across the world has driven sharp demand destruction for crude oil as whole economies ordered curtailed activity. As a result, companies across the industry have responded with severe capital spending budget cuts, personnel layoffs, facility closures and bankruptcy filings. We expect industry activity levels and spending by customers to remain depressed throughout the remainder of 2020 and 2021 as destruction of demand for oil and gas continues. 16 As the coronavirus continues to spread throughout areas in which we operate, we believe the outbreak has the potential to have a material negative impact on our operating results and financial condition. The extent of the impact of the coronavirus on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our operators, employees and vendors, all of which are uncertain and cannot be predicted. The extent of the pandemic's continued effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, the pace at which jurisdictions across the country re-open and restrictions begin to lift, the availability of government financial support to our business and our customers, and whether a resurgence of the outbreak occurs. Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating results and financial condition, but it could be material. Subsequent Events During the period of April 1, 2020through January 1, 2021, we received additional loan proceeds of $501,700from VPEG pursuant to the New VPEG Note (See Note 9, Related Party Transactions, to the condensed consolidated financial statements for a definition and description of the New VPEG Note). Effective September 1, 2020, we and AVV (See Note 9, Related Party Transactions, to the condensed consolidated financial statements for definitions and additional information) have mutually agreed to terminate the AVV Sublicense Agreement and Trademark License. Since the date of the Transaction Agreement, we have not realized any revenue from products or services related to the AVV Sublicense Agreement or Trademark License. Also effective September 1, 2020, we and LMCE have agreed to terminate the supply and services agreement dated September 6, 2019although we continue to purchase and utilize the products of LMCE. We are evaluating our business strategy in light of the current conditions of the national and global oil and gas markets. On October 30, 2020, we and VPEG entered into an amendment to the New Debt Agreement (the "Amendment"), pursuant to which the parties agreed to increase the loan amount to up to $3,000,000to cover advances from VPEG through October 30, 2020and our working capital needs.
Factors Affecting Our Operating Results
The following discussion presents certain elements of our income statements and the factors that affect these elements.
We generate revenue from reloading solutions for oilfield operators for drill pipe, ballast rod, tube and weights and grinding services.
Our revenues are generally impacted by the following factors:
? our ability to successfully develop and launch new solutions and services
? changes in the purchasing habits of our customers
? changes in the level of competition our products face
? domestic drilling activity and spending by the oil and natural gas industry in
the United States17 Total cost of revenue
The costs associated with generating our revenue fluctuate due to changes in sales volumes, average selling prices, product mix and changes in the price of raw materials and consist primarily of the following:
? purchases of reloading production materials
? hardbanding supplies ? labor
? depreciation charge for reloading equipment
? field expenses
Selling, general and administrative expenses (“SG&A”)
Our selling, general and administrative expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as administrative overhead costs, including:
? compensation and benefit costs for management, sales staff and
administrative staff, which includes stock-based compensation costs
? rent expense, communications expense, and maintenance and repair costs
? legal fees, accounting fees, consulting fees and insurance fees.
These expenses are not expected to increase or decrease significantly directly with changes in total revenues.
Depreciation and amortization
Depreciation and amortization expenses consist of amortization of intangible assets, depreciation of property, plant and equipment, net of depreciation of hardbanding equipment which is reported in Total cost of revenue Interest expense
Net interest expense is primarily comprised of interest expense and borrowing costs on borrowings as well as the amortization of debt issuance costs and debt discounts associated with our indebtedness.
Other (income) expense, net
Other (income) expense, net represents costs incurred, net of income, from various non-operating items including costs incurred in conjunction with our debt refinancing and extinguishment transactions, interest income, gain or loss on disposal of fixed assets, as well as non-operational gains and losses unrelated to our core business.
Tax benefit (disposition)
We are subject to income tax in the various jurisdictions in which we operate. While the extent of our future tax liability is uncertain, our operating results, the availability of any net operating loss carryforwards, any future business combinations, and changes to tax laws and regulations are key factors that will determine our future book and taxable income.
Income from interrupted operations
Income from discontinued operations includes income, related expenses and loss on disposal of Aurora. See Note 3, Discontinued operations, to the condensed consolidated financial statements for more information.
18 Results of Operations
The following discussion should be read in conjunction with the information contained in the accompanying unaudited financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Our historical results of operations summarized and analyzed below may not necessarily reflect what will occur in the future Three Months Ended
March 31, 2020compared to the Three Months Ended March 31, 2019Three Months Ended March 31, Percentage ($ in thousands) 2020 2019 Change Change Total revenue $ 222.4 $ 545.1 $ (322.7 )-59 % Total cost of revenue 165.9 262.6 (96.7 ) -37 % Gross profit 56.5 282.5 (226.0 ) -80 % Operating expenses
Selling, general and administrative 299.2 350.8
(51.6 ) -15 % Depreciation & amortization 4.5 66.4 (61.9 ) -93 % Total operating expenses 303.7 417.2 (113.5 ) -27 % Loss from operations (247.2 ) (134.7 ) (112.5 ) 83 % Other expense Interest expense (25.8 ) (44.9 ) 19.1 -43 % Total other income/(expense) (25.8 ) (44.9 ) 19.1 -43 %
Loss from continuing operations (273.0 ) (179.6 ) (93.4 ) 52 % Income/(loss) from discontinued operations - 60.0 (60.0 ) -100 % Loss applicable to common stockholders
$ (273.0 ) $ (119.6 )$
(153.4 ) 128 % Total Revenue
Total revenue decreased in the three months ended
Total Cost of Revenue Total cost of revenue decreased in the three months ended
March 31, 2020due primarily to decreases in materials, direct labor, other direct costs resulting from decreases in Pro-Tech's revenue generating activities as compared to the three month months ended March 31, 2019, and to a lesser extent, other reductions in expenses.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased due to the reduction in salary costs resulting from the downsizing.
Depreciation and amortization
Amortization decreased due to reduced amortization of intangible assets which were impaired at the end of 2019.
Interest expense decreased during the 2020 period primarily due to the restructuring of our notes payable to VPEG as well as the Rogers note. See note 6, Notes to pay, to the condensed consolidated financial statements for more information.
Loss from continuing operations, income from discontinued operations and loss applicable to common shareholders
We reported loss from continuing operations for the three months ended
March 31, 2020of $(273,049)compared to loss from continuing operations of $(179,700)for the three months ended March 31, 2019. Income from discontinued operations consist of revenues and related expenses resulting from the trailing activity of Aurora and loss on disposal of Aurora. See Note 3, Discontinued Operations, to the condensed consolidated financial statements for further information. As a result of the foregoing, loss applicable to common stockholders for the three months ended March 31, 2020was $(273,049), or $(0.01)per share, compared to a loss applicable to common stockholders of $(119,742), or $(0.00)per share, for the three months ended March 31, 2019on weighted average shares of 28,037,713 and 28,037,713, respectively
Liquidity and capital resources
Going Concern Historically we have experienced, and we continue to experience, net losses, net losses from operations, negative cash flow from operating activities, and working capital deficits. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date of issuance of the condensed consolidated financial statements. The condensed consolidated financial statements do not reflect any adjustments that might result if we are unable to continue as a going concern. Management anticipates that operating losses will continue in the near term as we continue efforts to leverage our intellectual property through the platform provided by the acquisition of Pro-Tech and, potentially, other acquisitions. In the near term, we are relying on financing obtained from VPEG through the New VPEG Note to fund operations as we seek to generate positive cash flow from operations. See Note 6 "Notes Payable," and Note 9 "Related Party Transactions," to the accompanying condensed consolidated financial statements for additional information regarding the New VPEG Note. In addition to increasing cash flow from operations, we will be required to obtain other liquidity resources in order to support ongoing operations. We are addressing this need by developing additional capital sources which we believe will enable us to execute our recapitalization and growth plan. This plan includes the expansion of Pro-Tech's core hardbanding business through additional drilling services and the development of additional products and services including wholesale materials, RFID enclosures and mid-pipe coating solutions. Based upon capital formation activities as well as the ongoing near-term funding provided through the New VPEG Note, we believe we will have enough capital to cover expenses through at least the next twelve months. We will continue to monitor liquidity carefully, and in the event we do not have enough capital to cover expenses, we will make the necessary and appropriate reductions in spending to remain cash flow positive. Capital Resources During the three months ended
March 31, 2020, we obtained $601,076from VPEG through the New VPEG Note. As of March 31, 2021and for the foreseeable future, we expect to cover operating shortfalls with funding through the New VPEG Note while we enact our strategy to become a technology-focused oilfield services company and seek additional sources of capital. As of March 31, 2021the remaining amount available to us for additional borrowings on the New VPEG
Note was approximately
In addition, during the three months ended
Off-balance sheet provisions
We have no off-balance sheet arrangement that has or is reasonably likely to have a current or future effect on our financial condition.
The following table provides detailed information on our free cash flow for the three months ended.
Three Months Ended March 31, 2020 2019 Net cash used in operating activities
$ (2,162 ) $ (50,677 )Net cash provided by (used in) investing activities (6,797 )
Net cash provided by financing activities 207,869
Net increase (decrease) in cash and cash equivalents 198,910 70,192 Cash and cash equivalents at beginning of period 17,076 76,746 Cash and cash equivalents at end of period
$ 215,986 $ 146,938
Net cash used in operating activities for the three months ended
March 31, 2020was $2,162. Net loss adjusted for non-cash items (depreciation, amortization, and share based compensation expense) used cash of $210,799. Changes in operating assets and liabilities provided cash of $208,637. The most significant drivers were decreases in accounts receivable (due to timing of collections) and increases in accrued and other short term liabilities which were partially offset by increases in prepaids and other current assets in addition to decreases in accounts payable. This compares to cash used in operating activities for the three months ended March 31, 2019of $50,677after the net loss adjusted for non-cash items for that period provided cash of $11,450. In addition, changes in operating assets and liabilities used cash of $62,127. The most significant drivers were decreases in accounts payable, accrued and other short term liabilities, and accounts receivable (due to timing of collections), which were partially offset by decreases in prepaid and other current assets. Net cash used in investing activities for the three months ended March 31, 2020was $6,797due to fixed asset purchases. This compares to $0used by investing activities for the three months ended March 31, 2019. Net cash provided by financing activities for the three months ended March 31, 2020was $207,869compared to $120,869in net cash provided by financing activities during the three months ended March 31, 2019. In each of 2020 and 2019 net cash provided by financing activities was primarily due to debt financing proceeds from affiliates, net of repayments.
We believe that it will be necessary to secure additional liquidity resources to support our operations. We are meeting our liquidity needs by developing additional sources of emergency capital.
Critical accounting conventions and estimates
The preparation of financial statements in conformity with
U.S.generally accepted accounting principles, or GAAP, requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements: Revenue Recognition
We recognize revenue as it satisfies contractual performance obligations by transferring promised goods or services to the customers. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services A good or service is transferred to a customer when, or as, the customer obtains control of that good or service.
21 We have one revenue stream, which relates to the provision of hardbanding services by its subsidiary Pro-Tech. All performance obligations of our contracts with customers are satisfied over the duration of the contract as customer-owned equipment is serviced and then made available for immediate use as completed during the service period. We have reviewed our contracts with Pro-Tech customers and determined that due to their short-term nature, with durations of several days of service at the customer's location, it is only those contracts that occur near the end of a financial reporting period that will potentially require allocation to ensure revenue is recognized in the proper period. We have reviewed all such transactions and recorded revenue accordingly.
For the three months ended
Since our contracts have an expected duration of one year or less, we have chosen the practical expedient in ASC 606-10-50-14 (a) not to disclose information on its remaining performance obligations.
Concentration of credit risk, accounts receivable and allowance for doubtful accounts
Financial instruments that potentially subject us to concentrations of credit risk primarily consist of cash and cash equivalents placed with high credit quality institutions and accounts receivable due from Pro-Tech's customers. Management evaluates the collectability of accounts receivable based on a combination of factors. If management becomes aware of a customer's inability to meet its financial obligations after a sale has occurred, we record an allowance to reduce the net receivable to the amount that it reasonably believes to be collectable from the customer. Accounts receivable are written off at the point they are considered uncollectible. Due to historically very low uncollectible balances and no specific indications of current uncollectibility, we have not recorded an allowance for doubtful accounts at
March 31, 2020. 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.
Tangible fixed assets
Property, Plant and Equipment is stated at cost. Maintenance and repairs are charged to expense as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. When property, plant and equipment is disposed of, the cost and related accumulated depreciation are removed from the condensed consolidated balance sheets and any gain or loss is included in Other income/(expense) in the condensed consolidated statement
Depreciation is calculated using the straight-line method over the estimated useful life of the assets concerned, as follows:
Asset category Useful Life
Welding equipment, Trucks, Machinery and equipment 5 years Office equipment
5 - 7 years Computer hardware and software 7 years
Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis or the pattern in which economic benefits are consumed, if reliably determinable. We review our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We perform an impairment test of goodwill annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. We have determined that the Company is comprised of one reporting unit at
December 31, 2019and 2018, and the goodwill balances of $145,149at December 31of each year are included in the single reporting unit. For the year ended December 31, 2020, we bypassed the qualitative assessment, and proceeded directly to the quantitative test for goodwill impairment and noted no indication of goodwill impairment was necessary. Our Goodwillbalance consists of the amount recognized in connection with the acquisition of Pro-Tech. Our other intangible assets are comprised of contract-based and marketing-related intangible assets, as well as acquisition-related intangibles. Acquisition-related intangibles include the value of Pro-Tech's trademark and customer relationships, both of which are being amortized over their expected useful lives of 10 years beginning August 2018. 22 Our 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 our existing intellectual property, we have 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
Business Combinations Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date in our condensed consolidated financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired
is recorded as goodwill. Share-Based Compensation
From time to time we may issue stock options, warrants and restricted stock as compensation to employees, directors, officers and affiliates, as well as to acquire goods or services from third parties. In all cases, the we calculate share-based compensation using the Black-Scholes option pricing model and expenses awards based on fair value at the grant date on a straight-line basis over the requisite service period, which in the case of third party suppliers is the shorter of the period over which services are to be received or the vesting period, and for employees, directors, officers and affiliates is typically the vesting period. Share-based compensation is included in general and administrative expenses in the condensed consolidated statements of operations. See Note 7, Stockholder's Equity, for further information. Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes, which requires an asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Deferred tax assets 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
March 31, 2020and 2019, respectively. The weighted average number of common shares outstanding was 28,037,713 and 28,037,713, respectively, at March 31, 2020and March 31, 2019. Diluted earnings per share reflect the potential dilutive effects of common stock equivalents such as options, warrants and convertible securities. Given the historical and projected future losses, all potentially dilutive common stock equivalents are considered anti-dilutive.
Recently adopted accounting standards
October 1, 2019, we adopted Accounting Standards Update ("ASU") 2017-04, Intangibles - Goodwilland Other (Topic 350): Simplifying the Test for GoodwillImpairment" ("ASU 2017-04"), which simplifies how an entity is required to test goodwill for impairment. The amendments in ASU 2017-04 require goodwill impairment to be measured using the difference between the carrying amount and the fair value of the reporting unit and require the loss recognized to not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 has been applied on a prospective basis, effective for our annual goodwill impairment test beginning in the fourth quarter of 2019.
Recently published accounting standards
December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes" as part of its initiative to reduce complexity in accounting standards. The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The new standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of ASU 2019-12 on our financial statements.
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