Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
This Quarterly Report on Form 10-Q (this “Form
10-Q”) is prepared by Coil Tubing Technology, Inc. Unless otherwise indicated or the context otherwise requires, in this
Form 10-Q all references to “Coil Tubing Technology, Inc.” the “Company,” “we,” “our”
and “us” refer to Coil Tubing Technology, Inc. and its subsidiaries on a consolidated basis.
The following discussion and analysis of our
results of operations and financial condition should be read in conjunction with our audited consolidated financial statements
as of December 31, 2013 and 2012, and for the years then ended, included in our Annual Report on Form 10-K for the year ended
December 31, 2013, filed with the Securities and Exchange Commission on March 31, 2014 (the “Form 10-K”) and with
the unaudited condensed consolidated financial statements and related notes thereto presented in this Form 10-Q.
Disclosure Regarding Forward-Looking Statements
Our disclosure and analysis in this Form 10-Q
may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities
Litigation Reform Act of 1995, that are subject to risks and uncertainties. Forward-looking statements give our current expectations
and projections relating to our financial condition, results of operations, plans, objectives, future performance and business.
You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements
may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,”
“plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the
timing or nature of future operating or financial performance or other events. All statements other than statements of historical
facts included in this Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or
may occur in the future are forward-looking statements.
These forward-looking statements are largely
based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management.
These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating
to our operations and business environment, all of which are difficult to predict and many of which are beyond our control.
Although we believe our estimates and assumptions
to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In
addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the
forward-looking statements contained in this Form 10-Q are not guarantees of future performance, and we cannot assure any reader
that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially
from those anticipated or implied in the forward-looking statements due to the factors listed under “Item 1A. Risk Factors”
in our Form 10-K and this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
section, or MD&A. All forward-looking statements speak only as of the date of this Form 10-Q. We do not intend to publicly
update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required
by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Our Markets and Business Strategy
Our primary markets for our coil tubing products
are oil and gas companies engaged in horizontal drilling activities located in the United States and Canada. We sell or rent our
products to these oil and gas companies either directly or indirectly through oil service companies. Our revenues are generated
by drilling and well services activities which are subject to drilling company budgets and the competitive bundling for our services
by oil service companies. During fiscal 2013 and continuing throughout the first six months of 2014, oil and gas service companies,
which are our clients, reduced their drilling and work-over operations in Canada, Pennsylvania and Louisiana which continues to
have an overall negative impact on our rental revenues. Our total revenues for the six months ended June 30, 2014 were approximately
$2,913,000 compared to $3,245,000 during the six months ended June 30, 2013, a decrease of $332,000. We expect our revenues in
North America and Canada to continue to be impacted by, and to follow the trends in natural gas drilling activities for the remainder
of 2014. As discussed below, we are in the process of advancing our technology and global participation in Mexico, South America
and Asia to take advantage of the growing coil tubing demands.
Based on the current trends in world-wide drilling
activities, we have implemented the following strategies:
|
·
|
We have entered into a Master Service
agreement with a multinational oil and gas service company to integrate and update their coil tubing service capabilities;
|
|
·
|
We are expanding our product lines using
new technology we have developed which has been field tested and approved for use by our customers; and
|
|
·
|
We have commenced sales of our coil tubing
products to large integrated oil companies.
|
We believe increasing the availability of our
proprietary product lines to our customers is critical to our profitability. Therefore, we will focus on initiatives to drive quarter
over quarter sales growth for our existing and new products emphasizing:
|
·
|
Expedited delivery time, training and
enhanced service at the customers’ sites;
|
|
·
|
Focusing on the higher margin coil tubing
products to be integrated into our customers current and long-term demands;
|
|
·
|
Marketing our new product lines to our
prospective international customers; and
|
|
·
|
Developing a sales division to market
our generic tools.
|
Critical Accounting Policies
Revenue Recognition.
The Company's
revenue is generated primarily from the rental and sales of its tools used for oilfield services primarily in Texas, Louisiana
and Pennsylvania in the U.S. and in Alberta, Canada. Rental income is recognized over the rental periods, which are generally from
one to thirty days. The estimated amounts of sales discounts, returns and allowances are accounted for as reductions of sales when
the sale occurs and the realization of collectability is reasonably assured. These estimates are based on historical amounts and
adjusted periodically based on changes in facts and circumstances when the changes become known to the Company. The Company also
recognizes rental revenue for the full sales price of any tools which are lost and/or damaged in use (and billed to the customer)
and recognizes the net carrying cost of such tool (“
manufacturers’ cost
” less depreciation) as cost of
product and rental revenue.
Sales of coil tubing related products are primarily
derived from instances where a customer has a specific need for a particular coil tubing related product and desires to have the
Company obtain and/or manufacture the particular product. These sales may include replacement parts, as well as proprietary tools
which are manufactured to the customer’s specification, but which are not part of the Company’s tool line. The Company
generally recognizes product revenue at the time the product is shipped. Concurrent with the recognition of revenue, the Company
provides for the estimated cost of product returns. Sales incentives are generally classified as a reduction of revenue and are
recognized at the later of when revenue is recognized or when the incentive is offered. Shipping and handling costs are included
in cost of goods sold.
Rental Tool Assets.
Approximately
89% of the Company’s revenues are generated from the rental of its coil tubing products. Rental tools are recorded on the
Company’s books as rental equipment at “
manufacturers’ cost.
” Depreciation is calculated using the
straight line method over the useful lives of the assets of five years. Lost or destroyed tools are not a significant source of
rental tools revenue for the Company. The Company bills customers for the sales price of any tools which are lost and/or damaged
in use and the cost and related accumulated depreciation are removed from the accounts and any resulting revenue or expense is
recognized. Lost tools are recognized as product rental revenue and cost of products and rental revenue, respectively.
Intangible Assets.
The Company’s
intangible assets, which are recorded at cost, consist primarily of the unamortized cost basis of issued and pending patents. These
assets are being amortized on a straight line basis over the estimated useful lives of 15 years. The Company continually evaluates
the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant
a revised estimated useful life or impairment in value. To date, no such impairment has occurred. To the extent such events or
circumstances occur that could affect the recoverability of our Intangible assets, we may incur charges for impairment in the future.
Stock-Based Compensation.
The
Company accounts for stock-based employee compensation arrangements using the fair value method that requires that the fair
value of employees awards issued, modified, repurchased or cancelled after implementation, under share-based payment arrangements,
be measured as of the date the award is issued, modified, repurchased or cancelled. The resulting cost is then recognized in the
statement of earnings over the service period.
The Company periodically issues common stock
for services rendered and may issue common stock for acquisitions in the future. Common stock issued is valued at fair market value.
Management and the board of directors consider market price quotations, recent stock offering prices and other factors in determining
fair market value for purposes of valuing the common stock. The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the various weighted average assumptions, including dividend yield, expected
volatility, average risk-free interest rate and expected lives.
Income Taxes.
The Company uses
the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined
based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation
allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the consolidated statements of operations in the period that includes the enactment date.
Comparison of Results of Operations
Three and Six Months Ended June 30, 2014,
Compared To Three and Six Months Ended June 30, 2013
The following tables set forth summarized consolidated
financial information for the three months ended June 30, 2014 and 2013:
|
|
Three
Months Ended June 30,
|
|
(in thousands)
|
|
2014
|
|
|
2013
|
|
|
$ Change
|
|
|
% Change
|
|
Total revenues
|
|
$
|
1,645
|
|
|
$
|
1,420
|
|
|
$
|
225
|
|
|
|
16
|
%
|
Cost of revenues
|
|
|
(887
|
)
|
|
|
(777
|
)
|
|
|
(110
|
)
|
|
|
(14
|
%)
|
Gross profit
|
|
|
758
|
|
|
|
643
|
|
|
|
115
|
|
|
|
18
|
%
|
Gross profit as a percentage of total revenues
|
|
|
46
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
1
|
%
|
Operating expenses
|
|
|
853
|
|
|
|
812
|
|
|
|
41
|
|
|
|
5
|
%
|
Loss from operations
|
|
|
(95
|
)
|
|
|
(169
|
)
|
|
|
74
|
|
|
|
44
|
%
|
Other income (expense)
|
|
|
(13
|
)
|
|
|
(4
|
)
|
|
|
(9
|
)
|
|
|
225
|
%
|
Net loss
|
|
$
|
(108
|
)
|
|
$
|
(173
|
)
|
|
$
|
65
|
|
|
|
38
|
%
|
For the three months ended June 30, 2014, the
Company's business operations reflected an increase in sales. For the three months ended June 30, 2014, the Company's consolidated
operations generated revenues of approximately $1,645,000 compared to revenues of $1,420,000 for the three months ended June 30,
2013. The $225,000 increase in total revenues is primarily attributable to an increase in sales of coil tubing products. We plan
to continue to tailor our product offerings to address the current trends in the international drilling industry based on sales
information provided by our largest customers with the goal of increasing our revenues moving forward. For the three months ended
June 30, 2014, the Company had a gross profit as a percentage of sales of 46%, compared to 45% for the three months ended June
30, 2013. The $115,000 increase in gross profit for the three months ended June 30, 2014, compared to the prior period, is primarily
attributed to increased revenue from the sale of coil tubing products.
The following tables set forth summarized consolidated
financial information for the six months ended June 30, 2014 and 2013:
|
|
Six
Months Ended June 30,
|
|
(in thousands)
|
|
2014
|
|
|
2013
|
|
|
$ Change
|
|
|
% Change
|
|
Total revenues
|
|
$
|
2,913
|
|
|
$
|
3,245
|
|
|
$
|
(332
|
)
|
|
|
(10
|
%)
|
Cost of revenues
|
|
|
(1,637
|
)
|
|
|
(1,631
|
)
|
|
|
(6
|
)
|
|
|
(0
|
%)
|
Gross profit
|
|
|
1,276
|
|
|
|
1,614
|
|
|
|
(338
|
)
|
|
|
(21
|
%)
|
Gross profit as a percentage of total revenues
|
|
|
44
|
%
|
|
|
50
|
%
|
|
|
|
|
|
|
(6
|
%)
|
Operating expenses
|
|
|
1,831
|
|
|
|
1,850
|
|
|
|
19
|
|
|
|
1
|
%
|
Loss from operations
|
|
|
(555
|
)
|
|
|
(236
|
)
|
|
|
(319
|
)
|
|
|
(135
|
%)
|
Other income (expense)
|
|
|
(26
|
)
|
|
|
(3
|
)
|
|
|
(23
|
)
|
|
|
(767
|
%)
|
Net loss
|
|
$
|
(581
|
)
|
|
$
|
(239
|
)
|
|
$
|
(342
|
)
|
|
|
(143
|
%)
|
For the six months ended June 30, 2014, the
Company's business operations reflected a decrease in sales. For the six months ended June 30, 2014, the Company's consolidated
operations generated revenues of approximately $2,913,000 compared to revenues of $3,245,000 for the quarter ended June 30, 2013.
The $332,000 decrease in total revenues is primarily attributable to a decline in rental orders for coil tubing products and competitive
pricing by larger service companies. We plan to continue to tailor our product offerings to address the current trends in the international
drilling industry based on sales information provided by our largest customers with the goal of increasing our revenues moving
forward. For the six months ended June 30, 2014, the Company had a gross profit as a percentage of sales of 44%, compared to 50%
for the six months ended June 30, 2013. The $338,000 decrease in gross profit for the six months ended June 30, 2014, compared
to the prior period, is primarily attributed to the slowdown in orders for our rental products by our largest customers.
Revenue Information
The following table sets forth summarized consolidated
sales information for the three months ended June 30, 2014 and 2013:
|
|
Three
Months Ended June 30,
|
|
(in thousands)
|
|
2014
|
|
|
2013
|
|
|
$ Change
|
|
|
% Change
|
|
Rentals
|
|
$
|
1,333
|
|
|
$
|
1,411
|
|
|
$
|
(78
|
)
|
|
|
(6
|
%)
|
Products
|
|
|
312
|
|
|
|
9
|
|
|
|
303
|
|
|
|
3,367
|
%
|
Total revenue
|
|
$
|
1,645
|
|
|
$
|
1,420
|
|
|
$
|
225
|
|
|
|
16
|
%
|
We had total revenues of approximately $1,645,000
for the three months ended June 30, 2014, compared to total revenues of $1,420,000 for the three months ended June 30, 2013, an
increase in total revenues of $225,000 or 16% from the prior period. Total revenues included $1,333,000 of rental revenue
for the three months ended June 30, 2014, compared to $1,411,000 for the three months ended June 30, 2013, a decrease in rental
revenue of $78,000 or 6% from the prior period. The decrease in rental revenue was mainly due to a decrease in customer demand
and an increase in competitive pricing by other large service companies. We believe that through joint pricing efforts
with our partner service companies we will be able to expand our product sales and services to new customers in the United States,
Mexico and Canada.
The following table sets forth summarized
consolidated sales information for the six months ended June 30, 2014 and 2013:
|
|
Six
Months Ended June 30,
|
|
(in thousands)
|
|
2014
|
|
|
2013
|
|
|
$ Change
|
|
|
% Change
|
|
Rentals
|
|
$
|
2,582
|
|
|
$
|
3,192
|
|
|
$
|
(610
|
)
|
|
$
|
(19
|
%)
|
Products
|
|
|
331
|
|
|
|
53
|
|
|
|
278
|
|
|
|
525
|
%
|
Total revenue
|
|
$
|
2,913
|
|
|
$
|
3,245
|
|
|
$
|
(332
|
)
|
|
|
(10
|
%)
|
We had total revenues of approximately $2,913,000
for the six months ended June 30, 2014, compared to total revenues of $3,245,000 for the six months ended June 30, 2013, a decrease
in total revenues of $332,000 or 10% from the prior period. Total revenues included $2,582,000 of rental revenue for
the six months ended June 30, 2014, compared to $3,192,000 for the six months ended June 30, 2013, a decrease in rental revenue
of $610,000 or 19% from the prior period. The decrease in rental revenue was mainly due to a decrease in customer demand and an
increase in competitive pricing by other large service companies. We believe that through joint pricing efforts with
our partner service companies, that we will be able to expand our product sales and services to new customers in the United States,
Mexico and Canada.
Cost of Revenue
The following table sets forth summarized cost
of revenue information for the three months ended June 30, 2014 and 2013:
|
|
Three
Months Ended June 30,
|
|
(in thousands)
|
|
2014
|
|
|
2013
|
|
|
$ Change
|
|
|
% Change
|
|
Depreciation of rental tools
|
|
$
|
288
|
|
|
$
|
273
|
|
|
$
|
15
|
|
|
|
5
|
%
|
Facilities and support expenses
|
|
|
49
|
|
|
|
72
|
|
|
|
(23
|
)
|
|
|
(32
|
%)
|
Compensation and benefits
|
|
|
263
|
|
|
|
211
|
|
|
|
52
|
|
|
|
25
|
%
|
Material, supplies and support service
|
|
|
287
|
|
|
|
221
|
|
|
|
66
|
|
|
|
30
|
%
|
Total cost of revenue
|
|
$
|
887
|
|
|
$
|
777
|
|
|
$
|
110
|
|
|
|
14
|
%
|
Cost of revenue includes costs associated with
products and rental sales and depreciation of capitalized rental tool assets that are rented to oil field service companies. We
had cost of products and rental revenue of approximately $887,000 for the three months ended June 30, 2014, compared to a cost
of approximately $777,000 for the three months ended June 30, 2013, an increase of $110,000 or 14% from the prior period. The main
reasons for the increase were an increase in material, supplies and support service which was directly related to the increase
in product sales revenue and an increase in compensation of machine shop staff for the three months ended June 30, 2014 compared
to the prior year’s period.
The following table sets forth summarized cost
of revenue information for the six months ended June 30, 2014 and 2013:
|
|
Six
Months Ended June 30,
|
|
(in thousands)
|
|
2014
|
|
|
2013
|
|
|
$ Change
|
|
|
% Change
|
|
Depreciation of rental tools
|
|
$
|
573
|
|
|
$
|
541
|
|
|
$
|
32
|
|
|
|
6
|
%
|
Facilities and support expenses
|
|
|
90
|
|
|
|
134
|
|
|
|
(44
|
)
|
|
|
(33
|
%)
|
Compensation and benefits
|
|
|
476
|
|
|
|
445
|
|
|
|
31
|
|
|
|
7
|
%
|
Material, supplies and support service
|
|
|
498
|
|
|
|
511
|
|
|
|
(13
|
)
|
|
|
(3
|
%)
|
Total cost of revenue
|
|
$
|
1,637
|
|
|
$
|
1,631
|
|
|
$
|
6
|
|
|
|
(0
|
%)
|
Cost of revenue includes costs associated with
products and rental sales and depreciation of capitalized rental tool assets that are rented to oil field service companies. We
had cost of products and rental revenue of approximately $1,637,000 for the six months ended June 30, 2014, compared to a cost
of approximately $1,631,000 for the six months ended June 30, 2013, an increase of $6,000 or less than 1% from the prior period.
The main reasons for the decrease was a decrease in office rent and material, supplies and support service offset by an increase
in compensation of machine shop staff and depreciation of rental tools.
Depreciation of Rental Tools
Depreciation expense (as a portion of cost
of revenues) increased by $15,000 or 5%, to $288,000 for the three months ended June 30, 2014, compared to $273,000 for the three
months ended June 30, 2013, which increase was mainly due to an increase in the depreciable asset base in 2014 versus 2013.
Depreciation expense (as a portion of cost
of revenues) increased by $32,000 or 6%, to $573,000 for the six months ended June 30, 2014, compared to $541,000 for the three
months ended June 30, 2013, which increase was mainly due to an increase in the depreciable asset base in 2014 versus 2013.
Gross Profit
We had gross profit of $758,000 for the three
months ended June 30, 2014, compared to gross profit of $643,000 for the three months ended June 30, 2013, an increase in gross
profit of $115,000 or 18% from the prior period. Our gross profit was 46% of revenue for the three months ended June 30, 2014,
compared to 45% for the three months ended June 30, 2013.
We had gross profit of $1,276,000 for the six
months ended June 30, 2014, compared to gross profit of $1,614,000 for the six months ended June 30, 2013, a decrease in gross
profit of $338,000 or 21% from the prior period. Our gross profit was 44% of revenue for the six months ended June 30, 2014, compared
to 50% for the six months ended June 30, 2013.
General Operating Expenses
The following table sets forth summarized operating
expense information for the three months ended June 30, 2014 and 2013:
|
|
Three
Months Ended June 30,
|
|
(in thousands)
|
|
2014
|
|
|
2013
|
|
|
$ Change
|
|
|
% Change
|
|
Depreciation and amortization
|
|
$
|
86
|
|
|
$
|
70
|
|
|
$
|
16
|
|
|
|
23
|
%
|
Compensation and benefits
|
|
|
165
|
|
|
|
211
|
|
|
|
(46
|
)
|
|
|
(22
|
%)
|
General and administrative - Professional services
|
|
|
203
|
|
|
|
90
|
|
|
|
113
|
|
|
|
126
|
%
|
General and administrative expenses - Other
|
|
|
21
|
|
|
|
62
|
|
|
|
(41
|
)
|
|
|
(66
|
%)
|
Total general operating expenses
|
|
$
|
475
|
|
|
$
|
433
|
|
|
$
|
42
|
|
|
|
10
|
%
|
We had total general operating expenses of
$475,000 for the three months ended June 30, 2014, compared to total general operating expenses of $433,000 for the three months
ended June 30, 2013, an increase in operating expenses of $42,000 or 10% from the prior period. The increase in general operating
expenses was primarily related to an increase in professional service fees related to the 2013 year-end audit and legal fees related
to our ongoing lawsuit (see also Part II - Item 1).
The following table sets forth summarized
operating expense information for the six months ended June 30, 2014 and 2013:
|
|
Six
Months Ended June 30,
|
|
(in thousands)
|
|
2014
|
|
|
2013
|
|
|
$ Change
|
|
|
% Change
|
|
Depreciation and amortization
|
|
$
|
169
|
|
|
$
|
136
|
|
|
$
|
33
|
|
|
|
24
|
%
|
Compensation and benefits
|
|
|
377
|
|
|
|
480
|
|
|
|
(103
|
)
|
|
|
(21
|
%)
|
General and administrative - Professional services
|
|
|
409
|
|
|
|
246
|
|
|
|
163
|
|
|
|
66
|
%
|
General and administrative expenses - Other
|
|
|
115
|
|
|
|
134
|
|
|
|
(19
|
)
|
|
|
(14
|
%)
|
Total general operating expenses
|
|
$
|
1,070
|
|
|
$
|
996
|
|
|
$
|
74
|
|
|
|
7
|
%
|
We had total general
operating expenses of $1,070,000 for the six months ended June 30, 2014, compared to total general operating expenses of $996,000
for the six months ended June 30, 2013, an increase in operating expenses of $74,000 or 7% from the prior period. The increase
in general operating expenses was primarily related to an increase in professional service fees related to the accounting and legal
fees related to our ongoing lawsuit (see also Part II - Item 1).
Selling and Marketing
The following table sets forth summarized selling
and marketing expense information for the three months ended June 30, 2014 and 2013:
|
|
Three
Months Ended June 30,
|
|
(in thousands)
|
|
2014
|
|
|
2013
|
|
|
$ Change
|
|
|
% Change
|
|
Auto
|
|
$
|
107
|
|
|
$
|
81
|
|
|
$
|
26
|
|
|
|
32
|
%
|
Commissions
|
|
|
121
|
|
|
|
148
|
|
|
|
(27
|
)
|
|
|
(18
|
%)
|
Compensation and benefits
|
|
|
99
|
|
|
|
101
|
|
|
|
(2
|
)
|
|
|
(2
|
%)
|
Other selling and marketing
|
|
|
51
|
|
|
|
47
|
|
|
|
4
|
|
|
|
9
|
%
|
Total selling and marketing expenses
|
|
$
|
378
|
|
|
$
|
377
|
|
|
$
|
1
|
|
|
|
0
|
%
|
We had total selling and marketing expenses
of $378,000 for the three months ended June 30, 2014, compared to $377,000 for the three months ended June 30, 2013, an increase
of $1,000 or less than 1% from the prior period, which increase was primarily due to decreased commissions offset by an increase
in auto repair and maintenance expenses.
The following table sets forth summarized selling
and marketing expense information for the six months ended June 30, 2014 and 2013:
|
|
Six
Months Ended June 30,
|
|
(in thousands)
|
|
2014
|
|
|
2013
|
|
|
$ Change
|
|
|
% Change
|
|
Auto
|
|
$
|
203
|
|
|
$
|
161
|
|
|
$
|
42
|
|
|
|
26
|
%
|
Commissions
|
|
|
223
|
|
|
|
338
|
|
|
|
(115
|
)
|
|
|
(34
|
%)
|
Compensation and benefits
|
|
|
227
|
|
|
|
211
|
|
|
|
16
|
|
|
|
8
|
%
|
Other selling and marketing
|
|
|
109
|
|
|
|
141
|
|
|
|
(32
|
)
|
|
|
(23
|
%)
|
Total selling and marketing expenses
|
|
$
|
762
|
|
|
$
|
851
|
|
|
$
|
(89
|
)
|
|
|
(10
|
%)
|
We had total selling and
marketing expenses of $762,000 for the six months ended June 30, 2014, compared to $851,000 for the six months ended June 30,
2013, a decrease of $89,000 or 10% from the prior period, which decrease was primarily due to decreased commissions, selling and
marketing expenses (due mainly to our decreased revenues) offset by an increase in auto repair and maintenance expense and compensation
benefits.
Depreciation and Amortization
Depreciation and amortization expense increased
by $16,000 or 23%, to $86,000 for the three months ended June 30, 2014, compared to $70,000 for the three months ended June 30,
2013. The increase was primarily due to the addition of shop equipment and automobiles.
Total depreciation and amortization expense
increased by $33,000 or 24%, to $169,000 for the six months ended June 30, 2014, compared to $136,000 for the six months ended
June 30, 2013. The increase was primarily due to the addition of shop equipment and automobiles.
Loss from Operations
We had a loss from operations of $95,000 for
the three months ended June 30, 2014, compared to a loss from operations of $169,000 for the three months ended June 30, 2013,
a decrease of $74,000 or 44% from the prior period.
We had a loss from operations of $555,000 for
the six months ended June 30, 2014, compared to a loss from operations of $236,000 for the six months ended June 30, 2013, an increase
of $319,000 or 135% from the prior period.
Other Income (expense)
We had other expense of $13,000 for the three
months ended June 30, 2014, which represented interest expense of $13,000 versus other expense of $4,000 for the three months ended
June 30, 2013, which represented $4,000 of interest expense. The increase in interest expense was directly attributable to the
new building debt.
We had other expense of $26,000 for the six
months ended June 30, 2014, which included interest expense of $27,000 offset by $1,000 of other income, versus other expense of
$3,000 for the six months ended June 30, 2013, which represented $5,000 of other income offset by $8,000 of interest expense. The
increase in interest expense was directly attributable to the new building debt.
Net Loss
We had a net loss of $108,000 for the three
months ended June 30, 2014, compared to a net loss of $173,000 for the three months ended June 30, 2013, a decrease in net loss
of $65,000 or 38% from the prior period. The decrease in net loss was attributable to the increase in total revenue
offset by an increase in certain operating expenses, for the three months ended June 30, 2014, compared to the three months ended
June 30, 2013.
We had a net loss of $581,000 for the six months
ended June 30, 2014, compared to a net loss of $239,000 for the six months ended June 30, 2013, an increase in net loss of $342,000
or 143% from the prior period. The increase in net loss was attributable to a decrease in total revenue and an increase
in certain operating expenses, for the six months ended June 30, 2014, compared to the six months ended June 30, 2013.
Liquidity and Capital Resources
We had $1,916,000 of working capital as of
June 30, 2014. We believe we are sufficiently capitalized to continue our growth and are in a position to develop financing alternatives
that will enable us to take advantage of growth opportunities in the future.
As of June 30, 2014, we had total assets of
$8,239,000, which included total current assets of $3,024,000, consisting of $1,128,000 of cash, $1,827,000 of accounts receivable,
net, and $69,000 of other current assets; and long term assets including $2,828,000 of rental tools, net; $1,474,000 of property
and equipment, net; and $913,000 of intangible assets, net.
We had total liabilities of $1,920,000 as of
June 30, 2014, which included total current liabilities of $1,108,000, consisting of accounts payable of $616,000; accrued liabilities
of $247,000; current portion of related party notes payable of $156,000, relating to amounts owed to Jerry Swinford in connection
with the IP Agreement, described in Note 4 to the financials included herein, and current portion of notes payable of $89,000,
relating to the amount due on loans associated with equipment financing and building loan; and long term liabilities consisting
of $13,000 of related party notes payable, net of current portion, relating to amounts owed to Jerry Swinford in connection with
the IP Agreement, described in Note 4 to the financials included herein, and $799,000 of notes payable, net of current portion
relating to equipment financing and our building loan.
We had net cash provided by operating
activities of $775,000 for the six months ended June 30, 2014, which consisted of non-cash items including $742,000 of
depreciation and amortization, $102,000 of stock-option expense, $138,000 of increase in accrued liabilities, $284,000 of
increase in accounts payable, $47,000 of decrease in accounts receivable, and $44,000 of decrease in other current assets
offset by $581,000 of net loss.
We had $469,000 of net cash used in investing
activities for the six months ended June 30, 2014, which included the purchase of $463,000 of rental tools and $120,000 of machinery
and equipment; offset by $104,000 from proceeds from the sale of lost tools and $10,000 from proceeds from the sale of fixed assets.
Our principal recurring investing activity was the funding of capital expenditures to ensure that we have the appropriate levels
and types of equipment in place to generate revenue from operations.
We had $80,000 of net cash used in financing
activities for the six months ended June 30, 2014, which included $49,000 of proceeds from notes payable related to vehicles, offset
by $78,000 of payments on related party notes payable, relating to amounts paid to Jerry Swinford in connection with the IP Agreement,
described in Note 4 to the financials included herein and $51,000 of payments on notes payable.
Effective October 25, 2013, we purchased a
6,000 square foot office/warehouse building and associated land located at 22305 Gosling Road, Spring, Texas 77389. The purchase
price was $884,508. The Company obtained $649,000 of the purchase price by way of a loan from Bank of Houston, evidenced by a promissory
note, which loan bears interest at 5% per annum for three years and the prime rate plus 1% thereafter (not to be less than 5%),
and has a maturity date of October 25, 2018. Upon an event of default, the loan bears interest at the lesser of the rate of 5%
above the then applicable interest rate of the note, and the greatest amount provided by law. Amortization payments based on a
20 year amortization schedule (initially $4,309 per month) are due on the loan until maturity (recalculated based on the then interest
rate after the first three years of the loan). The amount due under the loan is secured by a Deed of Trust, Security Agreement
and Financing Statement on the property purchased.
The Company’s outstanding notes payable
and the material terms thereof are described in Note 4 to the financials included herein.
The Company has historically been funded through
loans provided by, and through the sale of common stock and warrants to, the Company’s largest shareholder and former director,
Herbert C. Pohlmann, provided that Mr. Pohlmann is not required to provide us any additional funding and/or to purchase any securities
from us in the future.
Our immediate plans are to continue our growth
by meeting expected demand for our coil tubing tool products in our current geographic markets and further expanding into international
markets similar to what we accomplished in Canada during 2012 and 2013. We plan to supplement our cash flow with typical bank debt
or similar financing which will enable us to meet larger demand on bigger projects, enter new markets and improve our network for
servicing our customers.
Moving forward, we plan to increase spending
on research and development activities, which we believe will be required to provide technological advancement to our coiled tubing
technologies and workover product lines. We are currently working on a new generation of generic and proprietary coil tubing tools
to aid in and facilitate horizontal drilling. We expect the market for new applications of coiled tubing to continue to expand
throughout the remainder of fiscal 2014, especially in the horizontal drilling and workover applications.
In addition to debt financing and our organic
growth as discussed above, we may raise funds for further expansion of our tool fleet, development of new tools or to make strategic
acquisitions through the sale or exchange of equity securities. Our common stock is now quoted on the OTCQB market, provided that
we may choose to list our common stock on the NYSE MKT or NASDAQ Capital Market in the future. As a result of becoming a fully-reporting
public company, we believe investors may be more willing to purchase our common stock in private offerings allowing us to raise
funding to use for the items described above. The sale of additional equity or debt securities, if accomplished, may result in
dilution to our shareholders.
Off Balance Sheet Arrangements:
None.