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, 2012 and 2011, and for the years then ended, included in our Annual Report on Form 10-K for the year ended
December 31, 2012, filed with the Securities and Exchange Commission on March 22, 2013 (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 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 the first six months of 2013, oil and gas service companies, which
are our clients, have reduced their drilling and work-over operations and initiated vendor bundling of services at discounts
which have had an overall negative impact on our revenues. Our revenues for the six months ended June 30, 2013 were
approximately $3,245,000 compared to $4,346,000 during the six months ended June 30, 2012, a decrease of $1,101,000. We
expect our revenues to continue to follow the trends in drilling activities for the second half of 2013.
Based on the current trends in drilling
activities we intend to implement the following strategies:
|
—
|
Entering into partnerships with our distribution customers to provide a sales mix to meet their overall coil tubing needs;
|
|
—
|
Accelerating our research and development of new proprietary coil tubing products for the oil and gas industry; and
|
|
—
|
Refocusing our sales targets to include other large integrated oil companies with operations in Mexico and Canada.
|
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 products emphasizing:
|
—
|
Expanding our product inventories in the field to reduce delivery time and enhance our presence at the customers’ sites;
|
|
—
|
Focusing on the service aspect of our products to meet our customers current and long-term demands; and
|
|
—
|
Presenting new product lines through the bundling process offered to our customers.
|
During the 1
st
quarter of 2013
we became a fully-reporting public company. Our common stock is quoted on the OTCQB market under the symbol “CTGB”.
We intend to seek funding through public or other equity based offerings to support future acquisition and growth plans.
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
98% 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 “
manufacturer’s 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,
2013, Compared To Three and Six Months Ended June 30, 2012
The following tables set forth summarized
consolidated financial information for the three months ended June 30, 2013 and 2012:
|
|
Three Months Ended June 30,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
Total revenues
|
|
$
|
1,420
|
|
|
$
|
2,081
|
|
|
$
|
(661
|
)
|
|
|
32%
|
|
Cost of revenues
|
|
|
777
|
|
|
|
928
|
|
|
|
(151
|
)
|
|
|
16%
|
|
Gross profit
|
|
|
643
|
|
|
|
1,153
|
|
|
|
(510
|
)
|
|
|
44%
|
|
Gross profit as a percentage of total revenues
|
|
|
45%
|
|
|
|
55%
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
810
|
|
|
|
871
|
|
|
|
(61
|
)
|
|
|
7%
|
|
Income (loss) from operations
|
|
|
(167
|
)
|
|
|
282
|
|
|
|
(449
|
)
|
|
|
159%
|
|
Other income (expense)
|
|
|
(6
|
)
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
20%
|
|
Total income (loss)
|
|
$
|
(173
|
)
|
|
$
|
277
|
|
|
$
|
(450
|
)
|
|
|
162%
|
|
For the three months ended June 30, 2013,
the Company's business operations reflected a decrease in sales for Coil Tubing Technology, Inc. and subsidiaries (“CTT”).
For the three months ended June 30, 2013, the Company's consolidated operations generated revenues of approximately $1,420,000
compared to revenues of $2,081,000 for the quarter ended June 30, 2012. The $661,000 decrease in net sales is primarily attributable
to a decline in rental orders for coil tubing products and competitive pricing by larger service companies. We expect to increase
our revenues to reflect the current trends in the drilling industry based on sales information provided by our largest customers.
For the three months ended June 30, 2013, the Company had a gross profit as a percentage of sales of 45%, compared to 55% for the
three months ended June 30, 2012. The $510,000 decrease in gross profit for the three months ended June 30, 2013, compared to the
prior period, is primarily attributed to the slowdown in orders for our rental products by our largest customers.
Six Months Ended June 30, 2013, Compared
To Six Months Ended June 30, 2012
The following tables set forth summarized
consolidated financial information for the six months ended June 30, 2013 and 2012:
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
Total revenues
|
|
$
|
3,245
|
|
|
$
|
4,346
|
|
|
$
|
(1,101
|
)
|
|
|
25%
|
|
Cost of revenues
|
|
|
1,631
|
|
|
|
1,804
|
|
|
|
(173
|
)
|
|
|
10%
|
|
Gross profit
|
|
|
1,614
|
|
|
|
2,542
|
|
|
|
(928
|
)
|
|
|
37%
|
|
Gross profit as a percentage of total revenues
|
|
|
50%
|
|
|
|
58%
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,847
|
|
|
|
1,833
|
|
|
|
14
|
|
|
|
1%
|
|
Income (loss) from operations
|
|
|
(233
|
)
|
|
|
709
|
|
|
|
(942
|
)
|
|
|
133%
|
|
Other income (expense)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
3
|
|
|
|
33%
|
|
Total income (loss)
|
|
$
|
(239
|
)
|
|
$
|
700
|
|
|
$
|
(939
|
)
|
|
|
134%
|
|
For the six months ended June 30, 2013,
the Company's business operations reflected a decrease in sales for CTT. For the six months ended June 30, 2013, the Company's
consolidated operations generated revenues of approximately $3,245,000 compared to revenues of $4,346,000 for the quarter ended
June 30, 2012. The $1,101,000 decrease in net sales is primarily attributable to a decline in rental orders for coil tubing products.
This decline is a result of our customers postponing drilling operations until later in the 2013 budget year and competitive pricing
from other service providers. We expect to increase our revenues to reflect the current trends in the drilling industry based on
sales information provided by our largest customers. For the six months ended June 30, 2013, the Company had a gross profit as
a percentage of sales of 50%, compared to 58% for the six months ended June 30, 2012. The $928,000 decrease in gross profit for
the six months ended June 30, 2013, 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, 2013 and 2012:
|
|
Three Months Ended June 30,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
Rentals
|
|
$
|
1,411
|
|
|
$
|
2,029
|
|
|
$
|
(618
|
)
|
|
|
30%
|
|
Products
|
|
|
9
|
|
|
|
52
|
|
|
|
(43
|
)
|
|
|
83%
|
|
Total revenue
|
|
$
|
1,420
|
|
|
$
|
2,081
|
|
|
$
|
(661
|
)
|
|
|
32%
|
|
We had total revenues of approximately
$1,420,000 for the three months ended June 30, 2013, compared to total revenues of $2,081,000 for the three months ended June 30,
2012, a decrease in total revenues of $661,000 or 32% from the prior period. Total revenues included $1,411,000 of rental
revenue for the three months ended June 30, 2013, compared to $2,029,000 for the three months ended June 30, 2012, a decrease in
rental revenue of $618,000 or 30% 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 services to new customers in the United States, Mexico
and Canada and, accordingly, we will be able to maintain and increase our revenues throughout the second half of 2013.
The following table sets forth summarized
consolidated sales information for the six months ended June 30, 2013 and 2012:
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
Rentals
|
|
$
|
3,192
|
|
|
$
|
4,244
|
|
|
$
|
(1,052
|
)
|
|
|
25%
|
|
Products
|
|
|
53
|
|
|
|
102
|
|
|
|
(49
|
)
|
|
|
48%
|
|
Total revenue
|
|
$
|
3,245
|
|
|
$
|
4,346
|
|
|
$
|
(1,101
|
)
|
|
|
25%
|
|
We had total revenues of approximately
$3,245,000 for the six months ended June 30, 2013, compared to total revenues of $4,346,000 for the six months ended June 30, 2012,
a decrease in total revenues of $1,101,000 or 25% from the prior period. Total revenues included $3,192,000 of rental
revenue for the six months ended June 30, 2013, compared to $4,244,000 for the six months ended June 30, 2012, a decrease in rental
revenue of $1,052,000 or 25% from the prior period. The decrease in rental revenue was mainly due to a decrease in customer demand
and competitive pricing from other large service companies.
Cost of Revenue
The following table sets forth summarized
cost of revenue information for the six and three months ended June 30, 2013 and 2012:
|
|
Three Months Ended June 30,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
Depreciation of rental tools
|
|
$
|
273
|
|
|
$
|
246
|
|
|
$
|
27
|
|
|
|
11%
|
|
Facilities and support expenses
|
|
|
72
|
|
|
|
129
|
|
|
|
(57
|
)
|
|
|
44%
|
|
Compensation and benefits
|
|
|
211
|
|
|
|
223
|
|
|
|
(12
|
)
|
|
|
5%
|
|
Material, supplies and support service
|
|
|
221
|
|
|
|
330
|
|
|
|
(109
|
)
|
|
|
33%
|
|
Total cost of revenue
|
|
$
|
777
|
|
|
$
|
928
|
|
|
$
|
(151
|
)
|
|
|
16%
|
|
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 $777,000 for the three months ended June 30, 2013, compared to a cost
of $928,000 for the three months ended June 30, 2012, a decrease of $151,000 or 16% from the prior period.
The following table sets forth summarized
cost of revenue information for the six months ended June 30, 2013 and 2012:
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
Depreciation of rental tools
|
|
$
|
541
|
|
|
$
|
470
|
|
|
$
|
71
|
|
|
|
15%
|
|
Facilities and support expenses
|
|
|
134
|
|
|
|
227
|
|
|
|
(93
|
)
|
|
|
41%
|
|
Compensation and benefits
|
|
|
445
|
|
|
|
477
|
|
|
|
(32
|
)
|
|
|
7%
|
|
Material, supplies and support service
|
|
|
511
|
|
|
|
630
|
|
|
|
(119
|
)
|
|
|
19%
|
|
Total cost of revenue
|
|
$
|
1,631
|
|
|
$
|
1,804
|
|
|
$
|
(173
|
)
|
|
|
10%
|
|
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 $1,631,000 for the six months ended June 30, 2013, compared to a cost
of $1,804,000 for the six months ended June 30, 2012, a decrease of $173,000 or 10% from the prior period. Due to the decrease
in revenues, we implemented a plan to reduce non-essential services and compensation which resulted in a $173,000 decrease in cost
of revenues for six months ended June 30, 2013.
Depreciation of Rental Tools
Depreciation expense increased by $27,000
or 11%, to $273,000 for the three months ended June 30, 2013, compared to $246,000 for the three months ended June 30, 2012, which
increase was mainly due to an increase in the depreciable asset base in 2013 versus 2012.
Depreciation expense increased by $71,000
or 15%, to $541,000 for the six months ended June 30, 2013, compared to $470,000 for the six months ended June 30, 2012, which
increase was mainly due to an increase in the depreciable asset base in 2013 versus 2012.
Gross Profit
We had gross profit of $643,000 for the
three months ended June 30, 2013, compared to gross profit of $1,153,000 for the three months ended June 30, 2012, a decrease in
gross profit of $510,000 or 44% from the prior period. Our gross profit was 45% of revenue for the three months ended June 30,
2013, compared to 55% for the three months ended June 30, 2012.
We had gross profit of $1,614,000 for the
six months ended June 30, 2013, compared to gross profit of $2,542,000 for the six months ended June 30, 2012, a decrease in gross
profit of $928,000 or 37% from the prior period. Our gross profit was 50% of revenue for the six months ended June 30, 2013, compared
to 58% for the six months ended June 30, 2012.
Operating Expenses
General and Administrative
The following table sets forth summarized
operating expense information for the three months ended June 30, 2013 and 2012:
|
|
Three Months Ended June 30,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
Depreciation and amortization
|
|
$
|
70
|
|
|
$
|
60
|
|
|
$
|
10
|
|
|
|
17%
|
|
Compensation and benefits
|
|
|
211
|
|
|
|
133
|
|
|
|
78
|
|
|
|
59%
|
|
General and administrative - Professional services
|
|
|
90
|
|
|
|
87
|
|
|
|
3
|
|
|
|
3%
|
|
General and administrative expenses - Other
|
|
|
62
|
|
|
|
76
|
|
|
|
(14
|
)
|
|
|
18%
|
|
Total general operating expenses
|
|
$
|
433
|
|
|
$
|
356
|
|
|
$
|
77
|
|
|
|
22%
|
|
We had total general and administrative
expenses of $433,000 for the three months ended June 30, 2013, compared to total general and administrative expenses of $356,000
for the three months ended June 30, 2012, an increase in general and administrative expenses of $77,000 or 22% from the prior period.
The increase in general and administrative expenses was primarily due to stock option compensation expense of $115,000 (which is
included under compensation and benefits above) not applicable to the prior year.
The following table sets forth summarized
operating expense information for the six months ended June 30, 2013 and 2012:
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
Depreciation and amortization
|
|
$
|
136
|
|
|
$
|
118
|
|
|
$
|
18
|
|
|
|
15%
|
|
Compensation and benefits
|
|
|
480
|
|
|
|
269
|
|
|
|
211
|
|
|
|
78%
|
|
General and administrative - Professional services
|
|
|
246
|
|
|
|
260
|
|
|
|
(14
|
)
|
|
|
5%
|
|
General and administrative expenses - Other
|
|
|
134
|
|
|
|
152
|
|
|
|
(18
|
)
|
|
|
12%
|
|
Total general operating expenses
|
|
$
|
996
|
|
|
$
|
799
|
|
|
$
|
197
|
|
|
|
25%
|
|
We had total general and administrative
expenses of $996,000 for the six months ended June 30, 2013, compared to total general and administrative expenses of $799,000
for the six months ended June 30, 2012, an increase in general and administrative expenses of $197,000 or 25% from the prior period.
The increase in general and administrative expenses was primarily due to stock option compensation expense of $228,000 (which is
included under compensation and benefits above) and costs associated with being a reporting company not applicable to the prior
year and offset by a reduction in professional and administrative expenses.
Selling and Marketing
The following table sets forth summarized
selling and marketing expense information for the three months ended June 30, 2013 and 2012:
|
|
Three Months Ended June 30,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
Auto
|
|
$
|
81
|
|
|
$
|
79
|
|
|
$
|
2
|
|
|
|
3%
|
|
Commissions
|
|
|
148
|
|
|
|
210
|
|
|
|
(62
|
)
|
|
|
30%
|
|
Compensation and benefits
|
|
|
101
|
|
|
|
179
|
|
|
|
(78
|
)
|
|
|
44%
|
|
Other selling and marketing
|
|
|
47
|
|
|
|
47
|
|
|
|
–
|
|
|
|
0%
|
|
Total selling and marketing expenses
|
|
$
|
377
|
|
|
$
|
515
|
|
|
$
|
(138
|
)
|
|
|
27%
|
|
We had total selling and marketing expenses
of $377,000 for the
three months ended June 30, 2013
, compared to $515,000 for the
three
months ended June 30, 2012
, a decrease of $138,000 or 27% from the prior period, which decrease was primarily due to the
decrease in sales commissions and compensation.
The following table sets forth summarized
selling and marketing expense information for the six months ended June 30, 2013 and 2012:
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
Auto
|
|
$
|
161
|
|
|
$
|
155
|
|
|
$
|
6
|
|
|
|
4%
|
|
Commissions
|
|
|
338
|
|
|
|
442
|
|
|
|
(104
|
)
|
|
|
24%
|
|
Compensation and benefits
|
|
|
211
|
|
|
|
324
|
|
|
|
(113
|
)
|
|
|
35%
|
|
Other selling and marketing
|
|
|
141
|
|
|
|
113
|
|
|
|
28
|
|
|
|
25%
|
|
Total selling and marketing expenses
|
|
$
|
851
|
|
|
$
|
1,034
|
|
|
$
|
(183
|
)
|
|
|
18%
|
|
We had total selling and marketing expenses
of $851,000 for the six
months ended June 30, 2013
, compared to $1,034,000 for the six
months
ended June 30, 2012
, a decrease of $183,000 or 18% from the prior period, which decrease was mainly due to decreases
in sales commissions and compensation expenses.
Depreciation and Amortization
Depreciation and amortization expense increased
by $10,000 or 17%, to $70,000 for the
three months ended June 30, 2013
, compared to $60,000 for
the
three months ended June 30, 2012
. The increase was primarily due to the addition
of shop equipment and automobiles.
Total depreciation and amortization expense
increased by $18,000 or 15%, to $136,000 for the six
months ended June 30, 2013
, compared to
$118,000 for the six
months ended June 30, 2012
. The increase was primarily due to
the addition of shop equipment and automobiles.
Income (Loss) from Operations
We had a loss from operations of $167,000
for the
three months ended June 30, 2013
, compared to income from operations of $282,000 for
the
three months ended June 30, 2012
, a decrease of $449,000 or 159% from the prior period.
We had a loss from operations of $233,000
for the six
months ended June 30, 2013
, compared to income from operations of $709,000 for the
six
months ended June 30, 2012
, a decrease of $942,000 or 133% from the prior period.
Net Income (Loss)
We had a net loss of $173,000 for the
three
months ended June 30, 2013
, compared to net income of $277,000 for the
three months ended June
30, 2012
, a decrease in net income of $450,000 or 162% from the prior period. The decrease in net income
was attributable to a decrease in total revenue and an increase in certain operating expenses, principally $115,000 in stock option
expense, offset by a decrease in cost of goods sold, for the
three months ended June 30, 2013
,
compared to the
three months ended June 30, 2012
.
We had a net loss of $239,000 for the six
months ended June 30, 2013
, compared to net income of $700,000 for the six
months
ended June 30, 2012
, a decrease in net income of $939,000 or 134% from the prior period. The decrease in
net income was attributable to a decrease in total revenue and an increase in certain operating expenses, including $228,000 in
stock option expense, and an increase in expenses associated with becoming a reporting company, offset by a decrease in cost of
goods sold, for the six
months ended June 30, 2013
, compared to the six
months
ended June 30, 2012
.
Liquidity and Capital Resources
We had $2,464,000 of working capital as
of June 30, 2013. 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, 2013, we had total assets
of $8,336,000, which included total current assets of $3,228,000, consisting of $1,353,000 of cash, $1,802,000 of accounts receivable,
net, and $73,000 of other current assets; and long term assets including $3,488,000 of rental tools, net; $627,000 of property
and equipment, net; and $993,000 of intangible assets, net.
We had total liabilities of $1,143,000
as of June 30, 2013, which included total current liabilities of $764,000, consisting of accounts payable of $465,000; accrued
liabilities of $75,000; 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 $68,000, relating to the amount due on loans associated with equipment financing; and long term liabilities consisting of $168,000
of related party notes payable, relating to amounts owed to Jerry Swinford in connection with the IP Agreement, described in note
4 to the financials included herein, and $211,000 of notes payable, net of current portion relating to equipment financing.
We had net cash provided by operating
activities of $603,000 for the
six months ended June 30, 2013
, which consisted of non-cash
items including $677,000 of depreciation and amortization, $228,000 of stock-based compensation, $58,000 of increase in
accounts payable and $2,000 of increase in accrued liabilities; offset by $3,000 of loss on sale of equipment, $239,000 of
net loss, $110,000 of decrease in accounts receivable, and $16,000 of decrease in other current assets.
We had $399,000 of net cash used in investing
activities for the
six months ended June 30, 2013
, which included the purchase of $319,000 of
rental tools and $193,000 of property and equipment; offset by $113,000 in proceeds from the sale of lost tools. 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 $4,000 of net cash used in financing
activities for the
six months ended June 30, 2013
, which included $74,000 of proceeds from notes
payable 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.
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 rental tool products in our current geographic markets and further expanding into international
markets similar to what we accomplished in Canada during 2012. We anticipate entering markets in Mexico, the Middle East and Southeast
Asia in 2013 and 2014. 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 anticipate increased
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 coil tubing tools to aid
in and facilitate horizontal drilling. We expect the market for new applications of coiled tubing to continue to expand our operations
throughout fiscal 2013 and 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.