CAMBER ENERGY, INC. 10-Q/A

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. In preparing the management’s discussion and analysis, the registrant presumes that you have read or have access to the discussion and analysis for the preceding fiscal year. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENT S This document includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 or the Reform Act. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earning, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions of performance; and statements of belief; and any statements of assumptions underlying any of the foregoing. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: our ability to raise capital and the terms thereof; ability to gain an adequate player base to generate the expected revenue; competition with established gaming websites; adverse changes in government regulations or polices; and other factors referenced in this Form 10-Q. The use in this Form 10-Q of such words as “believes”, “plans”, “anticipates”, “expects”, “intends”, and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements present the Company’s estimates and assumptions only as of the date of this Report. Except for the Company’s ongoing obligation to disclose material information as required by the federal securities laws, the Company does not intend, and undertakes no obligation, to update any forward-looking statements. Although the Company believes that the expectations reflected in any of the forward-looking statements are reasonable, actual results could differ materially from those projected or assumed or any of the Company’s forward-looking statements. The Company’s future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. PLAN OF OPERATIONS Company Overview Camber is a growth-oriented diversified energy company. Through our majority-owned subsidiaries we provide custom energy and power solutions to commercial and industrial clients in North America, and have a majority interest in: (i) an entity with intellectual property rights to a fully developed, patented, proprietary Medical and Bio-Hazard Waste Treatment system using Ozone Technology; and (ii) entities with the intellectual property rights to fully developed, patented and patent pending, proprietary Electric Transmission and Distribution Open Conductor Detection Systems. Also, we hold a license to a patented clean energy and carbon-capture system with exclusivity in Canada and for multiple locations in the United States. Various of our other subsidiaries own interests in oil properties in the United States. The Company is also exploring other renewable energy-related opportunities and/or technologies which are currently generating revenue, or have a reasonable prospect of generating revenue within a reasonable period of time. 45 Table of Contents Custom Energy and Power Solutions: Simson-Maxwell Acquisition On August 6, 2021, Viking acquired approximately 60.5% of the issued and outstanding shares of Simson-Maxwell Ltd. (“Simson-Maxwell”), a Canadian federal corporation, for $7,958,159 in cash. Simson-Maxwell manufactures and supplies power generation products, services and custom energy solutions. Simson-Maxwell provides commercial and industrial clients with efficient, flexible, environmentally responsible and clean-tech energy systems involving a wide variety of products, including CHP (combined heat and power), tier 4 final diesel and natural gas industrial engines, solar, wind and storage. Simson-Maxwell also designs and assembles a complete line of electrical control equipment including switch gear, synchronization and paralleling gear, distribution, Bi-Fuel and complete power generation production controls. Operating for over 80 years, Simson-Maxwell’s seven branches assist with servicing a large number of existing maintenance arrangements and meeting the energy and power-solution demands of the Company’s other customers. Clean Energy and Carbon-Capture System: In August 2021, Viking entered into a license agreement with ESG Clean Energy, LLC (“ESG”), to utilize ESG’s patent rights and know-how related to stationary electric power generation and heat and carbon dioxide capture (the “ESG Clean Energy System”). The intellectual property licensed by Viking includes certain patents and/or patent applications, including: (i) U.S. Patent No.: 10,774,733, File date: October 24, 2018, Issue date: September 15, 2020, Titled: “Bottoming Cycle Power System”; (ii) U.S. Patent No.: 17/661,382, Issue date: August 8, 2023, Titled: ‘Systems and Methods Associated With Bottoming Cycle Power Systems for Generating Power, Capturing Carbon Dioxide and Producing Products’; (iii) U.S. Patent No.: 11624307, Issue date: April 22, 2023, Titled: ‘Systems and Methods Associated With Bottoming Cycle Power Systems for Generating Power and Capturing Carbon Dioxide’ (iv) European (validated in the United Kingdom, France and Germany) Patent No.: EP3728891, Issue date: April 12, 2023, Titled: “Bottoming Cycle Power System”; (v) U.S. Patent Application No.: 17/224,200, File date: April 7, 2021, Titled: “Bottoming Cycle Power System” (which was subsequently approved by the U.S. Patent & Trademark Office in March, 2022 (No. 11,286,832); (vi) U.S. Patent Application No.: 17/358,197, File date: June 25, 2021, Titled: “Bottoming Cycle Power System”; (vii) U.S. Patent Application No.: 17/448,943, File date: September 27, 2021, Titled: “Systems and Methods Associated With Bottoming Cycle Power Systems for Generating Power and Capturing Carbon Dioxide”; and (viii) U.S. Patent Application No.: 17/448,938, File date: September 27, 2021, Titled: “Systems and Methods Associated With Bottoming Cycle Power Systems for Generating Power, Capturing Carbon Dioxide and Producing Products. The ESG Clean Energy System is designed to, among other things, generate clean electricity from internal combustion engines and utilize waste heat to capture approximately 100% of the carbon dioxide (CO2) emitted from the engine without loss of efficiency, and in a manner to facilitate the production of certain commodities. Patent No. 11,286,832, for example, covers the invention of an “exhaust-gas-to-exhaust-gas heat exchanger” that efficiently cools – and then reheats – exhaust from a primary power generator so greater energy output can be achieved by a secondary power source with safe ventilation. Another key aspect of this patent is the development of a carbon dioxide capture system that utilizes the waste heat of the carbon dioxide pump to heat and regenerate the absorber that enables carbon dioxide to be safely contained and packaged. The Company intends to sell, lease and/or sub-license the ESG Clean Energy System to third parties using, among other things, Simson-Maxwell’s existing distribution channels. The Company may also utilize the ESG Clean Energy System for its own account, whether in connection with its petroleum operations, Simson-Maxwell’s power generation operations, or otherwise. Medical Waste Disposal System Using Ozone Technology: In January 2022, Viking acquired a 51% interest in Viking Ozone, which owns the intellectual property rights to a patented (i.e., US Utility Patent No. 11,565,289), proprietary medical and biohazard waste treatment system using ozone technology. Simson-Maxwell has been designated the exclusive worldwide manufacturer and vendor of this system. The technology is designed to be a sustainable alternative to incineration, chemical, autoclave and heat treatment of bio-hazardous waste, and for the treated waste to be classified as renewable fuel for waste-to-energy (“WTE”) facilities in many locations around the world. 46 Table of Contents Open Conductor Detection Technologies: In February 2022, Viking acquired a 51% interest in two entities, Viking Sentinel and Viking Protection, that own the intellectual property rights to patented and patent pending proprietary electric transmission and distribution open conductor detection systems. The systems are designed to detect a break in a transmission line, distribution line, or coupling failure, and to immediately terminate the power to the line before it reaches the ground. The technology is intended to increase public safety and reduce the risk of causing an incendiary event, and to be an integral component within grid hardening and stability initiatives by electric utilities to improve the resiliency and reliability of existing infrastructure. . A summary of the applicable patents, pending patents and/or patent applications associated with the intellectual property owned by Viking Sentinel and/or Viking Protection as at the date hereof is as follows: Application # Description Application Filed Notice of Allowance Received Patent Issued U.S. No. 17/672,422 Electric Transmission Line Ground Fault Prevention Methods Using Dual, High Sensitivity Monitoring Yes Yes Yes U.S. No. 17/693,504 Electric Transmission Line Ground Fault Prevention Systems Using Dual, High Sensitivity Monitoring Yes Yes Yes U.S. No. 17/821,651 Electric Transmission Line Ground Fault Prevention systems using dual parameter monitoring with high sensitivity relay devices in parallel with low sensitivity relay devices Yes Yes Yes U.S. No. 18/227,670 Electric Transmission Line Ground Fault Prevention Methods Using Multi-Parameter High Sensitivity Monitoring Yes Yes Yes U.S. No. 17/300,485 End of Line Protection with Trip-Signal Engaging Yes Yes Yes U.S. No. 17/628,545 End of Line Protection with Blocking Yes Yes Yes International Application No. PCT/US2024/010627 Electric Transmission Line Ground Fault Prevention Methods Using Multi-Parameter High Sensitivity Monitoring Yes Oil and Gas Properties: As of September 30, 2024, the Company did not hold any interest in producing oil and gas properties. Divestitures in 2024: On February 1, 2024, the Company sold its working interest in oil and gas properties producing from the Cline and Wolfberry formations in Texas for gross proceeds of $205,000. 47 Table of Contents The Company recorded a net loss on this transaction, as follows: Proceeds from sale (net of transaction costs) $ 205,000 Reduction in oil and gas full cost pool (based on % of reserves disposed) (1,038,900 ) ARO recovered 78,394 Loss on disposal $ (755,506 ) Divestitures in 2023: On November 5, 2023, Mid-Con Petroleum, LLC and Mid-Con Drilling, LLC, wholly-owned subsidiaries of Viking, sold 100% of their interest in oil and gas assets in Kansas, consisting of 168 producing wells, 90 injector wells and 34 non-producing wells, for gross proceeds of $515,000. On December 1, 2023, a subsidiary of Petrodome sold its non-operated working interest in a producing oil well in Texas for proceeds of $250,000. The Company recorded a net gain on these two transactions, as follows: Proceeds from sales (net of transaction costs) $ 751,450 Reduction in oil and gas full cost pool (based on % of reserves disposed) (1,049,229 ) ARO recovered 1,104,806 Cash bond recoverable (net of fees) 47,438 Gain on disposal $ 854,465 Following these transactions, Petrodome ceased to be the operator of any oil and gas properties and applied for the refund of a cash performance bond of $50,000. The refund, net of fees, is included in prepaids and other current assets at December 31, 2023 and was included in the determination of the gain on disposal. Merger with Viking Energy Group, Inc. On August 1, 2023, Camber Energy, Inc. (“Camber”, the “Company”, “we”, “us” or “our”) completed the previously announced merger (the “Merger”) with Viking Energy Group, Inc. pursuant to the terms and conditions of the Agreement and Plan of Merger between Camber and Viking dated February 15, 2021, which was amended on April 18, 2023 (as amended, the “Merger Agreement”), with Viking surviving the Merger as a wholly-owned subsidiary of Camber. Upon the terms and conditions in the Merger Agreement, each share: (i) of common stock, par value $0.001 per share, of Viking (the “Viking Common Stock”) issued and outstanding, other than shares owned by Camber, was converted into the right to receive one share of common stock of Camber (the “Camber Common Stock”); (ii) of Series C Preferred Stock of Viking (the “Viking Series C Preferred Stock”) issued and outstanding was converted into the right to receive one share of Series A Convertible Preferred Stock of Camber (the “New Camber Series A Preferred Stock”) and (iii) of Series E Convertible Preferred Stock of Viking (the “Viking Series E Preferred Stock,” and, together with the Viking Series C Preferred Stock, the “Viking Preferred Stock”) issued and outstanding was converted into the right to receive one share of Series H Preferred Stock of Camber (the “New Camber Series H Preferred Stock,” and, together with the New Camber Series A Preferred Stock, the “New Camber Preferred”). 48 Table of Contents Each share of New Camber Series A Preferred Stock is convertible into 890 shares of Camber Common Stock (subject to a beneficial ownership limitation preventing conversion into Camber Common Stock if the holder would be deemed to beneficially own more than 9.99% of Camber Common Stock), is treated equally with Camber Common Stock with respect to dividends and liquidation, and only has voting rights with respect to voting: (a) on a proposal to increase or reduce Camber’s share capital; (b) on a resolution to approve the terms of a buy-back agreement; (c) on a proposal to wind up Camber; (d) on a proposal for the disposal of all or substantially all of Camber’s property, business and undertaking; (f) during the winding-up of Camber; and/or (g) with respect to a proposed merger or consolidation in which Camber is a party or a subsidiary of Camber is a party. Each share of New Camber Series H Preferred Stock has a face value of $10,000 per share, is convertible into a certain number of shares of Camber Common Stock, with the conversion ratio based upon achievement of certain milestones by Viking’s subsidiary, Viking Protection (provided the holder has not elected to receive the applicable portion of the purchase price in cash pursuant to that certain Purchase Agreement, dated as of February 9, 2022, by and between Viking and Jedda Holdings, LLC), is subject to a beneficial ownership limitation of 4.99% of Camber Common Stock (but may be increased up to a maximum of 9.99% at the sole election of a holder by the provision of at least 61 days’ advance written notice) and has voting rights equal to one vote per share of Camber Series H Preferred Stock held on a non-cumulative basis. Each outstanding option or warrant to purchase Viking Common Stock (a “Viking Option”), to the extent unvested, automatically became fully vested and was converted automatically into an option or warrant (an “Adjusted Option”) to purchase, on substantially the same terms and conditions as were applicable to such Viking Option, except that instead of being exercisable into Viking Common Stock, such Adjusted Option is exercisable into Camber Common Stock. Each outstanding promissory note issued by Viking that was convertible into Viking Common Stock (a “Viking Convertible Note”) was converted into a promissory note convertible into Camber Common Stock (an “Adjusted Convertible Note”) having substantially the same terms and conditions as applied to the corresponding Viking Convertible Note (including, for the avoidance of doubt, any extended post-termination conversion period that applies following consummation of the Merger), except that instead of being convertible into Viking Common Stock, such Adjusted Convertible Note is convertible into Camber Common Stock. In connection with the Merger, Camber issued approximately 49,290,152 shares of Camber Common Stock, which represented approximately 59.99% of the outstanding Camber Common Stock after giving effect to such issuance. In addition, Camber reserved for issuance approximately 88,647,137 additional shares of Camber Common Stock in connection with the potential (1) conversion of the New Camber Series A Preferred Stock, (2) conversion of the New Camber Series H Preferred Stock, (3) exercise of the Adjusted Options and (4) conversion of the Adjusted Convertible Notes. For accounting purposes, the Merger was deemed a reverse acquisition. Consequently, Viking (the legal subsidiary) was treated as the acquiror of Camber (the legal parent). Accordingly, these consolidated financial statements reflect the financial position, operating results, and cash flow of Viking up to the date of the Merger, and the combined financial position, operating results and cash flow of Viking and Camber from August 1, 2023 to December 31, 2023. The prior year comparative financial information is that of Viking. James A. Doris continues to serve as President and Chief Executive Officer of the combined company, and the combined company continues to have its headquarters in Houston, Texas. Recent Development On August 7, 2024, the Company received notice from the NYSE Regulation that it had suspended trading of the Company’s common stock and determined to commence proceedings to delist the Company’s common stock from the NYSE American as a result of its determination that the Company is no longer suitable for listing pursuant to Section 1003(f)(v) of the NYSE American Company Guide due to the low selling price of the Company’s common stock. The Company had a right to a review of the staff’s determination to delist the Company’s common stock by the Listings Qualifications Panel of the Committee for Review of the Board of Directors of the NYSE American. The Company decided not to request a review of the staff’s determination and appeal this determination. On August 16, 2024, the NYSE filed a Notification of Removal from Listing with the Securities and Exchange Commission to delist the Company’s common stock pending. The Company’s common stock began trading under the trading symbol “CEIN” on the OTC Pink Market operated on the OTC Markets system effective with the open of the markets on August 8, 2024. Effective August 27, 2024, the Company received approval to have its common stock quoted on the OTCQB Venture Market on the OTC Markets. 49 Table of Contents Going Concern Qualification The Company’s condensed consolidated financial statements included herein have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company generated a net loss of $(64,891,096) for the nine months ended September 30, 2024, as compared to a net loss of $(10,785,683) for the nine months ended September 30, 2023. The loss for the nine months ended September 30, 2024, was comprised of, among other things, certain non-cash items, including: (i) goodwill impairment of $34,860,411; (ii) change in fair value of derivative liability of $18,573,289; (iii) amortization of debt discount of $2,538,362; (iv) loss on extinguishment of debt of $811,132; (v) loss on disposal of oil and gas properties of $755,506; and (vi) depreciation, depletion and amortization of $596,427. As of September 30, 2024, the Company had stockholders’ deficit of $(32,611,416), long-term debt, net of current, of $39,673,475 and a working capital deficiency of $(15,169,972). The largest components of current liabilities creating this working capital deficiency are accrued interest on notes payable to Discover Growth Fund, LLC (“Discover”) of $6,194,664 and drawings by Simson-Maxwell against its bank credit facility of $4,193,122. These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to utilize the resources in place to generate future profitable operations, to develop additional acquisition opportunities, and to obtain the necessary financing to meet its obligations and repay its liabilities arising from business operations when they come due. Management believes the Company may be able to continue to develop new opportunities and may be able to obtain additional funds through debt and / or equity financings to facilitate its business strategy; however, there is no assurance of additional funding being available. These condensed consolidated financial statements do not include any adjustments to the recorded assets or liabilities that might be necessary should the Company have to curtail operations or be unable to continue in existence. RESULTS OF CONTINUING OPERATIONS The following discussion of the financial condition and results of operation of the Company for the three and nine months ended September 30, 2024 and 2023, should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2023, filed with the SEC on August 26, 2024. Liquidity and Capital Resources Working Capital: Nine Months Ended September 30, 2024 2023 Current assets $ 16,319,840 $ 17,944,854 Current liabilities $ 31,489,812 $ 27,396,632 Working capital deficit $ (15,169,972 ) $ (9,451,778 ) 50 Table of Contents Cash Flows: Nine Months Ended September 30, 2024 2023 Net Cash Used in Operating Activities $ (1,454,022 ) $ (4,840,379 ) Net Cash Provided by (Used In) Investing Activities $ 138,546 $ 21,582 Net Cash Provided by Financing Activities $ 860,831 $ 3,012,047 Decrease in Cash during the Period $ (454,645 ) $ (1,806,750 ) Cash and Cash Equivalents, end of Period $ 451,415 $ 1,432,599 Net cash used in operating activities was $(1,454,022) during the nine months ended September 30, 2024, as compared to $(4,840,379) in the comparable period in 2023. This increase is primarily the result of a higher net working capital deficit, partially offset by an increased cash loss. Net cash flows from investing activities increased to $138,546 during the nine months ended September 30, 2024, as compared to $21,582 in the comparable period in 2023. This increase is due primarily to proceeds of $205,000 from the sale of oil and gas properties in 2024. Net cash flows from financing activities decreased to $860,831 during the nine months ended September 30, 2024, as compared to $3,012,047 in the comparable period in 2023. This decrease is mainly due to lower net proceeds on the issuance of debt. Three months ended September 30, 2024, compared to the three months ended September 30, 2023 Revenue The Company had gross revenues of $7,016,725 for the three months ended September 30, 2024, as compared to $10,131,070 for the three months ended September 30, 2023, a decrease of $3,114,345 or 31%. The reported decrease is driven primarily by an unusually large sale recorded in the three-month period ended September 30, 2023. Expenses The Company’s operating expenses decreased by $1,766,300 to $8,908,154 for the three-month period ended September 30, 2024, from $10,674,454 in the corresponding prior year three-month period. Cost of goods sold for the three months ended September 30, 2024 were $4,962,370, as compared to $6,653,715 for the three-month period ended September 30, 2023 due to decreased power segment sales. Lease operating costs decreased were nil for the three-month period ended September 30, 2024, as compared to $207,931 for the three-month period ended September 30, 2023. Depreciation, depletion and amortization (“DD&A”) expense decreased to $185,298 as compared to $237,361 in the prior period. General and administrative expenses increased to $3,760,486 compared to $3,557,486 in the corresponding prior period. Loss from Operations The Company generated a loss from operations for the three months ended September 30, 2024 of $(1,891,429), compared to $(543,384) for the three months ended September 30, 2023. 51 Table of Contents Other Income (Expense) The Company had other expense, net, of $(32,902,161) for the three months ended September 30, 2024, as compared to other expense, net of $(7,333,960) for the three months ended September 30, 2023. The higher expense was due primarily to goodwill impairment of $(34,860,411), partially offset by a gain in fair value of derivative liability of $2,668,909 as compared to a loss in fair value of $(5,986,536) in the prior year. Net Loss The Company had a net loss of $(34,793,590) during the three-month period ended September 30, 2024, compared with a net loss of $(7,877,344) for the three-month period ended September 30, 2023. Nine months ended September 30, 2024, compared to the nine months ended September 30, 2023 Revenue The Company had gross revenues of $23,214,755 for the nine months ended September 30, 2024, as compared to $24,407,583 for the nine months ended September 30, 2023, a decrease of $1,192,828 or 5%.Lower oil and gas revenues were partially offset by higher power segment revenues. Expenses The Company’s operating expenses increased by $1,930,917 to $29,552,093 for the nine-month period ended September 30, 2024, from $27,621,176 in the corresponding prior year nine-month period. Cost of goods sold for the nine months ended September 30, 2024 were $16,637,568, as compared to $16,256,686 for the nine-month period ended September 30, 2023 due to increased power segment sales. Lease operating costs decreased to $22,352 for the nine-month period ended September 30, 2024, as compared to $534,123 for the nine-month period ended September 30, 2023. Depreciation, depletion and amortization (“DD&A”) expense was $596,427 as compared to $698,061 in the prior period. Stock based compensation was $305,000 as compared to zero in the prior period. General and administrative expenses increased by $1,925,503 to $11,990,210 compared to $10,064,707 in the corresponding prior period. Loss from Operations The Company generated a loss from operations for the nine months ended September 30, 2024, of $(6,337,338), compared to $(3,213,593) for the nine months ended September 30, 2023. Other Income (Expense) The Company had other expense, net, of $(58,553,758) for the nine months ended September 30, 2024, as compared to other expense, net, of $(7,572,090) for the nine months ended September 30, 2023. The higher expense was due primarily to goodwill impairment of $(34,860,411), a loss on the change in fair value of derivative liability of $(18,573,289), a loss on disposal of membership interests of $(755,506) and higher interest expense, amortization of debt discount and loss on extinguishment of debt. Net Loss The Company had a net loss of $(64,891,096) during the nine-month period ended September 30, 2024, compared with a net loss of $(10,785,683) for the nine-month period ended September 30, 2023. 52 Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our condensed consolidated financial statements in conformity with U.S. GAAP, which requires management to make certain estimates and assumptions and apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the consolidated financial statements are prepared and actual results could differ from our estimates and such differences could be material. Due to the need to make estimates about the effect of matters that are inherently uncertain, materially different amounts could be reported under different conditions or using different assumptions. On a regular basis, we review our critical accounting policies and how they are applied in the preparation of our condensed consolidated financial statements, as well as the sufficiency of the disclosures pertaining to our accounting policies in the footnotes accompanying our condensed consolidated financial statements. Described below are the most significant policies we apply in preparing our condensed consolidated financial statements, some of which are subject to alternative treatments under GAAP. We also describe the most significant estimates and assumptions we make in applying these policies. See “Note 4 - Summary of Significant Accounting Policies” to our condensed consolidated financial statements. Consolidation of Variable Interest Entities The Company consolidates the financial results of its subsidiaries, defined as entities in which the Company holds a controlling financial interest. Several of the Company’s subsidiaries are considered to be Variable Interest Entities (“VIE’s”) which are defined as an entity for which any of the following conditions exist: 1. The total equity is not sufficient to permit the entity to finance its activities without additional subordinated financial support. 2. The equity holders as a group have one of the following four characteristics: i. Lack the power to direct activities that most significantly impact the entity’s economic performance. ii. Possess non-substantive voting rights. iii. Lack the obligation to absorb the entity’s expected losses. iv. Lack the right to receive the entity expected residual returns. The Company consolidates the financial results of a VIE when it is determined that the Company is the primary beneficiary of the VIE. Revenue Recognition Power Generation Revenues Through its 60.5% ownership in Simson-Maxwell, the Company manufactures and sells power generation products, services and custom energy solutions. Sale of Power Generation Units The Company considers a completed unit to be a performance obligation for purposes of revenue recognition and recognizes revenue when control of the product is transferred to the customer, which typically occurs upon shipment or delivery to the customer. Commissioning of the unit is considered to be a separate performance obligation for which revenue is recognized when the commissioning is completed. Progress payments are recognized as contract liabilities until the completed unit is delivered. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for the transfer of the unit and commissioning of the unit, which is generally the price stated in the contract. The Company does not allow returns because of the customized nature of the units and does not offer discounts, rebates, or other promotional incentives or allowances to customers. Simson-Maxwell has elected to recognize the cost for freight activities when control of the product has transferred to the customer as an expense within cost of goods. 53 Table of Contents Parts Revenue The Company considers the purchase orders for parts, which in some cases are governed by master sales agreements, to be the contracts with the customers. For each contract, the Company considers the commitment to transfer products, each of which is distinct, to be the identified performance obligations. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for the transfer of product, which is generally the price stated in the contract specific for each item sold, adjusted for the value of expected returns. Simson-Maxwell has elected to recognize the cost for freight activities when control of the product has transferred to the customer as an expense within cost of goods sold in the consolidated statements of comprehensive income. Parts revenues are recognized at the point in time when control of the product is transferred to the customer, which typically occurs upon shipment or delivery to the customer. Service and Repairs Service and repairs are generally performed on customer owned equipment and billed based on labor hours incurred. Each repair is considered a performance obligation. As a result of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. Simson-Maxwell generally uses the cost-to-cost measure of progress for its service work because the customer controls the asset as it is being serviced. Most service and repairs are completed in one or two days. Oil and Gas Revenues Sales of crude oil, natural gas, and natural gas liquids (“NGLs”) are included in revenue when production is sold to a customer in fulfillment of performance obligations under the terms of agreed contracts. Performance obligations primarily comprise delivery of oil, gas, or NGLs at a delivery point, as negotiated within each contract. Each barrel of oil, million BTU (“MMBtu”) of natural gas, or other unit of measure is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. Performance obligations are satisfied at a point in time once control of the product has been transferred to the customer. Goodwill Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is subject to impairment testing at least annually and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after completing the assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company will proceed to a quantitative test. The Company may also elect to perform a quantitative test instead of a qualitative test for any or all of our reporting units. The test compares the fair value of an entity’s reporting units to the carrying value of those reporting units. This quantitative test requires various judgments and estimates. The Company estimates the fair value of the reporting unit using a market approach in combination with a discounted operating cash flow approach. Impairment of goodwill is measured as the excess of the carrying amount of goodwill over the fair values of recognized and unrecognized assets and liabilities of the reporting unit. Intangible Assets Intangible assets include amounts capitalized for the Company’s license agreement with ESG as described in Note 2. This asset is amortized on a straight-line basis over the remaining life of the related patents being licensed, which is approximately 16 years. Additionally, with the acquisition of Simson-Maxwell, the Company identified other intangible assets consisting of customer relationships (which is being amortized on a straight-line basis over 10 years) and Simson-Maxwell brand (which is not being amortized) with an aggregate appraised fair value $3,908,126. 54 Table of Contents With the acquisition of a 51% interest in Viking Ozone, Viking Sentinel and Viking Protection, as described in Note 8, the Company has aggregate intangible assets of $15,433,340. These assets have an indefinite life and are not being amortized. The Company reviews these intangible assets, at least annually, for possible impairment when events or changes in circumstances that the assets carrying amount may not be recoverable. In evaluating the future benefit of its intangible assets, the Company estimates the anticipated discounted future net cash flows of the intangible assets over the remaining estimated useful life. If the carrying amount is not recoverable, an impairment loss is recorded for the excess of the carrying value of the asset over its fair value. Derivative Liability The Series C Preferred Stock COD contains provisions that could result in modification of the Series C Preferred Stock conversion price that is based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The Series C Preferred Stock are convertible into shares of common stock at a fixed $162.50 conversion rate. Upon conversion, the holder is entitled to dividends as if the shares had been held to maturity, which is referred to as the Conversion Premium. The Conversion Premium may be paid in shares or cash, at the option of the Company. If the Conversion Premium is paid in cash, the amount is fixed and not subject to adjustment. If the Conversion Premium is paid in shares, the conversion ratio is based on a VWAP calculation based on the lowest stock price over the Measurement Period. The Measurement Period is 30 trading days (or 60 trading days if there is a Triggering Event) prior to the conversion date and 30 trading days (or 60 trading days if there is a Triggering Event) after the conversion date. The VWAP calculation is subject to adjustment if there is a Triggering Event and the Measurement Period is subject to adjustment in the event that the Company is in default of one or more Equity Conditions provided in the COD. For example, the Measurement period may be extended one day for every day the Company is not in compliance with one or more of the Equity Conditions. Trigger events are described in the designation of the Series C Preferred Stock, but include items which would typically be events of default under a debt security, including filing of reports late with the SEC. At the conversion date, the number of shares due for the Conversion Premium is estimated based on the previous 30-day VWAP. If the Company does not elect to pay the Conversion Premium in cash, the Company will issue all shares due for the conversion and the estimated shares due for the conversion premium. If the VWAP calculation for the portion of the Measurement Period following the date of conversion is lower than the VWAP for the portion of the Measurement Period prior to the date of conversion, the holder will be issued additional shares of common stock, referred to as True-Up shares. If the VWAP calculation is higher, no True-Up shares are issued. The Company has determined that the Series C Preferred Stock contains an embedded derivative liability relating to the Conversion Premium and, upon conversion, a derivative liability for the potential obligation to issue True-Up Shares relating to Series C shares that have been converted and the Measurement Period has not expired, if applicable. The fair value of the derivative liability relating to the Conversion Premium for any outstanding Series C Shares is equal to the cash required to settle the Conversion Premium. The fair value of the potential True-Up share obligation has been estimated using a binomial pricing mode and the lesser of the conversion price or the low closing price of the Company’s stock subsequent to the conversion date and the historical volatility of the Company’s common stock. Capitalized terms used but not defined in this section have the meaning assigned to them in the Series C COD. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company, as a smaller reporting company (as defined by Rule 12b-2 of the Exchange Act), is not required to furnish the information required by this item. 55 Table of Contents