Enservco(ENSV) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section details the company's unaudited condensed consolidated financial statements, management's analysis, market risk, and internal controls ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with explanatory notes Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific dates Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (%) | | :----------------------------- | :-------------------------- | :-------------------------- | :--------- | | Total Assets | $14,525 | $19,838 | -26.7% | | Total Liabilities | $13,283 | $18,669 | -28.9% | | Total Stockholders' Equity | $1,242 | $1,169 | +6.2% | | Cash and cash equivalents | $300 | $35 | +757.1% | | Accounts receivable, net | $1,363 | $4,463 | -69.5% | | Property and equipment, net | $7,652 | $11,236 | -31.9% | | Total Current Liabilities | $7,497 | $10,241 | -26.8% | Condensed Consolidated Statements of Operations This section presents the company's financial performance over specific periods, including revenues, operating expenses, and net income or loss Condensed Consolidated Statements of Operations (in thousands) | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (%) | | :---------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------- | | Total revenues | $15,578 | $15,142 | +3.0% | | Loss from operations | $(5,148) | $(7,197) | +28.5% | | Net loss | $(6,574) | $(3,871) | +69.8% | | Net loss per share - basic and diluted | $(0.35) | $(0.34) | +2.9% | | Gain on debt extinguishment | $- | $4,277 | -100.0% | Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity accounts, reflecting share issuances, conversions, and net income or loss impacts Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Sep 30, 2023 (in thousands) | Jan 1, 2023 (in thousands) | Change (%) | | :-------------------------- | :-------------------------- | :------------------------- | :--------- | | Total Stockholders' Equity | $1,242 | $1,169 | +6.2% | | Common Shares Outstanding | 25,586 | 11,829 | +116.3% | - Shares issued in February 2023 Offering: 3,900,000 shares, contributing $984,000 to additional paid-in capital [18] - Shares issued from March 2022 Convertible Note conversion: 2,275,000 shares and 322,402 shares [18][81][82] - Shares issued from July 2022 Convertible Note conversion: 2,400,000 shares [18][82] - Acquisition of OilServ, LLC assets through issuance of common stock: 2,645,220 shares valued at $951,000 [19][100] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :-------------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash (used in) provided by operating activities | $(100) | $150 | $(250) | | Net cash provided by investing activities | $628 | $141 | $487 | | Net cash used in financing activities | $(263) | $(229) | $(34) | | Net Increase in Cash and Cash Equivalents | $265 | $62 | $203 | | Cash and Cash Equivalents, end of period | $300 | $211 | $89 | Notes to the Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's accounting policies, financial position, significant transactions, and segment performance Note 1 – Basis of Presentation The accompanying unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, including all normal and recurring adjustments - The Company provides hot oiling and acidizing ("Production Services") and frac water heating ("Completion and Other Services") to the domestic onshore oil and natural gas industry [25] - Financial statements are unaudited and prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X [27] Note 2 – Summary of Significant Accounting Policies This note details the company's significant accounting policies, including its going concern basis, revenue recognition, and earnings per share - The Company generated net losses of $3.0 million for the three months and $6.6 million for the nine months ended September 30, 2023 [30] - As of September 30, 2023, the Company had cash and cash equivalents of $300,000 and a working capital deficit of approximately $2.5 million [30] - The Company received net proceeds of $3.0 million from the February 2023 Offering and closed on $1.1 million of convertible debt financing in September 2023, with an additional $562,500 in October 2023 [31][32] - For the nine months ended September 30, 2023, revenues from two customers represented 28% and 12% of total revenues, respectively [35] - The Company recognized an impairment loss of $250,000 for the nine months ended September 30, 2023, due to ceasing operations in North Dakota and reclassifying related assets as 'Assets held for sale' [41] - Outstanding warrants totaling 12,568,414 and 9,978,021 were excluded from EPS computation for the three and nine months ended September 30, 2023, respectively, as they were antidilutive [54] Note 3 – Property and Equipment This note provides details on the company's property and equipment, including changes in net book value and depreciation expense Property and Equipment (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | | Property and equipment, net | $7,652 | $11,236 | -31.9% | | Accumulated depreciation | $(44,192) | $(46,925) | +5.8% | - Depreciation expense for the nine months ended September 30, 2023, was $2.8 million, a 15% decrease compared to $3.1 million in the same period of 2022, primarily due to selling and disposing of idle trucks and vehicles and the sale of the Tioga property [69][156] Note 4 – Intangible Assets This note details the company's intangible assets, including changes in net book value and amortization expense Intangible Assets (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :--------- | | Intangible assets, net | $18 | $182 | -90.1% | | Accumulated amortization | $(1,049) | $(885) | -18.5% | - Amortization expense for the nine months ended September 30, 2023, was approximately $163,000 [70] - The intangible assets are expected to be fully amortized within the next three months [70] Note 5 – Debt This note provides a comprehensive overview of the company's debt obligations, including various facilities, convertible notes, and changes due to conversions and new issuances Debt (in thousands) | Debt Type | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Utica Facility | $4,106 | $5,379 | $(1,273) | | LSQ Facility | $836 | $2,945 | $(2,109) | | March 2022 Convertible Note (related party) | $- | $1,200 | $(1,200) | | July 2022 Convertible Note (related party) | $- | $1,200 | $(1,200) | | November 2022 Convertible Note (related party) | $1,200 | $1,200 | $0 | | September 2023 Convertible Notes (related party) | $1,113 | $- | $1,113 | | Real Estate Loan | $8 | $54 | $(46) | | Total long-term debt | $7,263 | $11,978 | $(4,715) | | Less debt discount and debt issuance costs | $(364) | $(548) | $184 | | Less current portion | $(2,312) | $(4,409) | $2,097 | | Long-term debt, net of discount and current portion | $4,587 | $7,021 | $(2,434) | - The Company paid off and satisfied the $1.0 million EWB Obligation in April 2023 as part of the Refinancing [72] - Cross River converted approximately $1.1 million principal of the March 2022 Convertible Note into 2,275,000 shares on March 28, 2023, and the remaining $148,950 into 322,402 shares on June 30, 2023 [81][82] - The entire $1.2 million principal of the July 2022 Convertible Note was converted into 2,400,000 shares on June 30, 2023, with an associated five-year warrant for 2,400,000 shares [82] - In September 2023, the Company issued $1.1125 million in new convertible promissory notes to related parties, accruing interest at 16.00% annually [83][84][87] - An additional $562,500 was purchased in October 2023 [84][87] Note 6 – Income Taxes This note details the company's income tax provisions, including deferred tax benefits and liabilities - The Company recognized a $16,000 deferred tax benefit for the nine months ended September 30, 2023 [92] - As of September 30, 2023, the estimated amount of deferred tax liabilities that could reverse without an offsetting deferred tax asset was $257,000 [92] Note 7 – Commitments and Contingencies This note outlines the company's lease commitments and significant legal contingencies, including an ongoing class action lawsuit Future Minimum Lease Payments (in thousands) | Year | Operating Leases | Finance Leases | | :-------------------------- | :--------------- | :------------- | | 2024 | $523 | $14 | | 2025 | $384 | $2 | | 2026 | $269 | $- | | Total future lease payments | $1,176 | $16 | - A class action complaint was filed on May 22, 2022, alleging securities law violations related to the Company's 2021 Form 10-Q filings [95] - The Company filed a motion to dismiss on February 10, 2023, believing the complaint is baseless [96][97] - The Company has Director's and Officer's insurance coverage for such claims [97] Note 8 – Stockholders' Equity This note details changes in stockholders' equity, including impacts from equity offerings, debt conversions, asset acquisitions, and NYSE compliance issues - The February 2023 Offering generated $3.0 million in net proceeds from the sale of common stock, pre-funded warrants, and common warrants [98] - Cross River converted approximately $1.1 million of the March 2022 Convertible Note and the entire $1.2 million of the July 2022 Convertible Note into a total of 4,997,402 shares of common stock and warrants [99] - The Company acquired oilfield equipment assets from OilServ, LLC by issuing 2,645,220 shares of common stock, valued at $1,057,500 [100] - The Company received a NYSE notice of noncompliance as its equity balance fell below $2.0 million as of December 31, 2022, and has until June 9, 2024, to regain compliance [102][103] Note 9 – Restricted Stock and Stock Options This note outlines the company's restricted stock and stock option activity, including related compensation expenses and outstanding awards Stock-based Compensation Expense (in thousands) | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | | Stock-based compensation expense (restricted stock) | $224 | $655 | | Stock-based compensation expense (stock options) | $27 | $- | - As of September 30, 2023, there were 115,000 restricted shares outstanding [106] - On September 11, 2023, 500,000 stock options were granted to key employees, with 50% vesting on January 1, 2024, and the remainder on January 1, 2025 [110] Note 10 – Segment Reporting This note provides financial information for the company's two operating segments: Production Services and Completion and Other Services - The Company's reportable operating segments are Production Services and Completion and Other Services [111] Segment Revenues (in thousands) | Segment | Q3 2023 Revenues (in thousands) | Q3 2022 Revenues (in thousands) | YTD Sep 2023 Revenues (in thousands) | YTD Sep 2022 Revenues (in thousands) | | :---------------------- | :------------------------------ | :------------------------------ | :----------------------------------- | :----------------------------------- | | Production Services | $2,623 | $2,788 | $8,375 | $8,645 | | Completion and Other Services | $314 | $321 | $7,203 | $6,497 | | Total Revenues | $2,937 | $3,109 | $15,578 | $15,142 | Segment Profit (Loss) (in thousands) | Segment | Q3 2023 Segment Profit (Loss) (in thousands) | Q3 2022 Segment Profit (Loss) (in thousands) | YTD Sep 2023 Segment Profit (Loss) (in thousands) | YTD Sep 2022 Segment Profit (Loss) (in thousands) | | :---------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Production Services | $(528) | $189 | $1,034 | $669 | | Completion and Other Services | $(121) | $(569) | $145 | $(227) | | Total Segment (Loss) Profit | $(649) | $(380) | $1,179 | $442 | - Completion and Other Services revenues increased by $706,000, or 11%, for the nine months ended September 30, 2023, primarily due to earlier than usual completions activity in Colorado [149] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of the company's financial condition, results of operations, liquidity, and capital resources Cautionary Note Regarding Forward-Looking Statements This section highlights various risks and uncertainties that could impact future results, including funding, market conditions, and litigation - Key risks include the ability to obtain working capital and additional funding, constraints from indebtedness, fluctuations in crude oil and natural gas prices, increased competition, ability to implement price increases, rising interest rates, weather conditions, general economic conditions, and litigation [122] Recent Developments This section details recent significant events, including the issuance of new convertible promissory notes to various parties - On September 1, 2023, the Company issued convertible promissory notes totaling $800,000 to Cross River and Kevin Chesser [124] - On September 11, 2023, the Company issued additional September 2023 Convertible Notes totaling $312,500 to Angel Capital Partners, LP and Equigen, II, LLC [125] - In October 2023, Cross River, Richard Murphy (CEO), Equigen, and Angel Capital purchased an additional $562,500 in New Convertible Notes [126] Recent Market Conditions This section discusses recent market conditions, including trends in oil prices, rig count, and their impact on the company's operations - WTI crude oil price averaged $77 per barrel for the nine months ended September 30, 2023, compared to $98 per barrel for the comparable period last year [127] - Domestic rigs in operation decreased to 623 as of September 30, 2023, from 765 as of September 30, 2022 [127] - The Company expects improved activity despite the uncertain impact of the political environment on oil exploration and production, increased inflation, and rising interest costs [128] OVERVIEW Enservco Corporation provides hot oiling and acidizing (Production Services) and frac water heating (Completion and Other Services) to the domestic onshore oil and natural gas industry - Enservco Corporation provides hot oiling and acidizing ("Production Services") and frac water heating ("Completion and Other Services") to the domestic onshore oil and natural gas industry [131] - The Company serves customers in several major domestic oil and gas areas, including the Denver-Julesburg Basin, Bakken area, San Juan Basin, Marcellus and Utica Shale areas, Jonah area, Green River and Powder River Basins, and the Eagle Ford Shale and East Texas Oilfield [132] RESULTS OF OPERATIONS This section analyzes the company's operational results, including revenue, segment profit, net loss, and Adjusted EBITDA, considering seasonality Executive Summary This executive summary provides a high-level overview of the company's financial performance, highlighting key revenue, profit, and loss trends - The Company's business is highly seasonal, with more than half of revenues generated in the colder seasons (winter and spring) [134] Executive Summary (in thousands) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | YTD Sep 2023 (in thousands) | YTD Sep 2022 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :-------------------------- | :-------------------------- | | Total revenues | $2,937 | $3,109 | $15,578 | $15,142 | | Segment profit (loss) | $(649) | $(380) | $1,179 | $442 | | Net loss | $(3,016) | $(3,076) | $(6,574) | $(3,871) | | Loss from operations | $(2,600) | $(2,638) | $(5,148) | $(7,197) | | Adjusted EBITDA (non-GAAP) | $(1,528) | $(1,292) | $(1,542) | $(2,643) | Segment Overview This section provides a detailed breakdown of revenues and segment profit for Production Services and Completion and Other Services Segment Overview (in thousands) | Segment | YTD Sep 2023 Revenues (in thousands) | YTD Sep 2022 Revenues (in thousands) | YTD Sep 2023 Segment Profit (Loss) (in thousands) | YTD Sep 2022 Segment Profit (Loss) (in thousands) | | :---------------------- | :----------------------------------- | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Production Services | $8,375 | $8,645 | $1,034 | $669 | | Completion and Other Services | $7,203 | $6,497 | $145 | $(227) | | Total | $15,578 | $15,142 | $1,179 | $442 | - Completion and Other Services revenues increased by $706,000, or 11%, for the nine months ended September 30, 2023, primarily due to earlier than usual completions activity occurring in Colorado [149] Historical Seasonality of Revenues This section discusses the significant seasonal fluctuations in the company's revenues, with higher activity in colder quarters - 70% of the Company's 2022 revenues (60% of 2021 revenues) were generated during the first and fourth quarters [153] - Revenues generated during the cooler first and fourth quarters are typically significantly higher than revenues during the second and third quarters [152] Direct Operating Expenses This section analyzes direct operating expenses, including labor, fuel, and maintenance, for the current and prior periods - Direct operating expenses for the three and nine months ended September 30, 2023, were similar to the same periods in 2022 [154] Sales, General, and Administrative Expenses This section reviews sales, general, and administrative expenses for the current and prior reporting periods - Sales, general, and administrative expenses for the three and nine months ended September 30, 2023, were similar to the same periods in 2022 [155] Depreciation and Amortization This section details depreciation and amortization expenses, highlighting changes due to asset disposals and sales Depreciation and Amortization (in thousands) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | YTD Sep 2023 (in thousands) | YTD Sep 2022 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :-------------------------- | :-------------------------- | | Depreciation and amortization | $905 | $1,069 | $2,821 | $3,317 | - Depreciation and amortization expense decreased by $164,000 (15%) for Q3 2023 and $496,000 (15%) for YTD Sep 2023, primarily due to the selling and disposing of idle trucks and vehicles and the sale of the Tioga property [156] Loss from Operations This section analyzes the company's loss from operations, noting period-over-period changes and contributing factors Loss from Operations (in thousands) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | YTD Sep 2023 (in thousands) | YTD Sep 2022 (in thousands) | | :------------------- | :--------------------- | :--------------------- | :-------------------------- | :-------------------------- | | Loss from operations | $(2,600) | $(2,638) | $(5,148) | $(7,197) | - Loss from operations for the nine months ended September 30, 2023, improved by $2.0 million, or 28%, compared to the same period in 2022 [157] Interest Expense This section details interest expense, explaining increases due to financing facilities, convertible notes, and rising interest rates Interest Expense (in thousands) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | YTD Sep 2023 (in thousands) | YTD Sep 2022 (in thousands) | | :------------- | :--------------------- | :--------------------- | :-------------------------- | :-------------------------- | | Interest expense | $(476) | $(448) | $(1,584) | $(1,053) | - Interest expense for the nine months ended September 30, 2023, increased by $531,000, or 50%, compared to the same period in 2022, due to the 2022 Financing Facilities, convertible promissory notes, and rising interest rates [158] NON-GAAP FINANCIAL MEASURES This section presents non-GAAP financial measures, primarily Adjusted EBITDA, to provide additional insights into operating performance Adjusted EBITDA This section provides a reconciliation and analysis of Adjusted EBITDA for the current and prior reporting periods Adjusted EBITDA (in thousands) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | YTD Sep 2023 (in thousands) | YTD Sep 2022 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :-------------------------- | :-------------------------- | | Adjusted EBITDA (non-GAAP) | $(1,528) | $(1,292) | $(1,542) | $(2,643) | Use of Non-GAAP Financial Measures Adjusted EBITDA is used by management and investors to evaluate operating performance by excluding non-cash items and items not useful in assessing ongoing operations - Adjusted EBITDA excludes non-cash items (depreciation, amortization, stock-based compensation, impairment losses) and items management does not consider useful in assessing ongoing operating performance (income taxes, gains or losses on sale of assets, severance and transition costs, non-recurring legal expense) [163][164] - EBITDA and Adjusted EBITDA are used to compare operating performance on a consistent basis by removing the impact of certain items that do not directly reflect core operations [165] Changes in Adjusted EBITDA This section analyzes the period-over-period changes in Adjusted EBITDA, attributing them to shifts in segment profits and expenses - Adjusted EBITDA for the three months ended September 30, 2023, decreased by $236,000, or 18%, compared to the same period in 2022 [167] - Adjusted EBITDA for the nine months ended September 30, 2023, improved by $1.1 million, or 42%, compared to the same period in 2022 [167] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's liquidity position, capital resources, and strategies for managing cash flows and funding operations Cash Flows This section provides a detailed breakdown of cash flows from operating, investing, and financing activities Cash Flows (in thousands) | Cash Flow Activity | YTD Sep 30, 2023 (in thousands) | YTD Sep 30, 2022 (in thousands) | Change (in thousands) | | :-------------------------------------- | :------------------------------ | :------------------------------ | :-------------------- | | Net cash (used in) provided by operating activities | $(100) | $150 | $(250) | | Net cash provided by investing activities | $628 | $141 | $487 | | Net cash used in financing activities | $(263) | $(229) | $(34) | | Net increase in cash and cash equivalents | $265 | $62 | $203 | | Cash and Cash Equivalents, end of period | $300 | $211 | $89 | - The decrease in cash from operating activities was primarily due to a year-over-year reduction in net working capital changes [170] - The increase in cash from investing activities was primarily due to a year-over-year increase in net proceeds from disposals and purchases of property and equipment [171] Overview (Liquidity and Capital Resources) This overview summarizes the company's funding sources, outstanding debt, and recent financing activities impacting liquidity - As of September 30, 2023, outstanding principal loan balances on indebtedness were $7.3 million with a weighted average interest rate of 13.08% [175] - The February 2023 Offering generated net proceeds of $3.0 million [176] - Approximately $2.3 million in related party convertible debt (March 2022 and July 2022 Convertible Notes) was converted into common stock and warrants [177] - In September 2023, the Company issued $1.1 million in new convertible promissory notes to related parties, with an additional $562,500 purchased in October 2023 [179][180] Liquidity This section details the company's available liquidity and the ongoing need for additional capital to support operations - As of September 30, 2023, available liquidity was comprised of cash and cash equivalents balance of $300,000 [182] - The Company will need to raise additional capital for its ongoing operations, with no assurance that such financing would be available on favorable terms, or at all [182] Working Capital This section analyzes the company's working capital position, highlighting changes and contributing factors Working Capital (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Working capital deficit | $(2,544) | $(4,281) | $1,737 | - The $1.8 million decrease in working capital deficit was primarily attributable to reductions of short-term debt obligations under the 2022 Financing Facilities [183] Outlook This section provides the company's outlook on future performance, considering market conditions, strategic initiatives, and operational improvements - Revenues are primarily derived from services within the domestic oil and natural gas industry, subject to geopolitical influences, demand variances, drilling activities, and cold weather [184] - The Company has strengthened its balance sheet through the Refinancing and the February 2023 Offering, and is focused on controlling general and administrative expenses and costs during slower revenue-generating seasons [186] - The Company believes there will be a continued demand for fossil fuels and its services, which improve operating efficiencies of oil wells, barring a sudden decline in crude oil prices or a substantial reduction in domestic rigs in operation [186] Capital Commitments and Obligations This section details the company's capital commitments and obligations, including various debt facilities and lease payments - Capital obligations include the 2022 Financing Facilities, the November 2022 Convertible Note, and various September 2023 Convertible Notes, along with scheduled principal payments under term loans, debt obligations, finance leases, and operating leases [187] OFF-BALANCE SHEET ARRANGEMENTS As of September 30, 2023, the company had no significant off-balance sheet arrangements - As of September 30, 2023, the Company had no significant off-balance sheet arrangements [188] CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no changes in the company's critical accounting policies since the filing of its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no changes in critical accounting policies since the Annual Report on Form 10-K for the year ended December 31, 2022 [189] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, Enservco Corporation is not required to provide quantitative and qualitative disclosures about market risk under SEC regulations - The Company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk [190] ITEM 4. CONTROLS AND PROCEDURES This section addresses the effectiveness of the company's disclosure controls and procedures, noting identified material weaknesses and remediation efforts - Disclosure controls and procedures were not effective as of September 30, 2023, due to material weaknesses in internal controls over financial reporting [192] - Material weaknesses relate to the accounting for a warrant, Employee Retention Credits, and income taxes in connection with a change in control during the first quarter of 2021 [192] - Management is in the process of implementing measures to improve internal control over financial reporting to remediate these material weaknesses [193] - Notwithstanding the identified material weaknesses, management believes the unaudited condensed consolidated financial statements fairly present the financial condition, results of operations, and cash flows [192] PART II. OTHER INFORMATION This section presents other pertinent information, including legal proceedings, risk factors, equity sales, and exhibits ITEM 1. LEGAL PROCEEDINGS This section details ongoing legal proceedings, specifically a class action lawsuit alleging securities law violations - A class action complaint was filed on May 22, 2022, alleging securities law violations related to the Company's 2021 Form 10-Q filings [195] - The Company filed a motion to dismiss on February 10, 2023, citing a lack of specific facts and evidence, and believes the complaint is baseless and without merit [196][197] - The Company has Director's and Officer's insurance coverage to defend against such claims [197] ITEM 1A. RISK FACTORS There have been no material changes to the risk factors previously set forth in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes to the risk factors set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 [198] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS All recent sales of unregistered equity securities and their use of proceeds have been previously reported by the company - All recent sales of unregistered securities have been previously reported [199] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company reported no defaults upon senior securities during the period - None [200] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company's operations - Not applicable [201] ITEM 5. OTHER INFORMATION No other information is reported under this item for the period - None [202] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including various agreements and officer certifications - Exhibits include Convertible Promissory Notes dated September 1, 2023, an Asset Purchase Agreement dated September 11, 2023, a Note Purchase Agreement effective September 11, 2023, and certifications from the Principal Executive Officer and Principal Financial Officer [204]