WOLF ENERGY SERVICES INC. The following discussion of our financial condition and results of operations
for the three and six months ending
Overview
Effective
The Exchange was accounted for as a reverse acquisition. No cash was paid relating to the acquisition. As the acquisition of Banner Midstream resulted in the owners of Banner Midstream gaining control over the combined entity after the transaction, and the shareholders of the Company continuing only as passive investors, the transaction was not considered a business combination under ASC 805. Instead, this transaction was considered to be a capital transaction of the legal acquiree (Banner Midstream) and was equivalent to the issuance of shares by Banner Midstream for the net monetary assets of the Company accompanied by a recapitalization. As a result, the financial information in this report is that of Banner Midstream.
Pursuant to the Closing, the Company changed its fiscal year to
Banner Midstream has two operating subsidiaries:
Pinnacle Frac provides transportation of frac sand and logistics services to
major hydraulic fracturing and drilling operations. Its transportation services
entail using third party drivers who assist in transporting sand and related
materials to customers' locations for the customers' hydraulic fracturing, or
fracking. The logistics services Pinnacle Frac provides for its customers'
fracking and drilling enterprises, include the operation of a 24/7 dispatch
service center based in
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Pinnacle Frac uses a third party's licensed software known as "Sandbox" to monitor and execute its transportation and logistics operations. Use of this service offers the following benefits for customers and other industry participants: reduced road traffic; reduced personnel on frac site; and eliminate silica dust particles.
By operating a call center and using specialized licensed software to meet customers' demand for timely delivery and movement of fracking materials, Pinnacle Frac facilitates customers' fracking operations through the life cycle of the drilling process.
Hydraulic fracturing, or fracking, is a process that creates fractures extending from the well bore into the rock formation to enable natural gas or oil contained in the rock to move more easily from the rock pores to a production conduit, or an opening at the surface designed to allow for extraction of the energy resource. The hydraulic fracturing technique is used to enable the extraction of natural gas or oil from shale and other forms of "tight" rock, or in other words, impermeable rock formations that lock in oil and gas and make fossil fuel production difficult. The process entails blasting water, chemicals, and sand into these formations at pressures high enough to crack the rock in which the targeted resources is embedded, allowing the once-trapped gas and oil to flow to the surface.
Because the process is highly reliant on an ample supply of sand and other materials, Pinnacle Frac capitalizes on this demand by helping its customers timely supply the materials to the drilling site in sufficient quantities to complete the process. Banner Midstream's customers consist of oil and gas drilling to which Banner Midstream may be the prime contractor, and third party contractors assisting with another party's drilling operation for which Banner Midstream serves as the subcontractor.
Due to concerns surrounding health, safety and environmental, or HSE, impacts of hydraulic fracturing, Pinnacle Frac takes an active role in assessing occupational risk and finding methods to better manage these issues. To further these efforts, Banner Midstream has implemented an HSE program which consists of the following key features aimed at avoiding, preventing, detecting and mitigating certain hazards that are inherent in operating as a participant in the hydraulic fracturing field: Jobs Safety Analysis (JSA) Program; Near-Miss Reporting System; and Accident Reporting System.
All programs are designed with the purpose of mitigating the risk of future safety incidents, while also ensuring that when rare instances occur when a safety incident does occur, that Banner Midstream has a plan to address in a consistent, formal manner to ensure the utmost safety for its employees and contractors. To enhance safety, each of Pinnacle Frac employee and contractor are put through a safety program to meet the needs of its customers while maintaining adequate safety protocols. Through this system, workers gain knowledge of how to maintain optimum work conditions and be prepared for the variety of potential challenges that may arise. Pinnacle Frac monitors performance under its HSE program throughout the year to evaluate its goals are being met or address any concerns in this regard should they arise.
Going Concern
For the six months ended
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RESULTS OF OPERATIONS FOR CONTINUING OPERATIONS FOR THE SIX MONTHS ENDED
Revenue The following table shows revenues for the six months endedSeptember 30, 2022 and 2021: Six Months Ended September 30, 2022 2021 Revenue from continuing operations: Transportation Services$ 10,148,914 $ 9,615,861 Fuel Rebate 107,199 148,871 Equipment Rental and Other 15,000 33,312 Total$ 10,271,113 $ 9,798,044
Revenues for the six months ended
Cost of Revenues and Gross Profit
The following table shows the costs of revenues for the six months ended
Six Months
Ended September 30,
2022 2021
Total $ 8,287,616 $ 6,699,325 Cost of revenues for six months ended
Operating Expenses The following table shows operating expenses for the six months endedSeptember 30, 2022 and 2021: Six Months Ended September 30, 2022 2021 Operating Expenses: Salaries and salary related costs$ 538,869 $ 1,358,610 Professional and consulting fees 9,060 171,677 Selling, general and administrative 2,407,693 3,280,047
Depreciation, amortization, and impairment 3,836,409 392,526 Total
$ 6,792,031 $ 5,202,860
Total operating costs increased by approximately 31% for the six months ended
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Selling, General and Administrative
The following table shows selling, general and administrative expenses for the
six months ended
Six Months
Ended September 30,
2022 2021
Selling, General and Administrative Expenses:
Insurance $ 1,180,834 $ 861,591
Equipment rental 278,990 159.513
Factoring expense 174,912 220,879
Repairs and maintenance 156,734 388,691
Rents 100,503 108,509
Taxes and licenses 73,997 157,877
Legal and professional 43,162 6,814
Home office allocation - 992.955
Other 398,561 383,218
Total $ 2,407,693 $ 3,280,047 Total SG&A costs decreased
Depreciation, Amortization, and Impairment
The following table shows depreciation, amortization, and impairment expenses
for the six months ended
Six Months
Ended September 30,
2022 2021
Depreciation of frac sand transportation equipment
128,486 174.408
Impairment of Goodwill 3,613,144 -
Total $ 3,836,409 $ 392,527 Total depreciation, amortization, and impairment expense was
Other Income (Expense) The following table shows other income (expense) for the six months endedSeptember 30, 2022 and 2021: Six Months EndedSeptember 30, 2022 2021
Change in fair value of derivative liabilities $ -
(950,024 ) -
Interest expense, net of interest income (15,424 ) (339,125 )
Total $ (965,448 ) $ 1,818,714 Total other (expense) was
For the six months ended
Interest expense, net of interest income, for the six months ended
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RESULTS OF OPERATIONS FOR CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED
Revenue The following table shows revenues for the three months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, 2022 2021 Revenue from continuing operations: Transportation Services$ 4,800,689 $ 4,577,868 Fuel Rebate 44,269 56,463 Equipment Rental and Other 7,500 7,500 Total$ 4,852,458 $ 4,641,831
Revenues for the three months ended
Cost of Revenues and Gross Profit
The following table shows the costs of revenues for the three months ended
Three Months
Ended September 30,
2022 2021
Total $ 3,775,367 $ 3,139,478 Cost of revenues for the three months ended
Operating Expenses The following table shows operating expenses for the three months endedSeptember 30, 2022 and 2021: Six Months Ended September 30, 2022 2021 Operating Expenses: Salaries and salary related costs$ 277,048 $ 1,039,711 Professional and consulting fees 7,560 171,677 Selling, general and administrative 1,197,968 1,615,681
Depreciation, amortization, and impairment 3,723,580 196,264 Total
$ 5,206,156 $ 3,023,333
Total operating costs increased by approximately 72% for the three months ended
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Selling, General and Administrative
The following table shows selling, general and administrative expenses for the
three months ended
Three Months
Ended September 30,
2022 2021
Selling, General and Administrative Expenses:
Insurance $ 630,611 $ 514,675
Equipment rental 162,424 42,772
Factoring expense 78,511 100,588
Repairs and maintenance 68,479 192,581
Rents 44,814 55,512
Taxes and licenses 10,080 95,696
Legal and professional 43,042 19,955
Home office allocation - 496,477
Other 160,007 97,425
Total $ 1,197,968 $ 1,615,681 Total SG&A costs decreased
Depreciation, Amortization, and Impairment
The following table shows depreciation, amortization, and impairment expenses
for the three months ended
Three Months
Ended September 30,
2022 2021
Depreciation of frac sand transportation equipment
64,243 87,204
Impairment of Goodwill 3,613,144 -
Total $ 3,723,580 $ 196,264 Total depreciation, amortization, and impairment expense was
Other Income (Expense) The following table shows other income (expense) for the three months endedSeptember 30, 2022 and 2021: Three Months EndedSeptember 30, 2022 2021
Change in fair value of derivative liabilities $ -
(8,146 ) (324,848 )
Total $ (8,146 ) $ 295,626 Total other (expense) was
Interest expense, net of interest income, for the three months ended
Liquidity and Capital Resources:
Cash at
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On
Under the terms of the PPP, certain amounts of the 2021 PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. We received notification that the 2021 PPP Loan has been forgiven.
We do not have any external sources of liquidity and we do not have any capital commitments.
Summary of cash flows
The following table summarizes our cash flows:
Six months Ended
September 30,
2022 2021
(Unaudited)
Cash flow data:
Cash provided by operating activities
Net cash provided in operating activities in the six months ended
Net cash provided in operating activities in the six months ended
Net cash provided in investing activities during the six months ended
Net cash used in financing activities during the six months ended
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Our ability to generate future revenues, generate sufficient cash flow to pay our operating expenses and report profitable operations in future periods will depend on a number of factors, many of which are beyond our control. Our independent auditors have included in their audit report an explanatory paragraph that states that our working capital deficits and accumulated deficit raises substantial doubt about our ability to continue as a going concern. If we fail to achieve profitability on a quarterly or annual basis, or to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back operations. As a result of the above, there is substantial doubt about the ability of the Company to continue as a going concern and the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
Critical Accounting Policies, Estimates and Assumptions
The critical accounting policies listed below are those the Company deems most important to their operations.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the
Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
? Step 1: Identify the contract with the customer
? Step 2: Identify the performance obligations in the contract
? Step 3: Determine the transaction price
? Step 4: Allocate the transaction price to the performance obligations in
the contract
? Step 5: Recognize revenue when the Company satisfies a performance obligation
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In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606's definition of a "distinct" good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
? Variable consideration ? Constraining estimates of variable consideration ? The existence of a significant financing component in the contract ? Noncash consideration ? Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The standalone selling price is the price at which the Company would sell a promised service separately to a customer. The relative selling price for each performance obligation is estimated using observable objective evidence if it is available. If observable objective evidence is not available, the Company uses its best estimate of the selling price for the promised service. In instances where the Company does not sell a service separately, establishing standalone selling price requires significant judgment. The Company estimates the standalone selling price by considering available information, prioritizing observable inputs such as historical sales, internally approved pricing guidelines and objectives, and the underlying cost of delivering the performance obligation. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
Management judgment is required when determining the following: when variable consideration is no longer probable of significant reversal (and hence can be included in revenue); whether certain revenue should be presented gross or net of certain related costs; when a promised service transfers to the customer; and the applicable method of measuring progress for services transferred to the customer over time. The Company recognizes revenue upon satisfaction of its performance obligation at either a point in time in accordance with ASC 606-10-25-30 for its contracts in its Oil and Gas and Financial Services segments or over time in accordance with ASC 606-10-25-27 for its contracts with mining pool operators.
The Company accounts for incremental costs of obtaining a contract with a customer and contract fulfillment costs in accordance with ASC 340-40, Other Assets and Deferred Costs. These costs should be capitalized and amortized as the performance obligation is satisfied if certain criteria are met. The Company elected the practical expedient, to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would otherwise have been recognized is one year or less, and expenses certain costs to obtain contracts when applicable. The Company recognizes an asset from the costs to fulfill a contract only if the costs relate directly to a contract, the costs generate or enhance resources that will be used in satisfying a performance obligation in the future and the costs are expected to be recovered. The Company recognizes the cost of sales of a contract as expense when incurred or when a performance obligation is satisfied. The incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained, are not considered recoverable, or the practical expedient applies.
Recent Accounting Pronouncements
All newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
Off Balance Sheet Arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
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Key Trends
Impact of Inflation
In 2022, data indicates a sharp rise in inflation in the
In response to recent inflationary pressures in the
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