Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

☒    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

 

or

 

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File No. 333-184443

 

 

COIL TUBING TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 76-0625217
(State or other jurisdiction of incorporation or organization) (I.R.S Employer Identification No.)
   

22305 Gosling Road

Spring, Texas

 77389
(Address of principal executive offices) (Zip code)

 

Registrant's telephone number, including area code:(281) 651-0200
 
Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class   Name of each exchange on which registered

None

 

Securities registered pursuant to Section 12(g) of the Exchange Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes  ¨   No  x  
         
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act Yes  o   No  x  

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shortened period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

  Large accelerated filer ¨   Accelerated filer ¨
  Non-accelerated filer ¨   Smaller reporting company x

 

The aggregate market value of the registrant's common stock held by non-affiliates of the registrant on June 30, 2014 was approximately $2,400,884 (based upon the closing price for shares of common stock as reported by the OTCQB market on that date).

 

The number of shares outstanding of the registrant's $0.001 par value common stock on March 30, 2015: 15,632,425 shares 

 

 

 
 

 

Table of Contents

 

  Page
PART I
     
Item 1. Business 1
     
Item 1A. Risk Factors 8
     
Item 1B. Unresolved Staff Comments 19
     
Item 2. Properties 19
     
Item 3. Legal Proceedings 20
     
Item 4. Mine Safety Disclosures 20
     
PART II
     
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 21
     
Item 6. Selected Financial Data 22
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 28
     
Item 8. Financial Statements and Supplementary Data 29
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 30
     
Item 9A Controls and Procedures 30
     
Item 9B. Other Information 30
     
PART III
     
Item 10. Directors, Executive Officers and Corporate Governance 32
     
Item 11. Executive Compensation 34
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 39
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 40
     
Item 14. Principal Accounting Fees and Services 41
     
PART IV
     
Item 15. Exhibits and Financial Statement Schedules 42

 

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PART I

 

FORWARD-LOOKING STATEMENTS

 

Except for the historical information and discussions contained herein, statements contained in this Annual Report on Form 10-K, may constitute forward-looking statements. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed elsewhere in the Coil Tubing Technology, Inc. ("Company" or "CTT") filings with the U.S. Securities and Exchange Commission ("SEC"). The statements contained in this document that are not purely historical are forward-looking statements including without limitation statements regarding our expectations, beliefs, intentions or strategies regarding our business. This Annual Report on Form 10-K includes forward-looking statements about our business including, but not limited to, the level of our expenditures and savings for various expense items and our liquidity in future periods. We may identify these statements by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "project," "should," "would" and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law. Our actual results could differ materially from those anticipated in these forward-looking statements. References in this Form 10-K, unless another date is stated, are to December 31, 2014. As used herein, the “Company”, “CTT”, ”we”, “us”, “our” and words of similar meaning refer to Coil Tubing Technology, Inc. and its wholly-owned subsidiary, Coil Tubing Technology Holdings, Inc., which in turn has three wholly-owned subsidiaries, Total Downhole Solutions, Inc., Coil Tubing Technology, Inc. and Coil Tubing Technology Canada Inc. and Excel Inspection, LLC (a 51% owned limited liability company).

 

ITEM 1. BUSINESS

 

History

 

Please refer to the Form S-1 Registration Statement filing (Amendment No. 3), Registration Number 333-184443, filed on January 18, 2013 and the final prospectus filed pursuant to Rule 424(b)(3) on January 30, 2013, for a more complete history of the Company. As a result of the effectiveness of the Form S-1 filing, the Company became a fully-reporting public company with the Securities and Exchange Commission effective January 28, 2013.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of our initial public offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act,” and references herein to “emerging growth company” shall have the meaning associated with it in the JOBS Act.

 

Business Operations

 

We specialize in the design and production of proprietary tools for the coil tubing industry. We concentrate on three categories of coil tubing applications: tubing fishing, tubing work over and coil tubing drilling, which categories of applications are described in greater detail below. We currently outsource 95% of our tools and components to be manufactured by outside manufacturers and purchase the remaining 5% of our products off the shelf.

 

We focus on the development, marketing, sales and rental of advanced tools and related technical solutions for use with coil tubing and jointed pipe in the bottom hole assembly for the exploration and production of hydrocarbons (“E&P”). Although various companies in the E&P services industry have realized the importance of coiled tubing, we have focused entirely on the development of dedicated, patented, proprietary downhole tools and related marketing strategies.

 

Our core products/tools are Jars, Rotating Tools, Jet Nozzles, Jet Hammers, Jet Motors, Accelerators and Oscillators. These tools are principally used in the drilling of oil and gas wells and the workover of existing wells. Total sales grew $723,000 for 2014 compared to 2013.

 

Our principal executive offices are located at 22305 Gosling Road, Spring, Texas 77389, and our telephone number is (281) 651-0200. Our website address is www.coiltubingtechnology.com. Information on our website and accessible through such website is not incorporated by reference into this report.

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Coiled Tubing Operations

 

Coiled tubing refers to using a long, thin, continuous string of hollow pipe that is mounted on a truck to workover oil and gas wells. Crews lower this tubing into the well under the careful control of an operator and once in place this pipe allows the usage of specialized tools, and the pumping of fluids such as nitrogen into the well. The tool string at the bottom of the coil is often called the bottom hole assembly (“BHA”). The BHA can range from something as simple as a jetting nozzle, for jobs involving pumping chemicals or cement through the coil, to a larger string of logging tools, depending on the operations. Coiled tubing is used for a wide range of oil field services, including but not limited to drilling, logging, fracturing, cementing, fishing, completion and production.

 

Due to the natural characteristics of the hydrocarbon reservoir, a production reservoir needs maintenance to keep up production levels. Traditionally, workovers were performed using traditional rigs and jointed pipes. However, in the experience of our management, improvements in the material used to manufacture coiled tubing as well as the quality of the tools used in the bottom hole assembly have boosted demand for coiled tubing compared to traditional jointed drill pipes.

 

Compared to a coiled tubing unit, a traditional rig using jointed tubes is complex, immobile and requires a large surface to operate. Moreover, coiled tubing allows for workovers leaving the production tubes in the well as the coiled tubing can be fed through the production tubes instead of having to pull these tubes out replacing them with jointed pipes. The consequential savings in time and related cost has proven to be significant.

 

Furthermore, drilling with coiled tubing allows the operator to virtually steer the BHA in any desired direction to optimize production of the reservoir with relative ease at limited cost, creating for example multi-lateral wells. If need be, the operator can maintain a continuous under-balanced condition throughout the whole drilling operation, whereas a conventional rig and jointed pipe may require re-establishment of under-balanced conditions every 30 feet drilled. Expanding an existing well to increase production levels using coiled tubing re-entry drilling, thereby extending the life of the existing facilities has created an enormous potential for the oil companies to reduce the cost per barrel produced.

 

Circulation - The most popular use for coiled tubing is circulation. A hydrostatic head (a column of fluid in the well bore) may be inhibiting flow of formation fluids due to its weight (the well is said to have been killed). The safest solution to this problem is to attempt to circulate out the fluid using a gas, frequently nitrogen. By running in coiled tubing to the bottom of the hole and pumping in the gas, the kill fluid can be forced out to production.

 

Pumping - Pumping through coiled tubing can also be used for disbursing fluids to a specific location in the well such as for cementing perforations or performing chemical washes of downhole components such as sandscreens. In the former case, coiled tubing is particularly advantageous compared to simply pumping the cement from surface, as allowing it to flow through the entire downhole pipe could potentially damage important components.

 

Drilling - A relatively modern drilling technique involves using coiled tubing instead of conventional drill pipe. This has the advantage of requiring less effort to get in and out of the well (the coil can simply be run in and pulled out while drill string must be assembled and dismantled joint by joint). Instead of rotating the drill bit by using a rotary table or top drive at the surface, it is turned by a downhole motor, powered by the motion of drilling fluid pumped from surface.

 

Logging and perforating - Well logging usually refers to downhole measurements made via instrumentation that is lowered into the well at the end of a wireline cable (the simplest way to lower equipment in and out of the well, usually just a long strand of very thin wire). These tasks are by default the realm of wireline because coiled tubing is rigid; it can be pushed into the well from the surface. This is an advantage over wireline, which is gravity dependent and depends on the weight of the tool string to be lowered into the well. For highly deviated and horizontal wells, gravity may be insufficient.

 

Fishing - Fishing refers to the application of tools, equipment and techniques for the removal of junk, debris or fish (anything left in a wellbore) from a wellbore. By not having to connect individual pieces of pipe saves time and costs for the well owner, and coiled tubing crews greatly increase the speed of putting pipe into the well, whether dealing with circulation, pumping, drilling, logging and perforating and/or fishing operations.

 

Product Sales and Rentals

 

We believe that we have identified a domestic and international market for a new, innovative and independent, full line, tool company and have pursued that business strategy. We offer a turnkey tool package containing a full line of standard tools and proprietary downhole tools or a single item tool rental or sale. Since the United States (“U.S.”) domestic market is currently by far the largest market for coiled tubing, we are focusing primarily on the domestic market, as well as an expanded presence in Mexico and Canada. We are also working to expand our distribution markets to include Latin America, Asia and Middle Eastern markets.

 

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We offer (1) product sales of our proprietary downhole tools, and (2) the ability for our customers to rent only a single item from our inventory. We cause to be manufactured (i.e., we do not purchase such products off the shelf, but instead have the following tools manufactured by third parties based on our engineering specifications and plans) several products used in drilling applications, including the following products described in greater detail below:

 

Coiled Tubing Drilling - Although coiled tubing drilling has always provided an alternative to traditional vertical drilling, more sophisticated applications like horizontal, underbalanced, and re-entry drilling have elevated the success of coiled tubing in drilling applications in recent years. Our coiled tubing drilling products include:

 

·   The “Jet Motor”

The Jet Motor is a tool that produces rotation and horsepower by pumping fluid or gas through the components of the tool. The power generated by the tool is then used to drill subterranean objects in an oil well or to deepen an existing well.

 

·   The “Pulsator”

The Pulsator is a tool much like an automobile shock absorber. The tool absorbs spike loads induced by the drilling application, which are often created by a Jet Motor or other similar tool.

 

·   The CTT “H/H”

The CTT H/H jar enables energy to be stored like a spring placed in tension. When released the energy accelerates and is released to an internal hammer and anvil creating impact force to strike an object in a well.

 

·   The CTT “Amplidyne”

The CTT Amplidyne is used to store the energy released by the CTT H/H through a fluid spring. Upon release of the energy, the Amplidyne allows acceleration of energy and magnifies the impact of the CTT H/H.

 

·   The CTT “Oscillator”

 

 

 The CTT Oscillator distributes fluid and pressure through coil tubing, up to a volume required by a customer’s hydraulic specifications inducing vibration of the pipe. Recently, we completed testing of our newest product, Ampli-Max, which improves the flow and significantly lengthens the horizontal capabilities of the drilling operations.
   

·   The CTT “Ampli-Max”

The Ampli-Max is set up as a dual stage tool. The top end of the tool incorporates a dual acting valve mechanism that relieves a spring loaded triggering mechanism accelerating a piston to an internal stop, creating a high energy internal impact in a timed sequence with dual acting (up and down) impulses controlled by pressure and fluid (or gas) volumes. The energy generated in the top tool section is thus converted to lateral hertz frequency.

 

The bottom end of the Ampli-Max consists of an internal rotational motor with an eccentric counter weighted component that generates high revolutions per minute (rpm) and radial frequency based on pressure and gallons per minute (gpm) The CTT Ampli-Max is a unique tool that generates both lateral and radial hertz frequency that assists in the efficiency of extended reach drilling.

 

All of the products listed above are currently available for rent or sale by the Company. Additionally, the Company sometimes modifies its product at the request of a client and then sells such modified product to the client instead of renting it out.

 

Thru Tubing Well Maintenance - One of the biggest advantages of using coiled tubing technology is the ability to perform live-well workovers instead of killing the well first with fluids and deploying a conventional workover rig to the well. Our tools allow the well tubing to be cleared instead of replaced. We believe that the time and cost savings and ultimate effect on the cost per barrel produced using our technology is considerable. Our thru tubing well maintenance products include:

 

·    The “Jet Hammer”  

The Jet Hammer is a tool that creates rotational horsepower and axial impact energy to remove objects from a wellbore. The tool works under the same principal as a jackhammer cycling to 2000 impacts per minute. The tool is used for the removal of scale, sand cement, barium and paraffin from production tubing and the tool is also effective in shattering glass and ceramic discs placed in the well. The tool can be powered by water, light drilling fluids, air, nitrogen or other acid media. The tool is easy to operate and can withstand temperatures of up to 500 degrees Fahrenheit. Bits for the Jet Hammer are designed to maximize the penetration rate of the tool by taking advantage of the tool’s unique combination of rotational and percussive impact forces.

 

·    The “Jet Motor”

The Jet Motor is a very compact (19 inch overall length) downhole motor. The tool has a unique jetting system to maximize torque. It has no rubber thereby allowing the use of acids, nitrogen or fluid at high operating temperatures. The tool is ideal for use in wells up to 500 degrees Fahrenheit.

 

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·    The “Jet Nozzle” The Jet Nozzle incorporates a unique nozzle system developed for removal of downhole media deposits that impede efficient well productivity.
·    The 5 1/8 ”Rotorjet”

The 5 1/8” RotorJet is a tool developed with Hammelmann Corporation and is used to clean production tubing of sediments deposited during the production of oil and gas.

 

All of the products listed above are currently available for rent or sale by the Company.

 

Coiled Tubing Fishing - Fishing in the oilfield is generally known as the process of removing debris from a well. The process is used when a well production is affected and the debris must be removed. Our coiled tubing fishing products include:

 

·    The “Rotating Tool”

The Rotating Tool has been designed and developed specifically for use in our coiled tubing operations. Its purpose is to mechanically provide rotation to assist in connecting to a fish. The Rotating Tool can be also be used with CTT H/Hs in combination with an Amplidyne to remove a fish that remains stuck.

 

·    The CTT “H/H ”

The CTT H/H as described in the drilling application above can also be used in the fishing operations.

 

·    The CTT “Amplidyne” The CTT Amplidyne, also discussed above, can also be used for fishing operations.

 

All of the products listed above are currently available for rent or sale by the Company.

 

Coiled Tubing Industry

 

The coiled tubing industry is made up of three operational markets:

 

— Oil Companies;
—  Coiled Tubing Operators; and
—  Service Companies.

 

Oil companies typically outsource most of their coil tubing work to the E&P service industry in general and the coiled tubing industry in particular. The oil companies’ engineers rely on coiled tubing operators and downhole service companies to provide operational recommendations and applications to accomplish a specific task on their well. They are constantly seeking new tools for their operations, which often allow proprietary tool companies, such as us, an advantage on their wells. The trend to outsource services is expected to continue, as the oil companies are not interested in owning and paying for the upkeep of high cost coil tubing equipment and tools. As a result, service companies are responsible for the operation of the majority of drilling and fishing procedures using coil tubing technology. The service companies use mostly proprietary tools and large service companies, with whom we compete, including National Oilwell Varco, Thru Tubing Solutions, Baker-Hughes, Weatherford, and Smith International, all of whom are increasing their focus on drilling. These companies are attempting to create a one-stop-shop concept with turnkey solutions for oil companies, especially abroad, as the U.S. domestic market is regarded as highly competitive in this respect.

 

Market for Coiled Tubing

 

We believe that the U.S. domestic market, Mexico and Canada, which we are actively trying to expand our presence in are by far the largest and the most competitive markets for coil tubing technology, due to the older age of wells and the difficulty in keeping them profitable. Moreover, the U.S. is considered to be the breeding ground for new technology with a consequential large build-up of coiled tubing units and related companies keeping the rates competitive and therefore coiled tubing workovers more viable. We continue to focus our efforts primarily in the U.S., Mexico and Canada; however we are also working to expand our distribution markets to include South America, Asia and the Middle Eastern markets. During 2014 and continuing into 2015 we believe that our coil tubing rentals will follow the decline in oil and gas drilling activities that have been negatively impacted by lower oil and gas pricing. We are currently working with our larger service customers to provide new workover services during this downturn and sales of our products into their international operations.

 

Business Strategy

 

We have based our business strategy on the sales and rental of our product lines to oil companies; coiled tubing operators and well servicing companies.

 

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There are four components to our strategic vision:

 

·Increase year over year sales of existing proprietary products;
·Continue to accelerate development of new proprietary products for the oil and gas industry;
·Support the growth of our distribution stockpoints worldwide; and
·Expand into other areas of drilling, such as conventional drilling tools.

 

In December 2014 we formed Excel Inspection, LLC, a tubular pipe and coil tubing inspection company, to service the oil and gas industry in the United States. The company provides inspection and certification services for all tubular pipes using black light, ultra sound and mag particle technology. We expect to market these services to our customers initially and then to other tubular companies. This service commenced operations in February 2015.

 

We believe increasing our proprietary products and inspection service lines are key to expanding sales. Therefore, we will focus on initiatives to drive sales growth for our existing products and inspection services, funding permitting, emphasizing:

 

  —  Enhanced customer focus through a concerted sales and marketing effort in the future;
  —  Increased investment in product lines; and
  —  Development of new product and service lines.

 

Material Agreements

 

Distribution Agreement - The Company has a Distribution Agreement in place with Supreme Oilfield Services (“Supreme”) pursuant to which Supreme has agreed to distribute the Company’s products in the area south and west of Corpus Christi, Texas. The agreement was effective May 5, 2010, and renewable for successive one year terms thereafter until terminated by any party for any reason with ninety (90) days prior written notice. The Distribution Agreement, similar to other distribution agreements the Company has entered into in the past and which the Company may enter into in the future provides for the Company to train the employees of the distributor, provide product literature, expense reimbursements, and engineering and field support and that the parties will work together to jointly promote the products subject to such Distribution Agreement. Total rentals for products under this agreement were approximately $1,320,000 (19% of total revenue) and $2,056,000 (33% of total revenue) for the years ended December 31, 2014 and 2013, respectively.

 

Billing Process

 

We bill rental fees based on the use of rented tools by our customers. If a tool is on a jobsite but not being used for a downhole application we receive a standby fee for and if any tool is used downhole on any particular day we receive a much larger day rate for the use of these tools. We also bill our customers for the full cost of any tools which are lost and/or damaged in use and recognize the full cost of the tool as revenue after subtracting the net carrying cost of such tool. Additionally, we sell tools to our customers for their use and disposition.

 

Corporate Organization

 

We currently have one wholly-owned subsidiary, Coil Tubing Technology Holdings, Inc., a Nevada corporation, which in turn has three wholly-owned subsidiaries, Total Downhole Solutions, Inc. (“TDS”) and Coil Tubing Technology, Inc. (“CTT Texas”) both of which are Texas corporations, and Coil Tubing Technology Canada Inc., an Alberta, Canada corporation (“CTT Canada”). The majority of our tool rental operations are run through CTT Texas. TDS owns certain manufacturing equipment formerly used to produce tools used in the workover segment of the Company’s rental business, which generally require smaller tools than other coil tubing operations. TDS also stocks coil tubing tool parts which it sells directly to other service companies, making TDS a supply and sales arm for non-proprietary tools and equipment of the Company. CTT Canada opened a sales and service center in Alberta, Canada, and became operational in January 2012. We formed Excel Inspection, LLC (a 51% owned limited liability company organized in Texas) in December 2014 and commenced operations in February 2015. During 2014 we experienced a marginal increase of $71,000 in coil tubing activity in Canada; however, we still believe this is one of the largest markets for coil tubing products and technology and, accordingly we will continue to invest in facilities, equipment and tools in Canada.

 

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Major Suppliers

 

We obtain materials which we use to produce our coil tubing technology from the following suppliers, however we do not have any agreements in place with such suppliers:

 

  —  Industrial Bearing Services (IBS);
  —  H.E. Halford Welding;
  —  Inspection Oilfield Services (IOS); and
  —  Triple J Coil Tubing Products, LLC.

 

Heuer Manufacturing, LLC.is our principal contract manufacturer of our patented products/tools. This manufacturer is located in Spring, Texas.

 

Major Customers

 

The Company had total revenues of approximately $6,866,000 and $6,143,000 during the years ended December 31, 2014 and 2013, respectively. The Company had two customers each representing approximately 9% of gross sales and two customers representing approximately 13% and 19% of total accounts receivable for the year ended December 31, 2014. The Company had two customers representing approximately 17% and 18% of gross sales and 15% and 37% of total accounts receivable for the year ended December 31, 2013.

 

The majority of our revenues have historically been due to a small number of repeat customers. However, our repeat customers are using our products in multiple geographic locations such as the Eagle Ford shale in South Texas, the Haynesville shale in Northwest Louisiana, the Marcellus shale in Pennsylvania, the Bakken shale in Alberta, Canada and Mexico. Each location is unique in its customer relations and purchasing and rental process. Generally, we maintain an inventory of our products/tools at the customer location. We do not currently have any material agreements in place with any of our customers (except as set forth above under “Material Agreements”, above). We bill our customers based on purchase orders (“POs”) which contain standard provisions, and allow our customers thirty (30) days from the PO date to pay for their tool rentals.

 

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Patents, Trademarks and Licenses

 

Below is a summary of the Company’s trademark and patents, pending patents and related rights as of December 31, 2014, which Patents were acquired from Jerry Swinford, the Company’s Executive Vice President and Chairman pursuant to (a) the November 2010 IP Purchase Agreement and January 2012 IP Assignment Agreement (both described in greater detail below under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Liquidity and Capital Resources”), provided that Mr. Swinford has a first priority security interest over the Patents until such time as the $1,175,000 promissory notes he was provided in connection with the IP Purchase Agreement are satisfied in full ($91,000 remains outstanding at December 31, 2014); and (b) the March 25 2015, effective December 1, 2014, 2015 IP Purchase Agreement and March 2015 IP Assignment Agreement (both described in greater detail below under “Item 13, Certain Relationships and Related Transactions”), pursuant to which the Company purchased additional patents from Mr. Swinford for an aggregate of $3,750,000 which was evidenced by a promissory note due in three years and all assets acquired are pledged as collateral on this note with a guaranty by the Company and its subsidiaries. The following is a summary of the Company’s intellectual property:

 

COIL TUBING TECHNOLOGY, INC.  
COUNTRY PATENT OR APPLICATION NO. REGISTRATION  DATE TITLE  
 
US 5,584,342 12/17/1996 Subterranean Rotation-Inducing Device and Method  
US 7,686,102 3/30/2010 Jet Motor for Providing Rotation in a Downhole Tool  
US 8,151,908 4/10/2012 Jet Motor for Providing Rotation in a Downhole Tool  
Canada 2,646,326 2/5/2013 Jet Motor and Method for Providing Rotation in a Downhole Tool  
Canada 2,797,565 3/18/2014 Jet Motor and Method for Providing Rotation in a Downhole Tool  
Singapore 146369 5/14/2010 Jet Motor and Method for Providing Rotation in a Downhole Tool  
US 7,946,348 5/24/2011 Rotation Tool  
Canada 2,734,285 6/5/2013 Rotation Tool  
Indonesia W00201001371   Rotation Tool  
US 12/480,680   Jet Hammer  
US 8,151,910 4/10/2012 Drilling Jar  
Canada 2,723,420 1/28/2014 Drilling Jar  
Indonesia ID P 0029982 1/16/2012 Drilling Jar  
US 13/046,662   Method and Apparatus for Washing Downhole Tubulars and Equipment  
Norway 20120910   Method and Apparatus for Washing Downhole Tubulars and Equipment  
UK/Scotland 1216072.7   Method and Apparatus for Washing Downhole Tubulars and Equipment  
US 13/434,812   Downhole Oscillator  
Canada 2,837,938   Downhole Oscillator  
US 14/608,127   Downhole Tool (Ampli-Max)  
PCT PCT/US15/13372   Downhole Tool (Ampli-Max)  

 

*All annual patent permits have been paid and accordingly all patents are in force as of December 31, 2014.

 

The issued patents and the PCT, provisional and non-provisional patent applications, which are described above (collectively the “Patents”) make up the core of our business and we believe provide us with a competitive advantage over other coil tubing companies. The vast majority of our revenues are derived from the Patents, through the manufacture and rental of our proprietary tools based on the Patents. There are risks associated with our loss of the use of the Patents, which are described in greater detail above under “If We Are Unable To Adequately Protect Our Intellectual Property Rights Our Business Is Likely To Be Adversely Affected ” and “Jerry Swinford, Our Executive Vice President And Chairman Has A First Priority Security Interest Over Our Patents”.

 

Research and Development

 

Over the past two years we have incurred research and development costs to advance the technology of our coil tubing technologies and workover product lines. We will continue to incur these research and development costs in 2015.

 

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Seasonality and Dependence on Oil and Gas Pricing

 

Our revenues are generated by drilling and well services activities, and therefore, cold weather and holidays and employee vacations during our first and fourth quarters exert downward pressure on revenues for those quarters, which is usually partially offset by the year-end efforts on the part of many customers to spend any remaining funds budgeted for services and capital expenditures during the year. During 2014 and continuing into 2015 the pricing for oil and gas has significantly trended downward in the United States and Canada. This significant decline in the price of oil and gas has had the effect of our customers’ annual drilling and workover budgets being reduced and/or eliminated until a higher stabilization of prices occur. We have developed new products and services in an effort to sustain our operations for 2015 as well as reducing our direct and indirect operating expenses. In order maintain our current revenue levels, we plan to expand our international product sales and develop new technology and services to meet the on-going industry trends.

 

Employees

 

As of March 30, 2015, we had 26 full-time employees and no part-time employees. We also utilize independent contractors and consultants to assist us with key functions. Our agreements with these independent contractors and consultants are usually short-term. We believe that our relations with our employees, independent contractors and consultants are good. None of our employees are represented by a union or covered by a collective bargaining agreement.

 

Available Information

 

We file periodic and other reports with the United States Securities and Exchange Commission, or SEC. Additionally, we may provide shareholders proxy and information statements and other information in the future. Copies of the reports and other information may be examined without charge at the Public Reference Room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, or on the Internet at http://www.sec.gov.

 

Information about Coil Tubing Technology, Inc. is available on our website (www.coiltubingtechnology.com). Information on or accessible through our website is not incorporated by reference into this report.

 

Government Regulations

 

Our assets and operations are subject to regulation by federal, state and local authorities, including regulation by the Federal Energy Regulatory Commission (“FERC”) and regulation by various authorities under federal, state and local environmental laws. In addition, because we operate in multiple states and Canada, we are subject to various taxing authorities. Regulation affects almost every aspect of our business. Changes in such regulations may affect our capacity to conduct our business effectively and/or to operate profitably.

 

JOBS Act

 

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. Specifically, Section 102(b)(1) of the JOBS Act exempts “emerging growth companies” from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act, registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standard. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of the transition period.

 

ITEM 1A. RISK FACTORS.

 

Set forth below and elsewhere in this Report and in other documents that we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report. You should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this Report could have a material adverse effect on our business, financial condition and results of operations and that upon the occurrence of any of these events, the trading price of our common stock could decline. The below risk factors include a discussion of all material risks which we believe are applicable to the Company, its operations and its securities.

 

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We May Require Additional Financing To Implement Our Business Plan And Continue Developing And Marketing Our Products. The revenues we have generated since our incorporation have not been sufficient to support our operations, which have principally been funded through sales of common stock to date. We currently believe that we will be able to continue our business operations for approximately the next twelve months with our current cash on hand and from our expected revenues. Historically we have received funds from our largest shareholder and former director, Herbert C. Pohlmann, through private placements of our common stock, which we have used to fund our operations, provided that we do not anticipate Mr. Pohlmann providing us any further funding moving forward. Because of the current negative drilling trends in oil and gas, we do not anticipate any significant expansion of our operations over the next twelve months. Additional available capital may not be available on favorable terms, if at all. We may choose to raise additional funds in the future through sales of debt and/or equity securities to support our ongoing operations and for expansion.

 

Even if we are successful in raising capital in the future, we will likely need to raise additional capital to continue and/or expand our operations and repay our outstanding liabilities. If we do not raise the additional capital, it is likely that we may need to scale back or curtail implementing our business plan.

 

We May Have Difficulty Obtaining Future Funding Sources, If Needed, And We May Have To Accept Terms That Would Adversely Affect Shareholders. We will need to raise funds from additional financing. We have no commitments for any financing and any financing commitments may result in dilution to our existing stockholders. We may have difficulty obtaining additional funding, and we may have to accept terms that would adversely affect our stockholders. For example, the terms of any future financings may impose restrictions on our right to declare dividends or on the manner in which we conduct our business. Additionally, we may raise funding by issuing convertible notes, which if converted into shares of our common stock would dilute our then shareholders’ interests. Lending institutions or private investors may impose restrictions on a future decision by us to make capital expenditures, acquisitions or significant asset sales. If we are unable to raise additional funds, we may be forced to curtail or even abandon our business plan.

 

Our Ability To Grow And Compete In The Future Will Be Adversely Affected If Adequate Capital Is Not Available. The ability of our business to grow and compete depends on the availability of adequate capital, which in turn depends in large part on our cash flow from operations and the availability of equity and debt financing. Our cash flow from operations may not be sufficient or we may not be able to obtain equity or debt financing on acceptable terms or at all to implement our growth strategy. As a result, adequate capital may not be available to finance our current growth plans, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

 

Shareholders Who Hold Unregistered Shares Of Our Common Stock Will Be Subject To Resale Restrictions Pursuant To Rule 144, If and When Available, Due To The Fact That We Are Deemed To Be A Former “Shell Company”, and Because the Company Is Not Subject to Section 13 or 15(d) Of The Securities Exchange Act of 1934. Pursuant to Rule 144 of the Securities Act of 1933, as amended (“Rule 144”), a “shell company” is defined as a company that has no or nominal operations; and, either no or nominal assets; assets consisting solely of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets. While we do not believe that we are currently a “shell company”, we were previously a “shell company” and as such are deemed to be a former “shell company” pursuant to Rule 144, and as such, sales of our securities pursuant to Rule 144 may not be able to be made until we are subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and have filed all of our required periodic reports for at least the previous one year period prior to any sale pursuant to Rule 144; and a period of at least twelve months has elapsed from the date “Form 10 information” has been filed with the Commission reflecting the Company’s status as a non-“shell company”. Although to date we have complied with the requirement of Rule 144 as related to “shell companies”, our status as a former “shell company” could prevent us from raising additional funds, engaging consultants, and using our securities to pay for any acquisitions in the future (although none are currently planned). We are not currently subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and until such time as we are subject to such rules, investors will not be able to rely on Rule 144.

 

We Lack A Significant Operating History Focusing On Our Current Business Strategy Which You Can Use To Evaluate Us, Making Share Ownership In Our Company Risky. Our Company lacks a long standing operating history focusing on our current business strategy which investors can use to evaluate our Company’s previous earnings. Therefore, ownership in our Company is risky because we have no significant business history and it is hard to predict what the outcome of our business operations will be in the future.

 

We Have Established Preferred Stock Which Can Be Designated By The Company's Board Of Directors Without Shareholder Approval And The Board Established Series A Preferred Stock, Which Gives The Holders Majority Voting Power Over The Company. The Company has 5,000,000 shares of preferred stock authorized. The shares of preferred stock of the Company may be issued from time to time in one or more series, each of which shall have a distinctive designation or title as shall be determined by the Board of Directors of the Company ("Board of Directors") prior to the issuance of any shares thereof. The preferred stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as adopted by the Board of Directors. In May 2007, we designated 1,000,000 shares of Series A Preferred Stock, $0.001 par value per share (the "Series A Preferred Stock"). The Series A Preferred Stock have no dividend rights, no liquidation preference, no redemption rights and no conversion rights. Shortly after being designated, we granted all 1,000,000 shares of such Series A Preferred Stock to our Executive Vice President and Chairman, Jerry Swinford, who held such shares until approximately November 2010, when such shares were cancelled by Mr. Swinford. The Series A Preferred Stock have the right, voting in aggregate, to vote on all shareholder matters equal to fifty-one percent (51%) of the total vote (the “Super Majority Voting Rights”). In June 2007, we designated 1,000,000 shares of Series B Preferred Stock and subsequently issued such Series B Preferred Stock to Grifco International, Inc. (“Grifco”). The Series B Preferred Stock had no voting rights, no dividend rights, and no conversion rights (provided that such shares were previously convertible into 66,667 shares of our common stock (0.0667 of one share for each share of Series B Preferred Stock outstanding), prior to November 30, 2012, only if Grifco exercised its option to acquire the Series A Preferred Stock of the Company for aggregate consideration of $100, which option and which conversion rights have since expired). We believe that Grifco is no longer an operating entity. In August 2014, we terminated the designation of our Series B Convertible Preferred Stock.

 

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Because the Board of Directors is able to designate the powers and preferences of the preferred stock without the vote of a majority of the Company's shareholders, shareholders of the Company will have no control over what designations and preferences the Company's preferred stock will have. The issuance of shares of preferred stock or the rights associated therewith, could cause substantial dilution to our existing shareholders. Additionally, the dilutive effect of any preferred stock which we may issue may be exacerbated given the fact that such preferred stock may have voting rights and/or other rights or preferences which could provide the preferred shareholders with substantial voting control over us and/or give those holders the power to prevent or cause a change in control, even if that change in control might benefit our shareholders. As a result, the issuance of shares of preferred stock may cause the value of our securities to decrease.

 

Herbert C. Pohlmann, Our Majority Shareholder and Former Director, Can Vote A Majority Of Our Common Stock And Can Exercise Control Over Corporate Decisions. Herbert C. Pohlmann, our majority shareholder and former director beneficially owns 14,340,648 shares of our voting common stock as of the date of this filing, representing 81.7% of our outstanding voting common stock giving him the right to exercise control in determining the outcome of all corporate transactions or other matters, including the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Pohlmann may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to other shareholders.

 

Jerry Swinford, Our Executive Vice President, And Director Is Party To A Voting Agreement With Our Majority Shareholder. In January 2011, the Company’s majority shareholder and former director, Herbert C. Pohlmann, and the Company’s Executive Vice President, Chief Executive Officer and director, Jerry Swinford, entered into a Voting Agreement, pursuant to which Mr. Pohlmann agreed to vote the shares of the Company which he owns as directed by Mr. Swinford from time to time, to appoint at least 40% of the Company’s Board of Directors, rounded up to the nearest whole number of directors. As such, Mr. Swinford has the right to direct Mr. Pohlmann to appoint two (2) out of every five (5) directors of the Company, as determined by Mr. Swinford in his sole discretion, pursuant to the Voting Agreement, which remains in effect until December 31, 2015. Accordingly, Mr. Swinford will exercise significant control in determining the appointment of directors and subsequently, the outcome of corporate transactions or other matters concerning the Company, including the appointment of officers. The interests of Mr. Swinford may differ from the interests of the Company and the Company’s other stockholders. The voting rights provided to Mr. Swinford pursuant to the Voting Agreement may be viewed negatively by investors and the marketplace and may cause the value of our shares to decline in value and/or be worth less than similarly situated companies which do not have similar voting arrangements in place.

 

We Rely On Our Executive Vice President And Chairman, Jerry Swinford, And If He Were To Leave Our Company Our Business Plan Could Be Adversely Effected. We rely on Jerry Swinford, our Executive Vice President and Chairman, for the success of our Company. Mr. Swinford has an employment agreement with us, currently effective until November 2015, which employment agreement is described in greater detail below under “Item 11. Executive Compensation”, “Executive Employment Agreements”. Mr. Swinford’s experience and input creates the foundation for our business and he is responsible for the direction and control over the Company’s development activities. Moving forward, should he be lost for any reason, the Company will incur costs associated with recruiting a replacement and any potential delays in operations which this may cause. If we are unable to replace Mr. Swinford with another individual suitably trained in coil tubing technology we may be forced to scale back or curtail our business plan.

 

Our Officers Receive Discretionary Bonuses From Time To Time In the Sole Discretion of The Board of Directors, And Have The Ability To Approve Their Own Bonuses. The Employment Agreements of our officers, Jerry Swinford and his son, Jason Swinford, provide for them to receive discretionary bonuses from time to time in the sole discretion of the Board of Directors. Jerry Swinford received discretionary bonuses of $84,795 for 2014 and $71,255 for 2013 fiscal years, respectively, and Jason Swinford received discretionary bonuses of $84,795 for 2014 and $71,255 for 2013 fiscal years, respectively. The 2013 and 2014 bonuses were granted based on the gross profit generated during the 2013 and 2014 calendar years. As Jerry and Jason Swinford represent all of the members of the Board of Directors, they have the power, in their sole discretion, to approve discretionary bonuses to themselves from time to time and to further determine the amount of such discretionary bonuses. The approval and payment of discretionary bonuses to Jerry and Jason Swinford at the discretion of the Board of Directors (of which Jerry and Jason Swinford are the only members) may ultimately not be in the best interests of the Company or its shareholders. Furthermore, the perception from the investing community that such discretionary bonuses are not fair to the shareholders or the Company, may be perceived negatively. The payment of discretionary bonuses may create actual or perceived conflicts of interest between such officers, the Company and the Company’s shareholders. Our results of operations may be adversely affected by discretionary bonuses declared and paid to Jerry and Jason Swinford and the value of our common stock may be adversely affected by such discretionary bonuses and/or negative perceptions from the investing community regarding such bonuses. See also the risk factor below entitled “We Face Corporate Governance Risks And Negative Perceptions Of Investors Associated With The Fact That We Currently Have Only Two Directors, None of Whom Are Independent” and the description of the Employment Agreements below under “Executive Compensation”, “Executive Employment Agreements”.

 

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Our Chief Executive Officer and Executive Vice President Have The Right To Receive Substantial Bonuses From The Company Pursuant To Their Employment Agreements. The Employment Agreements of our Chief Executive Officer, Jason Swinford, and his father, Jerry Swinford, our Executive Vice President, provide them the right to receive discretionary bonuses (as described in the risk factor above), bonuses based on our yearly EBITDA (for each year other than fiscal 2013 and 2014), bonuses based on our gross profit (for fiscal 2013 and 2014) and in Jason Swinford’s case, a bonus based on the occurrence of certain fundamental transactions which effect the Company, including changes in control.

 

Each of the executives is due a bonus at the end of each calendar year during the term of the agreements (other than 2013 and 2014) in the event the Company has positive earnings before interest, taxes, depreciation and amortization (minus extraordinary items including stock buybacks, acquisitions and other extraordinary items as determined at the reasonable discretion of the Board of Directors of the Company, and legal fees associated with such items) (“EBITDA”) for the prior calendar year ended December 31 (the “Prior Year”). The bonus is based on a percentage of the officer’s annual base salary for the Prior Year (the “Prior Year’s Salary”) pursuant to a set schedule from between 100% of the Prior Year’s Salary if EBITDA exceeds $7 million to no bonus if EBITDA is less than $2 million.

 

The officers were also provided the right to earn a profit sharing bonus equal to 2.5% of the Company’s Gross Profit (the “Profit Bonus”) monthly in arrears for each month from January 2013 through December 2014 (each a “Profit Sharing Month”), which Profit Bonus is paid to the officers by the Company based on the applicable Profit Sharing Month’s Gross Profit. “Gross Profit” is defined as the Company’s gross profit (in the event the Company has a gross loss for any period, there shall be no Gross Profit for the applicable period) for each applicable period, calculated by taking the Company’s revenue for the applicable period and subtracting cost of revenues.

 

In addition to the bonuses described above, Jason Swinford’s Employment Agreement provides for him to receive a bonus (the “Transaction Bonus”) in the event that a (a) Change of Control (as defined in the Employment Agreement) of the Company, Holdings, or CTT Texas; or (b) the sale by the Company of substantially all of the assets of the Company (or controlling interests in the Company’s subsidiaries), each in one or more related transactions (each a “Bonus Transaction”); occurs while Mr. Swinford is employed under the terms of the Employment Agreement or within six (6) months of the termination of such agreement by the Company for any reason other than cause, or by Mr. Swinford for good reason. The Amount of the Transaction Bonus varies based on a set schedule and provides for Mr. Swinford to receive 2% of the total consideration received by the Company in connection with the Bonus Transaction, if the total consideration exceeds $20 million, but is less than $25,000,000.01; 3% of the total consideration received by the Company in connection with the Bonus Transaction, if the total consideration exceeds $25,000,000.01, but less than $35,000,000.01, and 3.5% of the total consideration received by the Company in connection with the Bonus Transaction, if the total consideration received is greater than $35,000,000.01.

 

The Employment Agreements and the bonuses are described in greater detail below under “Executive Compensation”, “Executive Employment Agreements”. Due to the structure of the bonuses, the officers have an incentive to increase our EBITDA and Gross Profit in the periods covered by the bonuses and Jason Swinford has an incentive to facilitate a Bonus Transaction. Such bonuses may cause actual or perceived conflicts of interest between such officers, the Company and the Company’s shareholders. The payment of the bonuses will likely have a material adverse effect on our results of operations, cash flow and funds available for business operations. The payment of the bonuses may force us to curtail or abandon planned expansion activities. The requirement for the Company to pay the bonuses could prevent a change of control of the Company. Consequently, the bonuses could cause the value of our common stock to decline in value and/or be valued at less than a similarly sized company which does not have a similar bonus structure.

 

We Will Owe Substantial Consideration To Our Chief Executive Officer and Executive Vice President In The Event They Are Able to Terminate Their Employment Agreements With Us For “Good Reason”, Including Their Death Or Disability. We entered into five year Executive Employment Agreements with Jerry Swinford to serve as our Chief Executive Officer and Jason Swinford to serve as our Chief Operating Officer in November 2010. In December 2011, the agreements were amended, Jerry Swinford resigned as Chief Executive Officer of the Company (provided that he still serves as the Treasurer, and Secretary of the Company) and was appointed as Executive Vice President of the Company and Jason Swinford was appointed as the Chief Executive Officer of the Company. The agreements were subsequently amended several times between August 2012 and July 2013 and such amendments are reflected in the discussion below. Both agreements are renewable for additional one-year terms as provided in the agreements. Pursuant to Jerry Swinford’s amended employment agreement, he is currently due $120,000 per year for services to the Company. Pursuant to Jason Swinford’s amended employment agreement, he is currently due $200,000 per year for services to the Company. Additionally, each is due Options and Bonuses (as described below under “Executive Compensation”, “Executive Employment Agreements”) pursuant to the agreements. If either individual’s employment is terminated by the Company for “cause” as defined in their agreements, the Company is required to pay such individual the compensation earned by him through the date of termination, including any Bonus which is due (which is calculated pro rata through the end of the last full calendar quarter as applicable), within 10 days of such termination date. In the event the Company terminates either individual’s employment for no reason or such individual terminates the agreement for “good reason” as provided for in the agreements, including his death, the Company materially diminishing his responsibilities, his disablement, the Company breaching any term of the employment agreement, or a constructive termination (including such individual being demoted, having his salary decreased or being forced to relocate), the Company is required pay such individual his salary for the remaining amount of the term of the agreement (at such times as the consideration would be due as if he was still employed by the Company), along with an additional $100,000 lump sum payment, due within 10 days of the termination date of the agreement. As such, in the event that either Jerry or Jason Swinford’s employment agreements are terminated by them for “good reason”, including, but not limited to their death or disablement, we will be forced to continue to pay their salaries, honor their Options and pay them (or their estate) the bonuses they would have been due as if they were still employed by the Company, as well as paying them a $100,000 lump sum payment. The requirement for the Company to continue to pay the salaries and other compensation to Jerry and Jason Swinford after they are no longer employed by the Company could prevent us from having sufficient available cash to engage new officers or directors, materially adversely affect our ability to pay our expenses as they become due, negatively affect our results of operations, and/or prevent a change of control of the Company.

 

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We Face Corporate Governance Risks And Negative Perceptions Of Investors Associated With The Fact That We Currently Have Only Two Directors, None of Whom Are Independent. Currently, our directors consist solely of Jerry Swinford and Jason Swinford, his son, both of whom also serve as executive officers of the Company. As such, Jerry and Jason Swinford have significant control over our business direction. As such, Jerry and Jason Swinford have control of the Board of Directors and can, among other things, declare themselves discretionary bonuses, take actions to maximize the consideration they are due under their Employment Agreements, and determine their own compensation levels. Jason Swinford and Jerry Swinford are also our Chief Executive Officer and Executive Vice President, respectively. As such, Jason and Jerry Swinford have significant control over our business direction. Additionally, there are no independent members of the Board of Directors available to second and/or approve related party transactions involving Jerry or Jason Swinford or Mr. Pohlmann, including the compensation paid to Jerry or Jason Swinford and the employment agreements we enter into with such individuals. Therefore, investors may perceive that because no other directors are approving related party transactions involving Jerry or Jason Swinford or Mr. Pohlmann, that such transactions are not fair to the Company. The price of our common stock may be adversely affected and/or devalued compared to similarly sized companies with multiple unrelated and independent officers and directors due to the investing public’s perception of limitations facing our Company due to the above.

 

We Have Arrangements In Place With Various Manufacturers To Build And Produce Our Products, And If The Demand For Those Manufacturers’ Skills Increases, The Cost Of Producing Our Products May Increase, Causing Our Profits (If Any) To Decrease. We currently have a number of arrangements with various manufacturing shops which manufacture our Coil Tubing Technology tools and equipment. In the event that the demand for those manufacturers’ time and unique skills increase, we may be forced to pay more money to have our products manufactured. If this were to happen, we may be forced to charge more for our products, which may cause the demand for our products and consequently our sales to decrease, which would likely cause any securities which you hold to decrease as well. Additionally, if the materials which our products are made from, including steel, increase in cost, it could similarly cause increases in the cost of manufacturing our products, which could force us to increase the prices we charge for our products, which could cause the demand for such products to decline.

 

Our Future Success And Profitability May Be Adversely Affected If We Fail To Develop And Introduce New And Innovative Products That Appeal To Our Customers. The oil and gas drilling industry is characterized by continual technological developments that have resulted in, and likely will continue to result in, substantial improvements in the scope and quality of oilfield chemicals, drilling and artificial lift products and services and product function and performance. As a result, our future success depends, in part, upon our continued ability to develop and introduce new and innovative products in order to address the increasingly sophisticated needs of our customers and anticipate and respond to technological and industry advances in the oil and gas drilling industry in a timely manner. If we fail to successfully develop and introduce new and innovative products and services that appeal to our customers, or if new companies or our competitors offer such products, our revenue and profitability may suffer.

 

If We Are Unable To Adequately Protect Our Intellectual Property Rights Our Business Is Likely To Be Adversely Affected. We rely on a combination of patents, trademarks, non-disclosure agreements and other security measures to establish and protect our proprietary rights. The measures we have taken or may take in the future may not prevent misappropriation of our proprietary information or prevent others from independently developing similar products or services, designing around our proprietary or patented technology or duplicating our products or services. Furthermore, some of our intellectual property rights are only protected by patent applications and we may choose to not move forward with those patent applications in the future. Finally, our patent applications may not be granted in the future. In the event that we do not move forward with the patent applications and/or do not obtain registration of those patents, we will have a diminished ability to protect our proprietary technology, which could cause us to spend substantial funds in connection with litigation and/or may force us to curtail or abandon our business activities.

 

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Jerry Swinford, Our Executive Vice President And Chairman, Has A First Priority Security Interest Over Our Patents. The Patents (defined above under “Item 1. Business”, “Patents, Trademarks and Licenses”) which we acquired from Jerry Swinford, our Executive Vice President and Chairman, are significant to our operations and are required for us to operate our business and protect our intellectual property rights. Mr. Swinford currently holds a first priority security interest over the Patents in order to secure the repayment of certain amounts owed to him under promissory notes described in greater detail below under “Management's Discussion And Analysis Of Financial Condition And Results Of Operations”, “Liquidity and Capital Resources”. In the event we default in the repayment of such note and Mr. Swinford enforces his security interest over the Patents we may be forced to curtail or abandon our business operations.

 

A Significant Amount Of Our Revenues Are Due To Only A Small Number Of Customers, And If We Were To Lose Any Of Those Customers, Our Results Of Operations Would Be Adversely Affected. The Company had total revenue of approximately $6,866,000 and approximately $6,143,000 during the years ended December 31, 2014 and 2013, respectively. The Company had two customers each representing approximately 9% of gross sales for the year ended December 31, 2014. The Company had two customers representing approximately 17% and 18% of gross sales for the year ended December 31, 2013.

 

As a result, the majority of our revenues are due to only a small number of customers, and we anticipate this trend continuing moving forward. Additionally, we do not have any contracts in place with the majority of our customers (except as described above under “Item 1. Business”, “Material Agreements”) and instead operate purchase order to purchase order with such customers. As a result, a termination in relationship or a reduction in orders from these customers could have a materially adverse effect on our results of operations and could force us to curtail or abandon our current business operations.

 

A Significant Amount Of Our Revenues Come From Entities Which Are Also Our Competitors, And If We Were To Lose Any Of Those Customers, Or They Were To Create Products To Directly Compete With Ours, Our Results Of Operations Would Be Adversely Affected. For the years ended December 31, 2014 and 2013, a significant portion of our revenues came from customers who are also our competitors. While these companies do not currently compete directly for our products, they offer similar products. If these entities, or any other entity which is a future customer of ours, creates products in the future which directly compete with ours, such entities will likely cease using our services and our revenues could be adversely affected. Similarly, we could lose additional customers to such directly competing competitors, which would further cause a decrease in our results of operations.

 

Our Revenues Are Subject To Seasonal Rules And Regulations, Such As The Frost Laws Enacted By Several States And Canada, Which Could Cause Our Operations To Be Subject To Wide Seasonal Variations. Certain states which experience below freezing temperatures during the winter months, and Canada have enacted Frost Laws, which put maximum weight limits on certain public roads during the coldest months of the years, to help prevent damage to the roads caused by frost heaves. As a result, our revenues may be limited in such cold weather states (and Canada) by such Frost Laws and our results of operations for those winter months may be substantially less than our results of operations during the summer months. We are currently focusing our efforts primarily in the U.S., Canada, Mexico and Latin America; however, we are also working to expand our distribution markets to include the North Sea, Asia and Middle Eastern markets. As a result, our results of operations for one quarterly period may not give an accurate projection of our results of operations for the entire fiscal year and/or may vary significantly from one quarter to the other.

 

Our Revenues Are Subject to Seasonal Variations. Our revenues are generated by drilling and well services activities, and therefore, cold weather and holidays and employee vacations during our first and fourth quarters exert downward pressure on revenues for those quarters, which is usually partially offset by the year-end efforts on the part of many customers to spend any remaining funds budgeted for services and capital expenditures during the year. Our customers’ annual budget process is normally completed in the first quarter of each calendar year, which can slow our services at the beginning of the year. Principally, due to these factors, our first and fourth quarters are typically less robust than our second and third quarters. As a result, our results of operations for one quarterly period may not give an accurate projection of our results of operations for the entire fiscal year and/or may vary significantly from one quarter to the other.

 

We May Not Be Able To Successfully Manage Our Growth, Which Could Lead To Our Inability To Implement Our Business Plan. Our growth is expected to place a significant strain on our managerial, operational and financial resources, especially considering that we currently only have three executive officers and two directors. Further, as we enter into additional contracts, we will be required to manage multiple relationships with various consultants, businesses and other third parties. These requirements will be exacerbated in the event of our further growth. Our systems, procedures and/or controls may not be adequate to support our operations or our management may not be able to achieve the rapid execution necessary to successfully implement our business plan. If we are unable to manage our growth effectively, our business, results of operations and financial condition will be adversely affected, which could lead to us being forced to abandon or curtail our business plan and operations.

 

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If We Make Any Acquisitions, They May Disrupt Or Have A Negative Impact On Our Business. If we make acquisitions in the future, funding permitting, of which there can be no assurance, we could have difficulty integrating the acquired company's personnel and operations with our own. We do not anticipate that any acquisitions or mergers we may enter into in the future would result in a change of control of the Company. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:

 

  — the difficulty of integrating acquired products, services or operations;
  — the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;
  — difficulties in maintaining uniform standards, controls, procedures and policies;
  — the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;
  — the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers;
  — the effect of any government regulations which relate to the business acquired;
  — potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition;
  — difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities; and
  — potential expenses under the labor, environmental and other laws of various jurisdictions.

 

Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Further, the commencement of business in other countries may be subject to significant risks in areas which we are not able to prepare for in advance.

 

RISKS RELATED TO OUR INDUSTRY

 

Volatility Or Decline In Oil And Natural Gas Prices May Result In Reduced Demand For Our Products And Services Which May Adversely Affect Our Business, Financial Condition And Results Of Operation. The markets for oil and natural gas have historically been extremely volatile. We anticipate that these markets will continue to be volatile in the future. During 2014 and continuing into 2015 oil and gas prices have decreased significantly. There can be no guarantees that these prices will increase from these current low levels. Such volatility in oil and gas prices, or the perception by our customers of unpredictability in oil and natural gas prices, affects the spending patterns in our industry. The demand for our products and services is, in large part, driven by current and anticipated oil and gas prices and the related general levels of production spending and drilling activity. In particular, volatility or a decline in oil and gas prices may cause a decline in exploration and drilling activities. This, in turn, could result in lower demand for our products and services and may cause lower prices for our products and services. As a result, volatility or a prolonged decline in oil or natural gas prices may adversely affect our business, financial condition and results of operations.

 

Competition From New And Existing Competitors Within Our Industry Could Have An Adverse Effect On Our Results Of Operations. The oil and gas industry is highly competitive and fragmented. Our principal competitors include numerous small coil tubing companies capable of competing effectively in our markets on a local basis as well as a number of large coil tubing companies that possess substantially greater financial and other resources than we do. Furthermore, we face competition from companies working to develop advanced oil and gas technology which would compete with us and other coil tubing companies. Additionally, our larger competitors may be able to devote greater resources to developing, promoting and selling or renting their products and services. We may also face increased competition due to the entry of new competitors including current suppliers that decide to sell or rent their coil tubing products and services directly. As a result of this competition, we may experience lower sales if our prices are undercut or advanced technology is brought to market which accomplishes greater results on average than our technology, which would likely have an adverse effect on our results of operations and force us to curtail or abandon our current business plan.

 

A Reduction In Spending Due To The Economic Downturn Could Result In A Decrease In Demand For Our Products. If spending on capital expenditures for oil and gas related products such as our coil tubing technology decreases, the demand for products like those provided by us would likely decline. This decrease could reduce our opportunity for growth, increase our marketing and sales costs, and reduce the prices we can charge for products, which could reduce our revenue and operating results.

 

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Our Results Of Operations May Be Negatively Affected By Sustained Downturns Or Sluggishness In The Economy, Including Reductions In Demand Or Low Levels In The Market Prices Of Commodities, All Of Which Are Beyond Our Control. Sustained downturns in the economy generally affect the markets in which we operate and negatively influence our operations. Declines in demand for oil and gas as a result of economic downturns may reduce our cash flows, especially if our customers reduce exploration and production activities and, therefore, use of our products.

 

Lower demand for oil and gas and lower prices for oil and gas result from multiple factors that affect the markets which consume our products and services:

 

  — supply of and demand for energy commodities, including any decreases in the production of oil and gas which could negatively affect the demand for oil and gas in general, and as a result the need for our coil tubing technology;
  — general economic conditions, including downturns in the U.S., Canada or other economies which affect energy consumption particularly in which sales to industrial or large commercial customers which could negatively affect the demand for oil and gas in general, and as a result the need for our coil tubing technology; and
  — federal, state and foreign energy and environmental regulations and legislation, which could make oil and gas exploration more costly, which could in turn drive down demand for oil and gas, and which could in turn reduce the demand for our technology and cause our revenues to decrease.

 

The Long-Term Financial Condition Of Our Businesses Is Dependent On The Continued Availability Of Oil And Gas Reserves. Our businesses are dependent upon the continued availability of oil production and reserves. Low prices for oil and gas, regulatory limitations, or the lack of available capital for these projects could adversely affect the development of additional reserves and production, and, therefore, demand for our products and services.

 

Our Business Is Subject To Extensive Regulation That Affects Our Operations And Costs. Our assets and operations are subject to regulation by federal, state and local authorities, including regulation by the Federal Energy Regulatory Commission (FERC) and regulation by various authorities under federal, state and local environmental laws. Regulation affects almost every aspect of our businesses, including, among other things, our ability to determine the terms and rates of services provided by some of our operations; make acquisitions; issue equity or debt securities; and pay dividends. Changes in such regulations may affect our capacity to conduct this business effectively and sustain or increase profitability.

 

Potential Legislative And Regulatory Actions Could Increase The Costs Of Oil And Gas Exploration Activities Of Our Customers, Reduce Their Revenues And/Or Prohibit Certain Activities, Which Could Decrease Demand For Our Products And The Market For Oil And Gas Exploration In General. The activities of exploration and production companies operating in the U.S. are subject to extensive regulation at the federal, state and local levels. Changes to existing laws and regulations or new laws and regulations such as those described below could, if adopted, have an adverse effect on the business and operations of our customers, which in turn could reduce the demand for our products and ultimately our revenues. For example:

 

Federal Taxation of Producers of Natural Gas and Oil. Federal budget proposals would potentially increase and accelerate the payment of federal income taxes of producers of natural gas and oil. Proposals that would significantly affect our customers would repeal the expensing of intangible drilling costs, the percentage depletion allowance and lengthen the amortization period of geological and geophysical expenses. These changes, if enacted, will make it more costly for our customers to explore for and develop natural gas and oil resources.

 

Hydraulic Fracturing . Hydraulic fracturing is used in completing greater than 90% of all natural gas and oil wells drilled today in the U.S. Certain environmental and other groups have suggested that additional federal, state and local laws and regulations may be needed to more closely regulate the hydraulic fracturing process. We cannot predict whether any such federal, state or local laws or regulations will be enacted and, if so, what actions any such laws or regulations would require or prohibit. If additional levels of regulation or permitting requirements were imposed through the adoption of new laws and regulations, our customers’ businesses and operations could be subject to delays, increased operating and compliance costs and process prohibitions. Hydraulic fracturing is material to the Company’s business and constitutes approximately 80% of the Company’s business.

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RISKS RELATING TO OUR SECURITIES

 

We Have Not Paid Any Cash Dividends In The Past And Have No Plans To Issue Cash Dividends In The Future, Which Could Cause The Value Of Our Common Stock To Have A Lower Value Than Other Similar Companies Which Do Pay Cash Dividends. We have not paid any cash dividends on our common stock to date and do not anticipate any cash dividends being paid to holders of our common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance our future expansion. As we have no plans to issue cash dividends in the future, our common stock could be less desirable to other investors and as a result, the value of our common stock may decline, or fail to reach the valuations of other similarly situated companies who have historically paid cash dividends in the past.

 

The Market For Our Common Stock Is Sporadic and Illiquid. Our common stock is currently quoted on the OTCQB market, an over-the-counter electronic quotation service, under the symbol “CTBG”. The market for our common stock is currently volatile, sporadic and illiquid. We are currently evaluating the potential engagement of a market maker to apply for quotation of our common stock on a national securities exchange or apply for quotation on the NASDAQ trading market. If we are successful in quoting our common stock on a national securities exchange or the NASDAQ trading market and/or if we are unsuccessful in quoting our common stock on a national securities exchange or the NASDAQ trading market and continue instead to quote our common stock on the OTCQB market, the market for our common stock will likely continue to be volatile, sporadic and illiquid. Additionally, we anticipate that the market for our common stock will be subject to wide fluctuations in response to several factors, including, but not limited to:

 

  — actual or anticipated variations in our results of operations;
  — our ability or inability to generate new revenues;
  — increased competition; and
  — conditions and trends in the oil and gas industry and/or the market for coil tubing technology products and tools in general.

 

Furthermore, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.

 

Shareholders May Face Significant Restrictions On The Resale Of Our Common Stock Due To Federal Regulations Of Penny Stocks. Our common stock is and will be subject to the requirements of Rule 15g-9, promulgated under the Securities Exchange Act of 1934, as amended, as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of Company shareholders to sell their securities in the secondary market.

 

Shareholders May Be Diluted Significantly Through Our Efforts To Obtain Financing And Satisfy Obligations Through The Issuance Of Additional Shares Of Our Common Stock. We have no committed source of financing. Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock. Our Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership interests of existing shareholders, may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.

 

State Securities Laws May Limit Secondary Trading, Which May Restrict The States In Which And Conditions Under Which You Can Sell Shares. Secondary trading in our common stock may not be possible in any state until the common stock is qualified for sale under the applicable securities laws of the state or there is confirmation that an exemption, such as listing in certain recognized securities manuals, is available for secondary trading in the state. If we fail to register or qualify, or to obtain or verify an exemption for the secondary trading of, the common stock in any particular state, the common stock cannot be offered or sold to, or purchased by, a resident of that state. In the event that a significant number of states refuse to permit secondary trading in our common stock, the liquidity for the common stock could be significantly impacted.

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Because We Are Not Subject To Compliance With Rules Requiring The Adoption Of Certain Corporate Governance Measures, Our Stockholders Have Limited Protections Against Interested Director Transactions, Conflicts Of Interest And Similar Matters. The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York Stock Exchange and the NASDAQ, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the NASDAQ. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than legally required, we have not yet adopted these measures.

 

Because we only have two directors, none of whom are independent, we do not currently have an independent audit or compensation committee. As a result, our directors have the ability to, among other things, determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and any potential investors may be reluctant to provide us with funds necessary to expand our operations.

 

We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of the Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.

 

We Will Incur Increased Costs As A Result Of Operating As A Fully Reporting Company As Well As In Connection With Section 404 Of The Sarbanes Oxley Act. We will incur legal, accounting and other expenses in connection with our future status as a fully reporting public company. The Sarbanes-Oxley Act of 2002 (the " Sarbanes-Oxley Act ") and rules subsequently implemented by the SEC have imposed various requirements on public companies, including requiring changes in corporate governance practices. As such, our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and make some activities more time-consuming and costly. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 and our future status as a publicly reporting company will require that we incur accounting, legal and filing expenses and expend significant management efforts. We currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.

 

Sales Of Our Common Stock Under Rule 144 Could Reduce The Price Of Our Stock. As of the date of this filing, we have 3,181,777 shares of our common stock held by non-affiliates and 12,450,648 shares held by affiliates which Rule 144 of the Securities Act defines as “restricted securities”. A total of 887,501 shares of common stock have been registered by us under a prior Form S-1 Registration Statement (including 325,000 shares issuable upon exercise of warrants, of which warrants to purchase 220,000 shares of common stock have expired unexercised as of the date of this report) and are available for resale as of the date of this filing. We are not currently subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and until such time as we are subject to such rules, investors will not be able to rely on Rule 144. If and when the other restricted shares outstanding are available for sale under Rule 144, although shares held by affiliates will be subject to restrictions relating to the amount that may be sold in any 90 day period and manner in which such sales may be made, among other limitations, the availability for sale of substantial amounts of common stock under Rule 144 could reduce prevailing market prices for our securities.

 

We Are Exposed To Risks From Uncertainties Both As To Potential Regulator Action And Potential Adverse Market Reaction If We Are Unable To Conclude We Have Effective Internal Control Over Financial Reporting, Which Could Reduce Our Stock Price. Under SEC rules we were required to establish an ongoing program to evaluate and test internal controls over financial reporting controls for each fiscal year beginning with December 31, 2013. In the event that our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404 or under SEC Rules, the SEC or other regulators could take legal action against us and/or the market may negatively react to this inability, and the market prices of our shares could be reduced.

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RISKS RELATING TO THE JOBS ACT

 

The Recently Enacted JOBS Act Will Allow Us To Postpone The Date By Which We Must Comply With Certain Laws And Regulations And To Reduce The Amount Of Information Provided In Reports Filed With The SEC. We Cannot Be Certain If The Reduced Disclosure Requirements Applicable To “Emerging Growth Companies” Will Make Our Common Stock Less Attractive To Investors. We are and we will remain an "emerging growth company" until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or exceed $1 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, or (iv) the date on which we are deemed a "large accelerated filer" (with at least $700 million in public float) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). For so long as we remain an "emerging growth company" as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies" as described in further detail in the risk factors below. We cannot predict if investors will find our common stock less attractive because we will rely on some or all of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. If we avail ourselves of certain exemptions from various reporting requirements, as is currently our plan, our reduced disclosure may make it more difficult for investors and securities analysts to evaluate us and may result in less investor confidence.

 

The Company's Election Not To Opt Out Of JOBS Act Extended Accounting Transition Period May Not Make Its Financial Statements Easily Comparable To Other Companies. Pursuant to the JOBS Act, as an “emerging growth company”, the Company can elect to opt out of the extended transition period for any new or revised accounting standards that may be issued by the Public Company Accounting Oversight Board (PCAOB) or the SEC. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an “emerging growth company”, can adopt the standard for the private company. This may make a comparison of the Company's financial statements with any other public company which is not either an “emerging growth company” nor an “emerging growth company” which has opted out of using the extended transition period difficult or impossible as possible different or revised standards may be used.

 

The Recently Enacted JOBS Act Will Also Allow The Company To Postpone The Date By Which It Must Comply With Certain Laws And Regulations Intended To Protect Investors And To Reduce The Amount Of Information Provided In Reports Filed With The SEC. The recently enacted JOBS Act is intended to reduce the regulatory burden on “emerging growth companies”. The Company meets the definition of an “emerging growth company” and so long as it qualifies as an “emerging growth company,” it will, among other things:

 

  — be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;
  — be exempt from the "say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the "say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of The Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and certain disclosure requirements of the Dodd-Frank Act relating to compensation of Chief Executive Officers;
  — be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934, as amended and instead provide a reduced level of disclosure concerning executive compensation; and
  — be exempt from any rules that may be adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.

 

Although the Company is still evaluating the JOBS Act, it currently intends to take advantage of all of the reduced regulatory and reporting requirements that will be available to it so long as it qualifies as an “emerging growth company”. The Company has elected not to opt out of the extension of time to comply with new or revised financial accounting standards available under Section 102(b)(1) of the JOBS Act. Among other things, this means that the Company's independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of the Company's internal control over financial reporting so long as it qualifies as an “emerging growth company”, which may increase the risk that weaknesses or deficiencies in the internal control over financial reporting go undetected. Likewise, so long as it qualifies as an “emerging growth company”, the Company may elect not to provide certain information, including certain financial information and certain information regarding compensation of executive officers, which it would otherwise have been required to provide in filings with the SEC, which may make it more difficult for investors and securities analysts to evaluate the Company. As a result, investor confidence in the Company and the market price of its common stock may be adversely affected.

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Notwithstanding the above, we are also currently a “smaller reporting company”, meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and have a public float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year. In the event that we are still considered a “smaller reporting company”, at such time are we cease being an “emerging growth company”, the disclosure we will be required to provide in our SEC filings will increase, but will still be less than it would be if we were not considered either an “emerging growth company” or a “smaller reporting company”. Specifically, similar to “emerging growth companies”, “ smaller reporting companies ” are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after January 21, 2013; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Decreased disclosures in our SEC filings due to our status as an “emerging growth company” or “smaller reporting company” may make it harder for investors to analyze the Company’s results of operations and financial prospects.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES.

 

Effective October 25, 2013, the Company 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.

 

Effective November 1, 2014, the Company entered into a contract to purchase an additional 6,000 square foot office/warehouse building and associated land located at 22315 Gosling Road, Spring, Texas 77389 at a purchase price of $1,060,000. The Company leased the building at a monthly rate of $6,500, until March 1, 2015, at which time the Company purchased the property. The Company paid $300,000 in cash and issued a fifteen year 7% note to the seller totaling $760,000 which is payable in monthly principal and interest payments of $6,831. The land and building is pledged as security for the note, and our Chief Executive Officer, Jason Swinford, also provided the seller a personal guaranty.

 

The Company leases approximately 1,560 square feet of warehouse and office space in Red Deer, Alberta, Canada. The Company renewed the lease which had expired on November 3, 2014 for the one year period from November 3, 2014 through November 3, 2015. Rent due under the lease is $1,300 per month plus the Company’s portion of common expenses associated with the rental property which total approximately $651 per month and goods and service tax of approximately $98 per month, for a total monthly rental expense of approximately $2,049 Canadian dollars (approximately $1,640 U.S. dollars) per month during the term of the lease. This lease expires in October 2015 and the related total lease expense is $16,400.

 

The Company had a twelve month residential sub-lease agreement in effect from December 1, 2013 to December 1, 2014, pursuant to which the Company rented a residence located in Blairsville, Pennsylvania at a monthly rental cost of $850 per month. The Company used the leased residence as a district office for sales in Ohio, Pennsylvania, and West Virginia and repair of equipment for that area. This lease arrangement was not renewed at the expiration of the agreement date.

 

The Company leased space serving as a sales office, warehouse and machine shop in Haynesville, Louisiana. The Company paid the landowner (a former employee of the Company) an aggregate of $77,632 in connection with the construction of the warehouse and machine shop (which is owned by the former employee). In consideration for paying for the cost to construct the warehouse and machine shop, the landowner agreed to allow the Company to use the warehouse and machine shop and sales office free of charge until August 2012. The Company and the former employee had entered into a two year extension of the lease (through August 2014) at $500 per month. This lease arrangement was not renewed at the expiration of the agreement date.

 

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ITEM 3. LEGAL PROCEEDINGS.

 

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations, other than the pleading below. We may become involved in material legal proceedings in the future.

 

On July 25, 2013, Eric Cohen (a shareholder of the Company) filed a lawsuit against the Company, Jerry Swinford (the Executive Vice President and director of the Company), Jason Swinford (the Chief Executive Officer and director of the Company) and Herbert C. Pohlmann (the Company’s majority shareholder and former director)(collectively, the “Defendants”) in the 61st Judicial District Court for Harris County, Texas (Cause No. 2013-43593). The suit sought monetary damages in excess of $1 million in connection with compensatory damages alleged suffered by Mr. Cohen or sought a buyout of Mr. Cohen’s interest in the Company. The suit also sought legal fees and pre-and-post judgment interest. The suit alleged “minority shareholder oppression” and “breach of fiduciary duty” in connection with the actions of Defendants, i.e., that Defendants engaged in wrongful conduct which has diluted Mr. Cohen’s shares; granted more power to Defendants (for little or no consideration); and granted rights to insiders for less than reasonably equivalent value. The Company disputed Mr. Cohen’s claims, engaged legal counsel in the matter and filed an answer to the complaint denying Cohen’s allegations. On January 27, 2014, the Company filed a counterclaim against Eric Cohen (plaintiff) requesting damages and attorneys’ fees incurred in the case. In November 2014, the parties entered into a Settlement and Mutual Release Agreement, whereby the Company agreed to repurchase the shares held by Mr. Cohen which were the subject of the litigation for $11,448, and to pay certain of Mr. Cohen’s legal fees and costs in the amount of $51,553; the parties each agreed to dismiss their actions against the other with prejudice; and the parties each released each other and their representatives from all claims, causes of actions and damages. The shares previously held by Mr. Cohen were cancelled in March 2015, and are not represented in the number of shares of common stock outstanding as disclosed throughout this report after such date. Additionally, the Company has paid Cohen all amounts due pursuant to the terms of the settlement to date. Following the date hereof the Company expects that each party will dismiss their claims against the other with prejudice.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

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PART II

 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information and Holders

 

The common stock of the Company is currently quoted on the OTCQB market run by the OTC Markets Group under the symbol "CTBG". Prior to the effectiveness of our Form S-1 Registration Statement on January 28, 2013, our common stock traded on the OTC Pink Market (otherwise known as the "pink sheets"), run by the OTC Markets Group. The following table sets forth the high and low trading prices of one (1) share of our common stock for each fiscal quarter for the past two full fiscal years. The quotations provided are for the over the counter market, which reflect interdealer prices without retail mark-up, mark-down or commissions, and may not represent actual transactions.

 

QUARTER ENDED   HIGH     LOW  
December 31, 2014   $ 1.05     $ 0.35  
September 30, 2014   $ 1.00     $ 0.35  
June 30, 2014   $ 1.40     $ 0.75  
March 31, 2014   $ 1.60     $ 0.55  

 

QUARTER ENDED   HIGH     LOW  
December 31, 2013   $ 1.99     $ 0.15  
September 30, 2013   $ 2.22     $ 0.10  
June 30, 2013   $ 2.95     $ 1.00  
March 31, 2013   $ 3.25     $ 2.05  

 

As of March 30, 2015, we had 15,632,425 shares of common stock outstanding, held by approximately 864 shareholders of record and no shares of Series A Preferred Stock issued or outstanding.

 

Dividends

 

To date, we have not declared or paid any dividends on our outstanding shares. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings to finance our operations and future growth, our Board of Directors will have discretion to declare and pay dividends in the future. Payment of dividends in the future will depend upon our earnings, capital requirements and other factors, which our Board of Directors may deem relevant.

 

There are no restrictions in our Articles of Incorporation or Bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:

 

  1. We would not be able to pay our debts as they become due in the usual course of business, or;
     
  2. Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.

 

Equity Compensation Plan Information

 

On January 19, 2011, and with an effective date of November 30, 2010, the Company’s then sole director, Jerry Swinford and its majority shareholder, Herbert C. Pohlmann approved the Company’s 2010 Stock Incentive Plan, which allows the Board of Directors to grant up to an aggregate of 83,333 qualified and non-qualified stock options, restricted stock and performance based awards of securities to the Company’s officers, directors and consultants to help attract and retain qualified Company personnel (the “2010 Stock Plan”).

 

On and effective January 12, 2012, the Company’s Board of Directors and its majority shareholder, Herbert C. Pohlmann, approved the Company’s 2012 Stock Incentive Plan, which allows the Board of Directors to grant up to an aggregate of 750,000 qualified and non-qualified stock options, restricted stock and performance based awards of securities to the Company’s officers, directors and consultants to help attract and retain qualified Company personnel (the “2012 Stock Plan” and together with the 2010 Stock Plan, the “Stock Plans”).

 

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The following table provides information as of the filing of this report regarding the Plans (including individual compensation arrangements) under which equity securities are authorized for issuance:

 

Plan Category   Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights		     Weighted-
average exercise
price of
outstanding
options,
warrants and
rights		     Number of
securities
available for
future issuance
under equity
compensation
plans (excluding
those in first
column) *		  
Equity compensation plans approved by the security holders     600,000     $ 1.00       233,333  
Equity compensation plans not approved by the security holders     603,334     $ 1.04       –  
Total     1,203,334               233,333  

 

* Also takes into account modified and terminated options originally issued under the 2010 Stock Plan.

 

Amendments to Certificate of Incorporation

 

In May 2007, we designated 1,000,000 shares of Series A Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock"). The Series A Preferred Stock have no dividend rights, no liquidation preference, no redemption rights and no conversion rights. Shortly after being designated, we granted all 1,000,000 shares of such Series A Preferred Stock to our former Chief Executive Officer, current Executive Vice President and Chairman, Jerry Swinford, who held such shares until his entry into an Executive Employment Agreement with us in November 2010, one of the conditions was that he cancel such Series A Preferred Stock shares. The Series A Preferred Stock have the right, voting in aggregate, to vote on all shareholder matters equal to fifty-one percent (51%) of the total vote (the “Super Majority Voting Rights”). Additionally, we are not allowed to adopt any amendments to our Bylaws, Articles of Incorporation, as amended, make any changes to the Certificate of Designations establishing the Series A Preferred Stock, or effect any reclassification of the Series A Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of the Series A Preferred Stock. However, we may, by any means authorized by law and without any vote of the holders of shares of Series A Preferred Stock, make technical, corrective, administrative or similar changes to such Certificate of Designations that do not, individually or in the aggregate, adversely affect the rights or preferences of the holders of shares of Series A Preferred Stock.

 

In June 2007, Mr. Swinford, as the sole director of Holdings, approved the designation of 1,000,000 shares of Holdings’ Series A Preferred Stock (with identical terms and conditions, including the Super Majority Voting Rights, as the Company’s Series A Preferred Stock) and the issuance of 1,000,000 shares of Holdings Series A Preferred Stock to Mr. Swinford which were cancelled in December 2012. As a result of the cancellation, the Company has sole voting control over and holds 100% of the outstanding securities of Holdings.

 

In June 2007, we designated 1,000,000 shares of Series B Preferred Stock and subsequently issued such Series B Preferred Stock to Grifco. The Series B Preferred Stock had no voting rights, no dividend rights, and no conversion rights (provided that such shares were previously convertible into 66,667 shares of our common stock (0.0667 of one share for each share of Series B Preferred Stock outstanding), prior to November 30, 2012, only if Grifco exercised its option to acquire the Series A Preferred Stock of the Company for aggregate consideration of $100, which option and which conversion rights have since expired). We believe that Grifco is no longer an operating entity.

 

Effective August 18, 2014, the Company filed a Certificate of Withdrawal of Certificate of Designation for the Company’s Series B Preferred Stock (the “Series B Preferred Stock”) with the Secretary of State of Nevada, which became effective on the same date. As a result of the filing, effective August 18, 2014, the Company no longer has any Series B Preferred Stock designated.

 

Recent Sales of Unregistered Securities

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto included in Part II, Item 8 of this Report and the “Risk Factors” included in Part I, Item IA of this Report, before deciding to purchase, hold or sell our common stock.

 

Overview

 

During 2014, we experienced an increase in sales activity in most of the United States and Mexico; however, our sales in Canada and Pennsylvania decreased due to a reduction of drill sites using coil tubing products in such locations. Our revenues were approximately $6,866,000 in 2014 and approximately $6,143,000 in 2013. During 2014, the coil tubing industry experienced a decline in the use of our technology. During this period we continued to maintain our presence in these affected drilling regions and, concurrently developed a new tool, Ampli-Max which is now being used by existing and new customers to reduce their drilling time in the lateral section of a well which enables these operators to achieve greater savings in the fracking and drillout process. We are manufacturing this new tool to be used domestically and internationally. Our sales of products increased in 2014 as service companies, including our clients, emphasized purchasing over renting. We plan to continue to sell products; however, our business strategy is to emphasize the rental of tools that improves our gross profit. We continued to invest in our distribution system for our tools during 2014 to reduce delivery time through the improvement of our inventory management and tool repair cycle. These changes are ongoing and necessary to maintain our market share.

 

During 2014 and continuing in 2015, the oil and gas industry is experiencing a significant downturn in oil prices. This trend impacts our customer’s operations and their use of our tools for drilling and workover operations. We are meeting this challenge through new product and service offerings and a reduction in our operating costs. Our immediate plans are to continue to expand product offerings to include tool and drill pipe inspections and grow by meeting expected demand for our rental tool products in our current geographic markets and further expanding our efforts to rent and sell our tools in international markets, including Mexico, Asia, Latin America and the Middle East. Moving forward, we anticipate increased spending on research and development activities, which we believe is required to provide technological advancement to our coiled tubing technologies and workover product lines and expansion of our new tool and drill pipe inspection business. We are currently working on multiple new generation 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 fiscal 2015 and 2016, especially in the horizontal drilling and workover applications.

 

Since 2011, the Company has seen an acceptance of its new technology in the coiled tubing service market. Based on our management’s personal knowledge of the market for our products, we believe that we have established a significant market share for certain of our products including the CTT H/H and CTT Oscillator. We also believe that our newest product, Ampli-Max, will be one of our core products as it has already been accepted by operators and service companies.

 

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 or through joint venture partnerships.

 

Our common stock is 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.

 

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., Mexico and 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 recognize the net carrying cost of such tool (“manufacturers cost” less depreciation) as cost of product of 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.

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Rental Tool Assets. Approximately 80% of the Company’s revenues were generated from the rental of its coil tubing products in 2014. 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. Sales of our tools along with lost or destroyed tools amounted to approximately 20% of the Company’s revenues in 2014, representing an increase of approximately 18% over 2013, the bulk of which resulted from sales of tools to our largest customer. 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 of 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 the estimated fair market value, as determined by management and the board of directors. 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

 

Year Ended December 31, 2014 Compared To the Year Ended December 31, 2013

 

Year ended December 31, 2014:  U.S.   Canada   Corporate   Consolidated 
Product revenue  $1,310,000   $47,000   $–   $1,357,000 
Rental revenue   4,946,000    563,000    –    5,509,000 
Total revenue   6,256,000    610,000    –    6,866,000 
Cost of products and rental revenue   (2,186,000)   (178,000)   –    (2,364,000)
Cost of revenue - depreciation of rental tools   (1,172,000)   –    –    (1,172,000)
Gross profit   2,898,000    432,000    –    3,330,000 
Selling and marketing   (1,378,000)   (130,000)   –    (1,508,000)
General and administrative, compensation and benefits   (1,507,000)   (87,000)   (205,000)   (1,799,000)
Depreciation and amortization   (307,000)   (31,000)   (18,000)   (356,000)
Gain on sale of fixed assets   49,000    –    –    49,000 
Income (loss) from operations  $(245,000)  $184,000   $(223,000)  $(284,000)
Other income                  30,000 
Interest expense                  (62,000)
Net loss                 $(316,000)

 

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Year ended December 31, 2013:  U.S.   Canada   Corporate   Consolidated 
Product revenue  $129,000   $–   $–   $129,000 
Rental revenue   5,438,000    576,000    –    6,014,000 
Total revenue   5,567,000    576,000    –    6,143,000 
Cost of products and rental revenue   (1,928,000)   (248,000)   –    (2,176,000)
Cost of revenue - depreciation of rental tools   (1,100,000)   –    –    (1,100,000)
Gross profit   2,539,000    328,000    –    2,867,000 
Selling and marketing   (1,400,000)   (208,000)   –    (1,608,000)
General and administrative, compensation and benefits   (1,168,000)   (177,000)   (460,000)   (1,805,000)
Depreciation and amortization   (257,000)   (31,000)   –    (288,000)
Loss on sale of fixed assets   (14,000)   –    –    (14,000)
Loss from operations  $(300,000)  $(88,000)  $(460,000)  $(848,000)
Other income                  6,000 
Interest expense                  (24,000)
Net loss                 $(866,000)

 

Change in Operating Results December 31, 2014 Compared to December 31, 2013:  U.S.   Canada   Corporate   Consolidated 
Product revenue  $1,181,000   $47,000   $–   $1,228,000 
Rental revenue   (492,000)   (13,000)   –    (505,000)
Total revenue   689,000    34,000    –    723,000 
Cost of products and rental revenue   (258,000)   70,000    –    (188,000)
Cost of revenue - depreciation of rental tools   (72,000)   –    –    (72,000)
Gross profit   359,000    104,000    –    463,000 
Selling and marketing   22,000    78,000    –    100,000 
General and administrative, compensation and benefits   (339,000)   90,000    255,000    6,000 
Depreciation and amortization   (50,000)   –    (18,000)   (68,000)
Gain on sale of fixed assets   63,000    –    –    63,000 
Income from operations  $55,000   $272,000   $237,000   $564,000 
Other income                  24,000 
Interest expense                  (38,000)
Net income                 $550,000 

 

Revenues

 

We had total revenue of approximately $6,866,000 for the year ended December 31, 2014, compared to total revenue of approximately $6,143,000 for the year ended December 31, 2013, an increase in total revenue of approximately $723,000 or 11.8% from the prior year. Total revenues included approximately $1,357,000 of product revenue for the year ended December 31, 2014 compared to approximately $129,000 for the year ended December 31, 2013, an increase in product revenue of approximately $1,228,000 or 951.9% from the prior period. The increase in product revenue was mainly due to an increase in international sales. Total revenues also included rental revenue of approximately $5,509,000 for the year ended December 31, 2014 compared to approximately $6,014,000 for the year ended December 31, 2013, a decrease of approximately $505,000 or 8.4% from the prior year. The decrease in rental revenue was primarily due to reduced customer demand during 2014 in Canada and the eastern United States due to a decrease in the decline of oil prices.

 

Cost of Revenue

 

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 $2,364,000 for the year ended December 31, 2014, compared to cost of approximately $2,176,000 for the year ended December 31, 2013, an increase of approximately $188,000 or 8.6% from the prior year, which increase was directly attributable to the increase in product sales for the year ended December 31, 2014, compared to the year ended December 31, 2013.

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We had cost of revenue – depreciation of rental tools, of approximately $1,172,000 for the year ended December 31, 2014, compared to approximately $1,100,000 for the year ended December 31, 2013, an increase of approximately $72,000 or 6.5% from the prior year, which increase was mainly due to an increase in our depreciable asset base, principally trucks, rental tools and a building in 2014 versus 2013.

 

Cost of revenue as a percentage of total revenue was 51.5% for the year ended December 31, 2014, compared to 53.3% for the year ended December 31, 2013, a decrease in cost of revenue as a percentage of revenue of 1.8%, which is primarily due to a change in product mix and a reflection of competitive pricing for our tools.

 

Gross Profit

 

We had gross profit of approximately $3,330,000 for the year ended December 31, 2014, compared to gross profit of approximately $2,867,000 for the year ended December 31, 2013, an increase in gross profit of approximately $463,000 or 16.1% from the prior year. Our gross profit was 48.5% of revenue for the year ended December 31, 2014, compared to 46.7% for the year ended December 31, 2013.

 

Operating Expenses

 

General and Administrative and compensation and benefits. We had total general and administrative and compensation and benefits expenses of approximately $1,799,000 for the year ended December 31, 2014, compared to total general and administrative and compensation and benefits expenses of approximately $1,805,000 for the year ended December 31, 2013, a decrease in general and administrative expenses of approximately $6,000 or 0.3% from the prior year. The decrease in general and administrative and compensation and benefits expenses was primarily due to decreased stock compensation and general office expenses offset by increased professional fees associated with litigation.

 

Selling and Marketing. We had total selling and marketing expenses of approximately $1,508,000 for the year ended December 31, 2014, compared to approximately $1,608,000 for the year ended December 31, 2013, a decrease of approximately $100,000 or 6.2% from the prior year, which decrease was mainly due to decreased sales commissions.

 

Depreciation and Amortization. Depreciation and amortization expense increased by approximately $68,000 or 23.6%, to approximately $356,000 for the year ended December 31, 2014, compared to approximately $288,000 for the year ended December 31, 2013. The increase was primarily due to improvements at the Company’s new office building and the addition of shop equipment and automobiles for the sales force.

 

Loss from Operations

 

We had a loss from operations of $284,000 for the year ended December 31, 2014, compared to a loss from operations of approximately $848,000 for the year ended December 31, 2013, a decrease of approximately $564,000 or 66.5% from the prior year. Loss from operations was 4.1% of revenue for the year ended December 31, 2014, compared to 13.8% for the year ended December 31, 2013. The decrease was mainly attributable to the 11.8% increase in total sales.

 

Net loss

 

We had net loss of approximately $316,000 for the year ended December 31, 2014, compared to net loss of approximately $866,000 for the year ended December 31, 2013, a decrease in net loss of approximately $550,000 or 63.5% from the prior year. The decrease in net loss was mainly attributable to an 11.8% increase in total revenue, partially offset by a 7.9% increase in total cost of revenue, and a 2.7% decrease in total operating expenses, for the year ended December 31, 2014, compared to the year ended December 31, 2013, as described above.

 

Liquidity and Capital Resources

 

We had approximately $2,808,000 of working capital as of December 31, 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 December 31, 2014, we had total assets of approximately $12,078,000, which included total current assets of approximately $3,576,000, consisting of approximately $1,280,000 of cash, approximately $2,102,000 of accounts receivable, net, and approximately $194,000 of other current assets; and long term assets including approximately $2,325,000 of rental tools, net; approximately $1,575,000 of property and equipment, net; and approximately $4,602,000 of intangible assets, net, consisting of our rights to the patents purchased from Jerry Swinford pursuant to the 2010 IP Purchase Agreement, described in greater detail below.

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We had total liabilities of approximately $5,391,000 as of December 31, 2014, which included total current liabilities of approximately $768,000, consisting of accounts payable of approximately $450,000; accrued liabilities of approximately $89,000; current portion of related party accrued liabilities of $39,000; current portion of related party notes payable of approximately $91,000, relating to amounts owed to Jerry Swinford in connection with the 2010 IP Purchase Agreement, described below; and current portion of notes payable of approximately $99,000, relating to the amount due on loans associated with equipment financing and building loan; and long term liabilities consisting of approximately $3,750,000 of related party notes payable, net of current portion, relating to the long term portion of the amounts owed to Jerry Swinford in connection with the 2015 IP Purchase Agreement, described below, and approximately $873,000 of notes payable, net of current portion relating to equipment financing and our building loan.

 

We had net cash provided by operating activities of approximately $1,196,000 for the year ended December 31, 2014, which consisted of approximately $316,000 of net loss, approximately $227,000 of decrease in accounts receivable, approximately $81,000 of decrease in other current assets, approximately $118,000 of increase in accounts payable, approximately $39,000 of increase in accrued liabilities – related party and $21,000 of decrease in accrued liabilities, offset by non-cash items including approximately $1,528,000 of depreciation and amortization, approximately $205,000 of stock based compensation and approximately $49,000 in gain on sale of fixed assets.

 

We had approximately $744,000 of net cash used in investing activities for the year ended December 31, 2014, which included the purchase of approximately $665,000 of rental tools and approximately $415,000 of building, property and equipment, offset by approximately $229,000 and approximately $107,000 in proceeds from the sale of assets and vehicles, respectively. 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. Expenditures for capital assets totaled approximately $1.1 million and $1.7 million in the years ended December 31, 2014 and 2013, respectively. While the majority of these expenditures were for the expansion of our rental tools, we have continued our purchase of property and equipment necessary for our operations.

 

We had approximately $74,000 of net cash used in financing activities for the year ended December 31, 2014, which included approximately $156,000 of payments on related party notes payable, relating to amounts paid to Jerry Swinford in connection with the IP Purchase Agreement, described below, approximately $79,000 of payments on notes payable and approximately $161,000 of proceeds from notes payable related to the new building and vehicles.

 

In November 2010, the Company entered into an Intellectual Property Purchase Agreement (the “2010 IP Purchase Agreement”) with Jerry Swinford, the Company’s Executive Vice President and Chairman. Pursuant to the 2010 IP Purchase Agreement, the Company agreed to purchase the patents and pending patents owned and held by Mr. Swinford at the time of the agreement (including certain of those Patents described above under “Patents, Trademarks and Licenses” for $25,000 in cash and $1,175,000 in the form of two promissory notes payable to Mr. Swinford (the “Swinford Notes”). The Company obtained an independent valuation in order to determine the value of the Patents. The first note, in the amount of $475,000 was due January 20, 2011, together with interest at the rate of 12% per annum, which note was paid in full in January 2011. The second note in the amount of $700,000 is due September 15, 2015, and is payable in monthly installments of the lesser of $12,963 or the amount outstanding under such note per month, with the first such payment due on February 15, 2011. The Company also agreed to grant Mr. Swinford a security interest in all of the Company’s assets in connection with and to secure the repayment of the Swinford Notes and Holdings also agreed, pursuant to a Guaranty, to guaranty the repayment of the Swinford Notes. Mr. Pohlmann agreed to subordinate the repayment of his Convertible Promissory Notes (as described above) to the repayment of the Swinford Notes. The 2010 IP Purchase Agreement also provided that in the event Mr. Swinford was required to pay taxes totaling more than 15% of the proceeds received by Mr. Swinford in connection with the payment of the Swinford Notes in any calendar year (the “15% Limit”), the Company would reimburse Mr. Swinford for any and all taxes due over such 15% Limit, which may substantially increase the amount due to Mr. Swinford from the Company in connection with the payment of the Swinford Notes.

 

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.

 

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Effective November 1, 2014, the Company entered into a contract to purchase an additional 6,000 square foot office/warehouse building and associated land located at 22315 Gosling Road, Spring, Texas 77389 at a purchase price of $1,060,000. The Company leased the building at a monthly rate of $6,500, until March 1, 2015, at which time the Company purchased the property. The Company paid $300,000 in cash and issued a fifteen year 7% note to the seller totaling $760,000 which is payable in monthly principal and interest payments of $6,831. The land and building are pledged as security for the note, and our Chief Executive Officer, Jason Swinford, also provided the seller a personal guaranty.

 

On March 25, 2015, and effective in December 2014, the Company entered into an Intellectual Property Purchase Agreement (the “2015 IP Purchase Agreement”) with Jerry Swinford, the Company’s Executive Vice President and Chairman. The Company had originally purchased various intellectual property and patents from Mr. Swinford in November 2010 for $1.2 million, which purchase agreement also required that Mr. Swinford enter into an agreement with the Company agreeing that all future intellectual property and patents developed by Mr. Swinford would automatically become the property of the Company in consideration for the salary payable to Mr. Swinford under the terms of his employment agreement entered into at the same time (the “At-Will Employment Agreement”). Notwithstanding the terms of the prior November 2010 agreement, the parties intended at the time of their entry into the original agreement, that in-process and non-commercialized intellectual property and technology owned by Mr. Swinford in November 2010 (the “In-Process Technology”), would be acquired by the Company at a future time subsequent to the date of the original agreements and for additional consideration, once such intellectual property and technology was fully-developed and commercialized, which the parties believe has occurred to date. The purchase of the In-Process Technology was further documented and memorialized by an Intellectual Property Assignment agreement (the “2015 IP Assignment Agreement”).

 

Pursuant to the 2015 IP Purchase Agreement, the parties amended the At-Will Employment Agreement to carve-out the In-Process Technology, which included various patents and pending patents in the Company’s name, which relate to the Company’s tools and products, which the parties agreed should never have been transferred to the Company in the first place. The Company agreed to purchase the In-Process Technology for $3,750,000 in the form of a promissory note payable to Mr. Swinford (the “2015 Swinford Note”). The Company obtained an independent valuation in order to determine the value of the In-Process Technology. Moving forward all patents, pending patents and other intellectual property whatsoever developed by Mr. Swinford while employed by the Company will automatically be owned by the Company for no additional consideration.

 

The 2015 Swinford Note has an effective date of December 1, 2014 and is due and payable on January 1, 2018. The 2015 Swinford Note bears interest at the rate of 3% per annum (12% upon the occurrence of an event of default), with payments of interest only due until January 1, 2017, and amortizing payments of $15,810 due monthly thereafter until maturity. The 2015 Swinford Note contains usual and standard events of defaults and further provides that in the event of a change of control transaction involving the Company, including the sale of 25% or more of the Company’s outstanding voting securities, a merger or consolidation where the Company is not the surviving entity, or a liquidation or dissolution, the Note is required to be repaid immediately. The 2015 Swinford Note can be prepaid at any time without penalty.

 

The Company also agreed to grant Mr. Swinford a security interest in all of the assets acquired by the Company in order to secure the repayment of the 2015 Swinford Note. Holdings, its subsidiaries and Excel Inspection, LLC also agreed, pursuant to a Guaranty, to guaranty the repayment of the Swinford Notes.

 

Off Balance Sheet Arrangements:

 

None.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

INDEX TO FINANCIAL STATEMENTS

 

 

Audited Financial Statements for years ended December 31, 2014 and 2013  
   
  Page
   
F-1
   
Consolidated Balance Sheets as of December 31, 2014 and 2013 F-2
   
Consolidated Statements of Operations for the Years Ended December 31, 2014 and 2013 F-3
   
Consolidated Statement of Stockholders’ Equity For the Years Ended December 31, 2014 and 2013 F-4
   
Consolidated Statements of Cash Flows for the Years ended December 31, 2014 and 2013 F-5
   
Notes to Consolidated Financial Statements F-6

 

 

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LBB & ASSOCIATES LTD., LLP

10260 Westheimer Road, Suite 310

Houston, TX 77042

Phone: (713) 800-4343 Fax: (713) 456-2408

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors of

Coil Tubing Technology, Inc. and Subsidiaries

Spring, Texas

 

 

We have audited the accompanying consolidated balance sheets of Coil Tubing Technology, Inc. and Subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2014. Coil Tubing Technology, Inc. and Subsidiaries’ management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Coil Tubing Technology, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ LBB & Associates Ltd., LLP

 

LBB & Associates Ltd., LLP

 

Houston, Texas

March 30, 2015

 

 

F-1
 

 

 

COIL TUBING TECHNOLOGY, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2014 and 2013

($ in thousands except share data)

 

   December 31,   December 31, 
   2014   2013 
Assets          
Current Assets:          
Cash  $1,280   $902 
Accounts receivable, net   2,102    1,875 
Other current assets   194    112 
Total Current Assets   3,576    2,889 
           
Rental tools, net   2,325    3,034 
Property and equipment, net   1,575    1,500 
Intangible assets, net   4,602    953 
Total Assets  $12,078   $8,376 
           
Liabilities and Stockholders' Equity          
Current Liabilities:          
Accounts payable  $450   $332 
Accrued liabilities   89    109 
           
Related party accrued liabilities   39    – 
Related party notes payable - current   91    156 
Notes payable – current   99    91 
Total Current Liabilities   768    688 
           
Long Term Liabilities:          
Related party notes payable, net of current portion   3,750    91 
Notes payable, net of current portion   873    799 
Total Liabilities   5,391    1,578 
           
Commitments and contingencies          
           
Stockholders' Equity:          
Preferred Stock, $0.001 par value, 5,000,000 shares authorized Series A Preferred Stock, $0.001 par value, 1,000,000 shares authorized; 0 shares issued and outstanding   –    – 
Series B Convertible Preferred Stock, $.001 par value, 0 and 1,000,000 shares authorized and 0 shares and 1,000,000 shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively   –    1 
Common Stock, $0.001 par value, 200,000,000 shares authorized; 15,651,827 shares issued and outstanding at December 31, 2014 and December 31, 2013   16    16 
Additional paid-in capital   10,047    9,841 
Accumulated deficit   (3,376)   (3,060)
Total Stockholders' Equity   6,687    6,798 
           
Total Liabilities and Stockholders' Equity  $12,078   $8,376 

 

See accompanying notes to consolidated financial statements

 

F-2
 

 

COIL TUBING TECHNOLOGY, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2014 and 2013

($ in thousands except share data and loss per share)

 

   December 31, 
   2014   2013 
Revenue:          
Rental revenue  $5,509   $6,014 
Product revenue   1,357    129 
Total revenue   6,866    6,143 
           
Cost of revenue:          
Compensation and benefits   1,004    914 
Material, supplies and support service   1,173    1,014 
Facilities and support expenses   187    248 
Depreciation of rental tools   1,172    1,100 
Total cost of revenue   3,536    3,276 
           
Gross profit   3,330    2,867 
           
Operating Expenses:          
Compensation and benefits   872    747 
Selling and marketing   1,508    1,608 
General and administrative   927    1,058 
Depreciation and amortization   356    288 
(Gain) loss on sale of fixed assets   (49)   14 
Total operating expenses   3,614    3,715 
           
Loss from operations   (284)   (848)
           
Other income (expense):          
Other income   30    6 
Interest expense   (62)   (24)
Total other income (expense)   (32)   (18)
           
Net loss  $(316)  $(866)
           
Net loss per share :          
Basic loss  $(0.02)  $(0.06)
Diluted loss  $(0.02)  $(0.06)
           
Weighted average common shares outstanding:          
Basic   15,651,827    15,651,827 
Diluted   15,651,827    15,651,827 

 

See accompanying notes to consolidated financial statements

 

 

F-3
 

 

COIL TUBING TECHNOLOGY, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2014 and 2013

($ and shares in thousands)

 

   Preferred Stock   Common Stock   Paid-In   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Totals 
Balances at December 31, 2012   1,000    1    15,652    16    9,381    (2,194)   7,204 
                                    
Option expense   –    –    –    –    460    –    460 
                                    
Net loss   –    –    –    –    –    (866)   (866)
                                    
Balances at December 31, 2013   1,000    1    15,652    16    9,841    (3,060)   6,798 
                                    
Termination of Series B Preferred Stock   (1,000)   (1)   –    –    1    –    – 
                                    
Option expense   –    –    –    –    205    –    205 
                                    
Net loss   –    –    –    –    –    (316)   (316)
                                    
Balances at December 31, 2014   –   $–    15,652   $16   $10,047   $(3,376)  $6,687 

 

 

See accompanying notes to consolidated financial statements

 

F-4
 

 

COIL TUBING TECHNOLOGY, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2014 and 2013

($ in thousands)

 

   December 31, 
   2014   2013 
Cash Flows From Operating Activities:          
Net loss  $(316)  $(866)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Stock-based compensation   205    460 
Depreciation and amortization   1,528    1,388 
(Gain) loss on sale of fixed assets   (49)   14 
Bad debt expense   –    91 
Changes in:          
Accounts receivable   (227)   (301)
Other current assets   (81)   (53)
Accounts payable   118    (75)
Accrued liabilities – related party   39    – 
Accrued liabilities   (21)   36 
Net cash provided by operating activities   1,196    694 
           
Cash Flows From Investing Activities:          
Purchase of rental tools   (665)   (419)
Purchase of building, machinery and equipment   (415)   (1,242)
Proceeds from sale of fixed assets   107    24 
Proceeds from disposal of assets   229    163 
Net cash used in investing activities   (744)   (1,474)
           
Cash Flows From Financing Activities:          
Proceeds from notes payable   161    749 
Payments on notes payable   (79)   (64)
Payments on related party notes payable   (156)   (156)
Net cash (used in) provided by financing activities   (74)   529 
           
Net change in cash   378    (251)
Cash at beginning of year   902    1,153 
Cash at end of year  $1,280   $902 
Supplemental disclosure of cash flow information:          
Cash paid for:          
Interest  $62   $24 
Income taxes  $–   $– 
Note payable – related party issued for intangible assets  $3,750   $– 
Termination of Series B Preferred Stock  $1   $– 

 

 

See accompanying notes to consolidated financial statements

 

F-5
 

 

COIL TUBING TECHNOLOGY, INC. & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

 

NOTE 1 - BUSINESS OVERVIEW AND SUMMARY OF ACCOUNTING POLICIES

 

Organization and Business. Coil Tubing Technology, Inc. (“we” or the “Company”) was formed in 2005 to specialize in the design and production of proprietary tools for the coil tubing industry. The Company concentrates on three categories of coil tubing applications: tubing fishing, tubing work over and coil tubing drilling. The Company supplies a full line of tools to oil companies, coiled tubing operators and well servicing companies. The Company focuses on the development, marketing, sales and rental of advanced tools and related technical solutions for use with coil tubing and jointed pipe in the bottom hole assembly for the exploration and production of hydrocarbons.

 

Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Coil Tubing Technology Holdings, Inc., a Nevada corporation and its subsidiaries, Total Downhole Solutions, Inc. (“TDS”) and Coil Tubing Technology, Inc. (“CTT Texas”) Texas corporations and Coil Tubing Technology Canada Inc., an Alberta, Canada corporation (“CTT Canada”) and Excel Inspection, LLC (a 51% owned limited liability company). The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Reclassifications. Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform to the current presentation for comparative purposes. These reclassifications have no impact on net income.

 

Use of Estimates in Financial Statement Preparation. The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.

 

Cash Equivalents. The Company considers all highly liquid investments with original purchased maturities of three months or less to be cash equivalents.

 

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 Alberta, Canada. The 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 of 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 Tools. Approximately 80% of the Company’s revenues were generated from rental equipment in 2014. Rental tools are recorded on the Company’s books as rental equipment at “manufacturers cost” as they are purchased from a contract manufacturer. 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 revenue for the Company (approximately 4.1% in 2014). 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 of 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 their 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.

F-6
 

 

Earnings Per Share. Basic earnings per common share equals net earnings attributable to common shareholders divided by the weighted average shares outstanding during the period. Diluted earnings per share include the impact on dilution from all contingently issuable shares, including options, warrants and convertible securities. The common stock equivalents from contingent shares are determined by the treasury stock method. For the years ended December 31, 2014 and 2013 potential dilutive securities had an anti-dilutive effect and were not included in the calculation of fully diluted net loss per common share.

 

Stock Based Compensation. The Company accounts for stock-based employee compensation arrangements using the fair value method that requires that the fair value of employee 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 as general and administrative expense in the statement of operations over the service period.

 

The Company periodically issues common stock for acquisitions and services rendered. Common stock issued is valued at the estimated fair market value, as determined by management and the board of directors. 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.

 

Financial Instruments. Financial instruments consist of cash, accounts receivable, accounts payable, accrued liabilities, notes payable, and debt. The Company carries cash, accounts receivable, accounts payable and accrued liabilities at historical costs; their respective estimated fair values approximate carrying values due to their current nature. The fair values of the notes payable approximate carrying values based on the comparable market interest rates applicable to similar instruments.

 

Customer Deposits. The Company receives deposits from customers under certain agreements. Deposits are usually liquidated over the period of product deliveries.

 

Allowance for Doubtful Accounts. Accounts receivable consists of amounts billed and currently due from customers. The Company monitors the aging of its accounts receivable and related facts and circumstances to determine if an allowance should be established for doubtful accounts. The Company recorded an allowance of $104,607 as of December 31, 2014 and 2013, respectively. Bad debt expense was $-0- and $91,204 for the years ended December 31, 2014 and 2013, respectively.

 

Property and Equipment. Property and Equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight line method over the useful lives of the assets of five to thirty-nine years. Maintenance, repairs, and minor renewals and betterments are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized.

 

Fair Value Estimates. Pursuant to the Accounting Standards Codification (“ASC”) No. 820, “Disclosures About Fair Value of Financial Instruments”, the Company records its financial assets and liabilities at fair value. ASC No. 820 provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. ASC No. 820 establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the asset/liability’s anticipated life.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

The carrying values for cash and cash equivalents, accounts receivable, prepaid assets, accounts payable and accrued liabilities approximate their fair value due to their short maturities.

F-7
 

 

Non-controlling Interest. Non-controlling interest in our majority-owned limited liability company, Excel Inspection, LLC, is included in the equity section of the consolidated balance sheets. Non-controlling interest represents 51% of the equity of Excel Inspection, LLC. Non-controlling interest is adjusted for the non-controlling interest holders’ proportionate share of the earnings or losses of Excel Inspection, LLC. Any excess losses applicable to the non-controlling interests have been and are borne by the Company as there is no obligation of the non-controlling interests to fund any losses in excess of their original investment. There is also no obligation or commitment on the part of the Company to fund operating losses of any subsidiary whether wholly-owned or majority-owned. Excel Inspection, LLC. was formed in December 2014 and commenced operations in February 2015.

 

Recently Issued Accounting Pronouncements. We do not expect any recently issued but not yet adopted accounting pronouncements to have a material effect on our financial position, results of operations or cash flow.

 

NOTE 2 – RENTAL TOOLS, NET

 

Rental tools are purchased from contract manufacturers engaged to produce the Company’s patented or licensed products. These tools are rented or leased to a variety of well-servicing companies over the life of the tool. Rental tools are depreciated over their estimated useful life of 5 years and are presented in the accompanying financial statements, net of accumulated depreciation of $4,316,834 and $3,171,693 as of December 31, 2014 and 2013, respectively. For the years ended December 31, 2014 and 2013, depreciation expense of $1,172,063 and $1,099,968, respectively, was included in the cost of revenue.

 

NOTE 3 – PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

        December 31,  
Description   Life   2014     2013  
Office equipment   5 years   $ 48,658     $ 35,870  
Shop equipment   5 years     350,097       297,174  
Vehicles   4 years     617,359       575,519  
Leasehold improvements   10 years     130,088       180,562  
Building   39 years     689,770       689,770  
Land   N/A     194,000       194,000  
          2,029,972       1,972,895  
Less: accumulated depreciation         (455,462 )     (473,329 )
        $ 1,574,510     $ 1,499,566  

 

For the years ended December 31, 2014 and 2013, depreciation expense was $255,437 and $208,565, respectively. During the year ended December 31, 2014 the Company traded in vehicles resulting in a gain of $49,422. During the year ended December 31, 2013, the Company traded in vehicles and disposed of obsolete equipment resulting in a loss of $14,533.

 

NOTE 4 - INTANGIBLE ASSETS, NET

 

In November 2010, the Company entered into an Intellectual Property Purchase Agreement (the “IP Agreement”) with Jerry Swinford, the Company’s then Chief Executive Officer and current Executive Vice President. Pursuant to the IP Agreement, the Company agreed to purchase the patents and pending patents owned and held by Mr. Swinford at the time of the agreement for $25,000 cash and $1,175,000 in the form of two promissory notes payable to Mr. Swinford (the “Swinford Notes”). Mr. Swinford reserved a first priority security interest over these patents until such time as the Swinford Notes are paid in full (the first note, in the amount of $475,000, was paid in full in January 2011). Effective on December 1, 2014, the Company purchased additional patents from Mr. Swinford through the issuance of a $3,750,000 note due in three years. All assets are pledged as collateral on this note with a guaranty by the Company and its subsidiaries.

 

Below is a summary of the Company’s intangible assets as of December 31, 2014, comprised of patents which were acquired from Jerry Swinford, the Company’s Executive Vice President and Chairman pursuant to the November 2010 IP Purchase Agreement and March 25, 2015 IP Assignment Agreement, provided that Mr. Swinford has a first priority security interest over the patents until such time as the $1,175,000 promissory notes he was provided in connection with the IP Purchase Agreement are satisfied in full ($91,000 remains outstanding at December 31, 2014) and the $3,750,000 owed pursuant to a promissory note which was provided in connection with the March 2015 IP Purchase Agreement.

F-8
 

 

Intangible assets consisted of the following:

 

      December 31, 
Description  Life  2014   2013 
Issued and pending patents - Total intangible assets  15 years   4,950,000    1,200,000 
Less: accumulated amortization      (348,000)   (246,670)
Intangible assets, net     $4,602,000   $953,330 

 

Amortization expense was $101,330 and $80,000 for the years ended December 31, 2014 and 2013, respectively and is reflected as a component of operating expenses in the accompanying consolidated financial statements.

 

Estimated amortization at December 31, 2014 is as follows:

 

Year Ending
December 31,		  Amount 
2015   330,000 
2016   330,000 
2017   330,000 
2018   330,000 
2019 and after   3,282,000 
Total  $4,602,000 

 

 

NOTE 5 – NOTES PAYABLE

 

As of December 31, 2014 and 2013, the following promissory notes were outstanding:

 

   December 31, 
   2014   2013 
Notes payable – vehicle loans  $345,692   $244,137 
Notes payable – building loan   626,459    645,874 
Related party notes payable - Jerry Swinford   3,840,739    246,295 
Total debt   4,812,890    1,136,306 
Less current portion – current portion – notes payable – vehicle loans   (78,405)   (71,425)
Less current portion – current portion – notes payable – building loan   (20,422)   (19,415)
Less current portion – related party note payable   (90,739)   (155,556)
Long-term debt  $4,623,324   $889,910 

 

Building Loan

 

Effective October 25, 2013, the Company 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.

 

Effective November 1, 2014, the Company entered into a contract to purchase an additional 6,000 square foot office/warehouse building and associated land located at 22315 Gosling Road, Spring, Texas 77389 at a purchase price of $1,060,000. The Company leased the building at a monthly lease of $6,500 until March 1, 2015 at which time the Company purchased the property. The Company paid $300,000 in cash and issued a fifteen year 7% note totaling $760,000 which is payable in monthly principal and interest payments of $6,831. The land and building is pledged as security for the note, as well as, a personal guaranty of Jason Swinford, our chief executive officer.

 

F-9
 

 

Vehicle Loans

 

The Company has entered into a number of loans for the purchase of vehicles used in its business. These vehicles are primarily used by sales and delivery personnel. These installment loans are generally two to six year loans at interest rates varying for 5.34% to 8.79% and are secured by the vehicles, and mature from one to six years. The vehicle loans are personally guaranteed by Jason Swinford, our chief executive officer.

 

Related Party Notes Payable

 

In November 2010, the Company entered into the IP Agreement with Jerry Swinford, the Company’s then Chief Executive Officer and current Executive Vice President. Pursuant to the IP Agreement, the Company agreed to purchase the patents and pending patents owned and held by Mr. Swinford at the time of the agreement for $25,000 cash and $1,175,000 in the form of two promissory notes payable to Mr. Swinford (the “Swinford Notes”). The first note, in the amount of $475,000 was paid in full in January 2011. The second note in the amount of $700,000 is due September 15, 2015, and is payable in equal monthly installments of $12,963. The notes are non-interest bearing. The Company also agreed to grant Mr. Swinford a security interest in all of the Company’s assets in connection with and to secure the repayment of the Swinford Notes and Coil Tubing Technology Holdings, Inc., the Company’s wholly-owned subsidiary (“Holdings”) also agreed, pursuant to a Guaranty Agreement, to guaranty the repayment of the Swinford Notes.

 

In connection with the IP Agreement, Mr. Swinford agreed to cancel 1,000,000 shares of the Company’s Series A Preferred Stock. As a result of this cancellation, there was a change of control whereby Mr. Pohlmann obtained voting control over the Company. Mr. Swinford has a first priority security interest over the patents until such time as the promissory notes he was provided in connection with the IP Purchase Agreement (described above) are satisfied in full.

 

On March 25, 2015, and effective in December 2014, the Company entered into an Intellectual Property Purchase Agreement (the “2015 IP Purchase Agreement”) with Jerry Swinford, the Company’s Executive Vice President and Chairman. Pursuant to the 2015 IP Purchase Agreement, the Company agreed to purchase additional patents and pending patents owned and held by Mr. Swinford for $3,750,000 in the form of a promissory note payable to Mr. Swinford (the “2015 Swinford Note”). The Company obtained an independent valuation in order to determine the value of the patents. The note, in the amount of $3,750,000 is due January 1, 2018, together with interest at the rate of 3% per annum with monthly installments of $15,810 due commencing on January 1, 2017. The note can be prepaid earlier without penalty. The Company also agreed to grant Mr. Swinford a security interest in all of the assets acquired by the Company in order to secure the repayment of the Swinford Notes. Holdings, its subsidiaries and Excel Inspection, LLC also agreed, pursuant to a Guaranty, to guaranty the repayment of the 2015 Swinford Note.

 

Future maturities under the above mentioned notes payable at December 31, 2014 were as follows:

 

Year Ending
December 31,		  Amount 
2015   189,566 
2016   98,328 
2017   178,369 
2018   711,021 
2019 and after   3,635,606 
Total  $4,812,890 

 

NOTE 6 – STOCKHOLDERS’ EQUITY

 

The total number of shares of stock of all classes which the Company has authority to issue as a result of the amendment in September 2011 and described below is two hundred and five million (205,000,000), of which five million (5,000,000) are shares of Preferred Stock with a par value of $0.001 per share ("Preferred Stock"), and two hundred million (200,000,000) are shares of Common Stock with a par value of $0.001 per share ("Common Stock").

 

In January 2011, the Company’s majority shareholder, Mr. Herbert C. Pohlmann, and the Company’s then sole director, Jerry Swinford, entered into a Voting Agreement, pursuant to which Mr. Herbert C. Pohlmann agreed to vote the shares of the Company which he owns as directed by Mr. Swinford from time to time, to appoint at least 40% of the Company’s Board of Directors, rounded up to the nearest whole number of directors. The Voting Agreement remains in effect until December 31, 2015.

 

In May 2011, the Company’s sole director and its majority shareholder approved the filing of a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of Nevada, pursuant to which our authorized shares of Common Stock were increased to 4,990,000,000 shares of Common Stock $0.001 par value per share and we re-authorized 5,000,000 shares of Preferred Stock $0.001 par value per share, which was filed and effective with the Secretary of State of Nevada in May 2011.

F-10
 

 

In September 2011, the Company’s sole director and majority shareholder approved an amendment to the Company’s Articles of Incorporation to affect a 1:300 reverse stock split of the Company’s outstanding shares of Common Stock and to authorize 205,000,000 shares of capital stock, including 200,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000 shares of Preferred Stock, $0.001 par value per share, which amendment was effective with the Secretary of State of Nevada on October 21, 2011. All share amounts presented herein reflect retroactive recognition of the 1:300 reverse stock split.

 

Preferred Stock

 

The shares of preferred stock of the Company may be issued from time to time in one or more series, each of which shall have a distinctive designation or title as shall be determined by the Board of Directors of the Company ("Board of Directors") prior to the issuance of any shares thereof. The preferred stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as adopted by the Board of Directors.

 

The total number of designated shares of the Company’s Series A Preferred Stock is one million (1,000,000). As of December 31, 2014 and 2013, the Company had -0- shares of its Series A Preferred Stock, $0.001 par value issued and outstanding. The Series A Preferred Stock has no dividend rights, no liquidation preference, no redemption rights and no conversion rights and has 51% voting rights or voting rights equal to 51% of the Company’s outstanding common stock.

 

The Company had one million (1,000,000) total designated shares of Series B Preferred Stock as of December 31, 2013, provided the Company currently has no designated shares of Series B Preferred Stock. As of December 31, 2014 and 2013, the Company had -0- and 1,000,000 shares of its Series B Preferred Stock, $0.001 par value issued and outstanding, respectively. The Series B Preferred Stock had no dividend rights, no liquidation preference, no redemption rights, no voting rights and conversion rights of 0.0667 shares of common stock for each one preferred share during the Option Period (the “Option”). The “Option Period”, beginning in November 2010 and terminated in November 2012, allowed the holder of such Series B Preferred Stock to purchase shares of Series A Preferred Stock of the Company for aggregate consideration of one hundred dollars and lasted for two years from the date that the holder of the Series A Preferred Stock no longer desired to hold the Series A Preferred Stock. Effective August 18, 2014, the Company filed a Certificate of Withdrawal of Certificate of Designation for the Company’s Series B Preferred Stock with the Secretary of State of Nevada, which became effective on the same date. As a result of the filing, effective August 18, 2014, the Company no longer has any Series B Preferred Stock designated.

 

Series A Preferred Stock – Coil Tubing Technology Holdings, Inc. The Series A Preferred Stock of our wholly-owned subsidiary Coil Tubing Technology Holdings, Inc., has no dividend rights, no liquidation preference, no redemption rights and no conversion rights and has 51% voting rights or voting rights equal to 51% of Holdings’ outstanding common stock. On December 5, 2012, and effective November 30, 2010, the Company, Jerry Swinford and Holdings entered into a Series A Preferred Stock Cancellation Agreement pursuant to which Mr. Swinford cancelled the 1,000,000 shares of Series A Preferred Stock of Holdings which he held and the Company agreed to pay Mr. Swinford $1,000 ($0.001 per share of Series A Preferred Stock) in connection with such cancellation. As a result of the cancellation, the Company has sole voting control over and holds 100% of the outstanding securities of Holdings.

 

Common Stock

 

As of December 31, 2014 and 2013, the Company had 15,651,827 shares of its $0.001 par value common stock issued and outstanding.

 

As of December 31, 2014, Mr. Herbert C. Pohlmann held 12,440,648 shares (12,242,397 directly and 198,251 through a trust) (or approximately 79.5%) of the Company’s issued and outstanding shares of common stock.

 

NOTE 7 - STOCK OPTIONS AND WARRANTS

 

Stock Options

 

In January 2011, the Company’s then sole director and its majority shareholder, approved the Company’s 2010 Stock Incentive Plan, which allows the Board of Directors to grant up to an aggregate of eighty-three thousand three hundred and thirty-three (83,333) qualified and non-qualified stock options, restricted stock and performance based awards of securities to the Company’s officers, directors and consultants to help attract and retain qualified Company personnel (the “2010 Stock Plan”).

F-11
 

 

On and effective January 12, 2012, the Company’s Board of Directors and its majority shareholder, Herbert C. Pohlmann, approved the Company’s 2012 Stock Incentive Plan, which allows the Board of Directors to grant up to an aggregate of 750,000 qualified and non-qualified stock options, restricted stock and performance based awards of securities to the Company’s officers, directors and consultants to help attract and retain qualified Company personnel (the “2012 Stock Plan” and together with the 2010 Stock Plan, the “Stock Plans”).

 

  Stock Plans 
Options initially reserved   833,333 
Options issued under the 2012 plan   (600,000)
Securities available to be granted/issued at December 31, 2014   233,333 
Options issued and outstanding under the plans as of December 31, 2014   600,000 

 

The Company recognized total option expense of $204,855 and $459,865 for the years ended December 31, 2014 and 2013, respectively. The remaining amount of unamortized options expense at December 31, 2014 and 2013 was $119,574 and $324,429, respectively. The intrinsic value of outstanding as well as exercisable options at December 31, 2014 and 2013 was $-0-.

 

In August 2012, options to purchase an aggregate of 100,000 shares of common stock were granted to Jerry Swinford, at an exercise price of $1.00 per share. The options have a term of 10 years and vest on December 31, 2014. Fair value of $100,000 was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for the options granted include: (1) discount rate of 1.64%, (2) term of 10 years, (3) expected volatility of 362%, and (4) zero expected dividends.

 

In August 2012, pursuant to a Second Amendment to Employment Agreement entered into with Jerry Swinford, 301,667 options were modified to extend the term from 5 to 10 years and to set the exercise price of certain of the options at $1.00 per share, resulting in an additional expense of $37,881. In March 2013, and effective as of October 2012, pursuant to an amendment to the Employment Agreement entered into with Jerry Swinford, the parties modified the vesting of certain of the options previously granted. The options granted to Jerry Swinford are as follows:

 

  · 1,667 options vested on November 30, 2011;

 

  · 100,000 options vested on December 14, 2011;

 

  · 200,000 options vest on December 31, 2013; and

 

  · 100,000 options vest on December 31, 2014.

 

In August 2012, options to purchase an aggregate of 100,000 shares of common stock were granted to Jason Swinford, at an exercise price of $1.00 per share. The options have a term of 10 years and vest on December 31, 2014. Fair value of $100,000 was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for the options granted include: (1) discount rate of 1.64%, (2) term of 10 years, (3) expected volatility of 362%, and (4) zero expected dividends.

 

In August 2012, pursuant to a Second Amendment to Employment Agreement entered into with Jason Swinford, 301,667 options were modified to extend the term from 5 to 10 years and to set the exercise price of certain of the options at $1.00 per share, resulting in an additional expense of $37,881. In March 2013, and effective as of October 2012, pursuant to an amendment to the Employment Agreement entered into with Jason Swinford, the parties modified the vesting of certain of the options previously granted. The options granted to Jason Swinford are as follows:

 

  · 1,667 options vested on November 30, 2011;

 

  · 100,000 options vested on December 14, 2011;

 

  · 200,000 options vest on December 31, 2013; and

 

  · 100,000 options vest on December 31, 2014.

 

In August 2012, options to purchase an aggregate of 400,000 shares of common stock were granted to Herbert C. Pohlmann, at an exercise price of $1.00 per share. The options have terms of 10 years, with 25% of the options vesting on December 31, 2012 and 25% vesting annually thereafter over the next three years. Fair value of $400,000 was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for the options issued include: (1) discount rate of 1.64%, (2) term of 10 years, (3) expected volatility of 362%, and (4) zero expected dividends.

 

F-12
 

 

Activity in options during the year ended December 31, 2014 and related balances outstanding as of that date are reflected below:

 

    Number of
Shares
Outstanding		     Weighted
Average
Exercise
 Price		     Weighted
Average
Contract Term		  
          (in dollars)     (in years)  
Balance at December 31, 2014     1,203,334     $ 1.02       5.92  
Exercisable at December 31, 2014     1,103,334     $ 1.02       5.92  

 

Summary of options outstanding and exercisable as of December 31, 2014 is as follows:

 

Exercise Price     Weighted Average
Remaining Life (years)		     Number of Options
 Outstanding		     Number of Options
Exercisable		  
$ 7.50       5.92       3,334       3,334  
$ 1.00       5.92       1,200,000       1,100,000  
$ 1.00 to 7.50       5.92       1,203,334       1,103,334  

 

Activity in options during the year ended December 31, 2013 and related balances outstanding as of that date are reflected below:

 

    Number of
Shares
Outstanding		     Weighted
Average
Exercise Price		     Weighted
Average
Contract Term		  
              (in dollars)       (in years)  
Balance at December 31, 2013     1,203,334     $ 1.02       6.92  
Exercisable at December 31, 2013     803,334     $ 1.03       6.92  

 

Summary of options outstanding and exercisable as of December 31, 2013 is as follows:

 

Exercise Price     Weighted Average
Remaining Life (years)		     Number of Options
Outstanding		     Number of Options
 Exercisable		  
$ 7.50       6.92       3,334       3,334  
$ 1.00       6.92       1,200,000       800,000  
$ 1.00 to 7.50       6.92       1,203,334       803,334  

 

Investor Warrants

 

In December 2011, the Company completed a private placement of 1,600,000 Units to Mr. Herbert C. Pohlmann. Each Unit consisted of one share of common stock, and a warrant. Each warrant entitles the holder to purchase one additional share of common stock at a price of $1.00 per share at any time until December 14, 2016. The Company sold each Unit at a price of $1.00 per Unit, which represents total proceeds of $1,600,000.

 

In January, 2012, the Company completed a private placement of 52,500 Units to a former director. Each Unit consisted of one share of common stock, and a warrant. Each warrant entitles the holder to purchase one additional share of common stock at a price of $1.00 per share at any time until January 5, 2017. The Company sold each Unit at a price of $1.00 per Unit, which represents total proceeds of $52,500. The relative fair value of the warrants issued was approximately 50% of the proceeds. The warrants vest upon issuance. Variables used in the Black-Scholes option-pricing model for the warrants issued include: (1) discount rate of 0.86%, (2) term of 5 years, (3) expected volatility of 437%, and (4) zero expected dividends.

 

In August, 2012, the Company granted John Callis, a former director of the Company (a) warrants to purchase 220,000 shares of common stock of the Company with a term of one (1) year and an exercise price of $1.00 per share, which warrants expired unexercised on August 8, 2013; and (b) warrants to purchase 52,500 shares of common stock of the Company with a term expiring on January 5, 2017 and an exercise price of $1.00 per share in consideration for funding previously provided to the Company. The relative fair value of the warrants issued was approximately 33% of the proceeds. In October 2011, John Callis purchased 166,667 shares of the Company’s common stock for consideration of $200,000 or $1.20 per share. The warrants vest upon issuance. Variables used in the Black- Scholes option-pricing model for the warrants issued include: (1) discount rate ranging from 0.18% to 0.69%, (2) term ranging from 1 to 4.4 years, (3) expected volatility ranging from 469% to 782%, and (4) zero expected dividends.

F-13
 

 

The intrinsic value of outstanding as well as exercisable warrants at December 31, 2014 and 2013 was $-0-.

 

Activity in warrants during the year ended December 31, 2014 and related balances outstanding as of that date are reflected below:

 

    Number of Shares
Outstanding		     Weighted Average
Exercise Price		     Weighted Average
Contract Term		  
          (in dollars)     (in years)  
Balance at December 31, 2014     1,705,000     $ 1.00       1.96  
Exercisable at December 31, 2014     1,705,000     $ 1.00       1.96  

 

Summary of warrants outstanding and exercisable as of December 31, 2014 is as follows:

 

Exercise Price     Weighted Average
Remaining Life (years)		     Number of Warrants
Outstanding		     Number of Warrants
 Exercisable		  
$ 1.00       1.96       1,705,000       1,705,000  
$ 1.00       1.96       1,705,000       1,705,000  

 

Activity in warrants during the year ended December 31, 2013 and related balances outstanding as of that date are reflected below:

 

    Number of Shares
 Outstanding		     Weighted Average
 Exercise Price		     Weighted Average
 Contract Term		  
          (in dollars)     (in years)  
Balance at December 31, 2012     1,925,000     $ 1.00       2.96  
Forfeited and canceled     220,000     $            
Balance at December 31, 2013     1,705,000     $ 1.00       2.96  
Exercisable at December 31, 2013     1,705,000     $ 1.00       2.96  

 

Summary of warrants outstanding and exercisable as of December 31, 2013 is as follows:

 

Exercise Price     Weighted Average
 Remaining Life (years)		     Number of Warrants
Outstanding		     Number of Warrants
Exercisable		  
$ 1.00       2.96       1,705,000       1,705,000  
$ 1.00       2.96       1,705,000       1,705,000  

 

NOTE 8 - INCOME TAXES

 

Income tax expense (benefit) attributable to income from continuing operations differed from the amounts computed by applying the U.S. Federal income tax of 34% to pretax income from continuing operations as a result of the following:

 

   December 31,
 2014		   December 31,
 2013		 
Provision (benefit) at statutory rate  $(107,000)  $(295,000)
Net operating loss utilization   (144,000)   (55,000)
Other adjustments   129,000    140,000 
Non-deductible expenses   86,000    156,000 
Change in valuation allowance   36,000    54,000 
   $–   $– 

 

F-14
 

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013, are presented below:

 

   December 31,
2014		   December 31,
2013		 
Deferred tax assets:        
Net operating loss carryforward  $1,218,000   $1,362,000 
Deferred tax assets   1,218,000    1,362,000 
           
Deferred tax liabilities:          
Property and equipment   (776,000)   (957,000)
Deferred tax liabilities   (776,000)   (957,000)
           
Net deferred tax assets   442,000    405,000 
Valuation allowance   (442,000)   (405,000)
   $–   $– 

 

The Company has determined that a valuation allowance of $442,000 at December 31, 2014, is necessary to reduce the net deferred tax assets to the amount that will more than likely than not be realized. The change in valuation allowance, net of the reduction of the deferred tax asset for the use of the net operating loss, for 2014 was approximately $442,000. As of December 31, 2014, the Company has an approximate net operating loss carry-forward of $4,400,000, which is available to offset future federal taxable income, if any, with expiration in starting in 2022.

 

The ability of the Company to utilize net operating loss (“NOL”) carryforwards to reduce future federal taxable income and federal income tax is subject to various limitations under the Internal Revenue Code of 1986, as amended. The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes, including the issuance or exercise of rights to acquire stock, the purchase or sale of stock by 5% stockholders, as defined in the Treasury regulations, and the offering of stock during any three-year period resulting in an aggregate change of more than 50% in the beneficial ownership of the Company.

 

In the event of an ownership change (as defined for income tax purposes), Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the company multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an ownership change occurs. In addition, the limitation is increased if there are recognized built-in gains during any post-change year, but only to the extent of any net unrealized built-in gains (as defined in the Code) inherent in the assets sold. Certain NOLs acquired through various acquisitions are also subject to limitations.

 

There are no significant differences between the Company’s operating results for financial reporting purposes and for income tax purposes.

 

NOTE 9 – CONCENTRATION OF RISK

 

The Company had gross sales of $6,865,890 and $6,143,093 for the years ended December 31, 2014 and 2013, respectively. The Company had two customers each representing approximately 9% of gross sales and two customers representing approximately 13% and 19% of total accounts receivable for the year ended December 31, 2014. The Company had two customers representing approximately 17% and 18% of gross sales and 15% and 37% of total accounts receivable for the year ended December 31, 2013.

 

The Company supplies a full line of tools to oil companies, coiled tubing operators and well servicing companies. A significant amount of the Company’s customers are in the oil and gas industry. Volatility or decline in oil and natural gas prices may result in reduced demand for our products and services which may adversely affect our business, financial condition and results of operation.

 

The Company has a Distribution Agreement in place with Supreme Oilfield Services (“Supreme”) pursuant to which Supreme has agreed to distribute the Company’s products in the area south and west of Corpus Christi, Texas. The agreement was effective May 5, 2010, and renewable for successive one year terms thereafter until terminated by any party for any reason with ninety (90) days prior written notice. The Distribution Agreement, similar to other distribution agreements the Company has entered into in the past and which the Company may enter into in the future provides for the Company to train the employees of the distributor, provide product literature, expense reimbursements, and engineering and field support and that the parties will work together to jointly promote the products subject to such Distribution Agreement. Total rentals for products under this agreement were approximately $1,320,000 (19% of total revenue) and $2,056,000 (33% of total revenue) for the years ended December 31, 2014 and 2013, respectively.

 

At various times during the year, the Company maintained cash balances in excess of FDIC insurable limits. Management feels this risk is mitigated due to the longstanding reputation of these banks.

F-15
 

 

NOTE 10 – LITIGATION

 

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations other than the proceeding described below. We may become involved in other material legal proceedings in the future.

 

On July 25, 2013, Eric Cohen (a shareholder of the Company) filed a lawsuit against the Company, Jerry Swinford (the Executive Vice President and director of the Company), Jason Swinford (the Chief Executive Officer and director of the Company) and Herbert C. Pohlmann (the Company’s majority shareholder and former director)(collectively, the “Defendants”) in the 61st Judicial District Court for Harris County, Texas (Cause No. 2013-43593). The suit sought monetary damages in excess of $1 million in connection with compensatory damages alleged suffered by Mr. Cohen or sought a buyout of Mr. Cohen’s interest in the Company. The suit also sought legal fees and pre-and-post judgment interest. The suit alleged “minority shareholder oppression” and “breach of fiduciary duty” in connection with the actions of Defendants, i.e., that Defendants engaged in wrongful conduct which has diluted Mr. Cohen’s shares; granted more power to Defendants (for little or no consideration); and granted rights to insiders for less than reasonably equivalent value. The Company disputed Mr. Cohen’s claims, engaged legal counsel in the matter and filed an answer to the complaint denying Cohen’s allegations. On January 27, 2014, the Company filed a counterclaim against Eric Cohen (plaintiff) requesting damages and attorneys’ fees incurred in the case. In November 2014, the parties entered into a Settlement and Mutual Release Agreement, whereby the Company agreed to repurchase the shares held by Mr. Cohen which were the subject of the litigation for $11,448, and to pay certain of Mr. Cohen’s legal fees and costs in the amount of $51,553; the parties each agreed to dismiss their actions against the other with prejudice; and the parties each released each other and their representatives from all claims, causes of actions and damages. The shares previously held by Mr. Cohen were cancelled in March 2015. Additionally, the Company has paid Cohen all amounts due pursuant to the terms of the settlement to date. Following the date hereof the Company expects that each party will dismiss their claims against the other with prejudice.

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

The Company leases approximately 1,560 square feet of warehouse and office space in Red Deer, Alberta, Canada, which lease arrangement is in effect from November 3, 2014 through November 3, 2015. Rent due under the lease is $1,300 per month plus the Company’s portion of common expenses associated with the rental property which total approximately $651 per month and goods and service tax of approximately $98 per month, for a total monthly rental expense of approximately $2,049 Canadian dollars (approximately $1, 640 U.S. dollars) per month during the term of the lease.

 

The above mentioned lease expires in October 2015 and the related total lease expense is $16,400.

 

As disclosed in Note 5, effective November 1, 2014, the Company entered into a contract to purchase an additional 6,000 square foot office/warehouse building and associated land located at 22315 Gosling Road, Spring, Texas 77389 at a purchase price of $1,060,000. The Company leased the building at a monthly lease of $6,500 until March 1, 2015 at which time the Company closed on the purchase.

 

NOTE 12 - RELATED PARTY TRANSACTIONS

 

Executive Bonuses

 

The Company paid bonuses to executive management totaling $169,586 and $142,510 for the years ended December 31, 2014 and 2013, respectively.

 

Employment Agreements

 

Jerry Swinford

 

In November 2010, the Company entered into an executive employment agreement with Jerry Swinford that expires in November 2015 (automatically renewable for additional one year terms unless terminated by either party as provided in the agreement). This agreement was amended in November 2011 (First Amendment), August 2012 (Second Amendment) and October 2012 (Third Amendment, effective August 2012). Pursuant to the First Amendment, Mr. Swinford will receive (i) a base salary of $108,000 per year, (ii) standard benefits that are available to other executive officers, (iii) a one-time option to purchase up to 301,667 shares, (iv) and an annual bonus ranging from 20% to 100% of the prior year salary if certain earnings before income taxes, depreciation and amortization (EBITDA) are met.

 

Pursuant to the Second Amendment, (i) Mr. Jerry Swinford’s base salary increased to $120,000 effective July 1, 2012, (ii) Mr. Jerry Swinford received an option to purchase an additional 100,000 shares of the Company’s common stock at $1.00 per share, vesting on December 31, 2014, (iii) the option to purchase shares (401,667 in aggregate) was extended from five years to ten years, (iv) and Mr. Swinford was provided a profit bonus equal to 2.5% of the Company’s gross profit for fiscal 2013, in lieu of the EBITDA bonus discussed above. The Third Amendment clarified the terms of the gross profit bonus described in the Second Amendment and corrected the expiration date of the options (November 30, 2020) as previously set forth in the option agreements evidencing such options. In March 2013, and effective as of October 10, 2012, Mr. Jerry Swinford entered into a fourth amendment to his employment agreement with the Company, pursuant to which the parties agreed to modify the vesting date of stock options to purchase 100,000 shares of the Company’s common stock from December 31, 2012 to December 31, 2013.

 

F-16
 

 

In the event of termination, for good reason, by Mr. Jerry Swinford, including but not limited to death or disability, the Company will continue to pay his salary through the term of the agreement, plus a $100,000 lump-sum payment within ten (10) days of such termination. In the event of termination, for cause, by the Company, the Company will pay his compensation and benefits, through the date of termination within ten (10) days of such termination, and thereafter the Company shall have no further compensation, benefit or payment obligations to him, and all unvested options will terminate and be forfeited by him.

 

In March 2013, and effective as of October 10, 2012, Jerry and Jason Swinford each entered into fourth amendments to their employment agreements with the Company, pursuant to which they agreed to modify the vesting date of stock options to purchase 100,000 shares of the Company’s common stock from December 31, 2012 to December 31, 2013 resulting in an additional expense of $36,689 for the year ended December 31, 2012.

 

Jason Swinford

 

In November 2010, the Company entered into an executive employment agreement with Jason Swinford that expires in November 2015 (automatically renewable for additional one year terms unless terminated by either party as provided in the agreement). This agreement was amended in November 2011 (First Amendment), August 2012 (Second Amendment) and October 2012 (Third Amendment, effective in August 2012). Pursuant to the First Amendment, Mr. Jason Swinford will receive (i) a base salary of $200,000 per year, (ii) standard benefits that are available to other executive officers, (iii) a one-time stock grant of up to 301,667 shares, (iv) and an annual bonus ranging from 20% to 100% of the prior year salary if certain earnings before income taxes, depreciation and amortization (EBITDA) are met.

 

Pursuant to the Second Amendment, (i) Mr. Jason Swinford received an option to purchase an additional 100,000 shares of the Company’s common stock at $1.00 per share, vesting on December 31, 2014, (ii) the option to purchase shares (401,667 in aggregate) was extended from five years to ten years, (iii) a profit bonus equal to 2.5% of the Company’s gross profit for the 2013 fiscal year (in lieu of the EBITDA bonus), and (iv) a transaction bonus ranging from $3 million to $5 million based on certain corporate events. The Third Amendment clarified the terms of the gross profit bonus described in the Second Amendment and corrected the expiration date of the options (November 30, 2020) as previously set forth in the option agreements evidencing such options. In March 2013, and effective as of October 10, 2012, Mr. Jason Swinford entered into a fourth amendment to his employment agreement with the Company, pursuant to which the Company agreed to modify the vesting date of stock options to purchase 100,000 shares of the Company’s common stock from December 31, 2012 to December 31, 2013.

 

In the event of termination, for good reason, by Mr. Jason Swinford, including but not limited to death or disability, the Company will continue to pay his salary through the term of the agreement, plus a $100,000 lump-sum payment within ten (10) days of such termination. In the event of termination, for cause, by the Company, the Company will pay his compensation and benefits through the date of termination within ten (10) days of such termination, and thereafter the Company shall have no further compensation, benefit or payment obligations to him, and all unvested options will terminate and be forfeited by him.

 

In March 2013, and effective as of October 10, 2012, Jerry and Jason Swinford each entered into fourth amendments to their employment agreements with the Company, pursuant to which they agreed to modify the vesting date of stock options to purchase 100,000 shares of the Company’s common stock from December 31, 2012 to December 31, 2013 resulting in an additional expense of $36,689 for the year ended December 31, 2012.

 

In July 2013, the Company entered into a fifth amendment to the employment agreement originally entered into between the Company and Jason Swinford (the “Fifth Amendment”). Pursuant to the Fifth Amendment, the employment agreement was modified to include a transaction bonus payable to Mr. Swinford in the event (1) a Change of Control (as defined in the employment agreement) of the Company, its wholly-owned subsidiary, Coil Tubing Technology Holdings, Inc., a Nevada corporation (“Holdings”) and/or Coil Tubing Technology, Inc., a Texas corporation (the wholly-owned subsidiary of Holdings) occurs; or (2) the sale by the Company of a substantial amount of the assets of the Company (or the Company’s subsidiaries), each in one or more related transactions (each a “Bonus Transaction”); occurs while Mr. Swinford is employed under the terms of the employment agreement or within six (6) months of the termination of such employment agreement (a) by the Company for any reason other than Cause (as defined in the employment agreement), or (b) by Mr. Swinford for Good Reason (as defined in the employment agreement).

F-17
 

 

The bonus payable in connection with the Bonus Transaction is payable based on the following schedule:

 

(1) If the total consideration received by the Company and the Company’s shareholders in such Bonus Transaction, including the assumption of any liabilities of the Company in such transaction and the value of any securities received by the Company or its shareholders in connection with such Bonus Transaction (collectively the “Bonus Transaction Consideration”), exceeds $20 million, but is less than $25,000,000.01, Mr. Swinford is to receive a bonus of 2% of the total Bonus Transaction Consideration;

 

(2) If the Bonus Transaction Consideration is between $25,000,000.01 and $35,000,000.01, Mr. Swinford is to receive a Transaction Bonus of 3% of the total Bonus Transaction Consideration; and

 

(3) If the Bonus Transaction Consideration is above $35,000,000.01, Mr. Swinford is to receive a Transaction Bonus of 3.5% of the total Bonus Transaction Consideration.

 

The Fifth Amendment also extended the term of the employment agreement for an additional year such that the employment agreement now expires on November 1, 2014, subject to automatic renewals for successive one (1) year increments unless either party is given written notice of their intent to not renew not less than 60 days prior to such automatic renewal date(s).

 

NOTE 13 – SUBSEQUENT EVENTS

 

As disclosed in Notes 5 and 11, effective November 1, 2014, the Company entered into a contract to purchase an additional 6,000 square foot office/warehouse building and associated land located at 22315 Gosling Road, Spring, Texas 77389 at a purchase price of $1,060,000. The Company leased the building at a monthly lease of $6,500 until March 1, 2015 at which time the Company purchased the property. The Company paid $300,000 in cash and issued a fifteen year 7% note totaling $760,000 which is payable in monthly principal and interest payments of $6,831. The land and building is pledged as security for the note, as well as, a personal guaranty of Jason Swinford, our chief executive officer.

 

F-18
 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014 in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.

 

Management's Assessment Regarding Internal Control

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control over Financial Reporting - Guidance for Smaller Public Companies.

 

Changes in Internal Control over Financial Reporting

 

No changes in our internal control over financial reporting occurred during the quarter ended December 31, 2014, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

Effective November 1, 2014, the Company entered into a contract to purchase an additional 6,000 square foot office/warehouse building and associated land located at 22315 Gosling Road, Spring, Texas 77389 at a purchase price of $1,060,000. The Company leased the building at a monthly rate of $6,500, until March 1, 2015, at which time the Company purchased the property. The Company paid $300,000 in cash and issued a fifteen year 7% note to the seller totaling $760,000 which is payable in monthly principal and interest payments of $6,831. The land and building is pledged as security for the note, and our Chief Executive Officer, Jason Swinford, also provided the seller a personal guaranty.

 

On March 25, 2015, and effective in December 2014, the Company entered into an Intellectual Property Purchase Agreement (the “2015 IP Purchase Agreement”) with Jerry Swinford, the Company’s Executive Vice President and Chairman. The Company had originally purchased various intellectual property and patents from Mr. Swinford in November 2010 for $1.2 million, which purchase agreement also required that Mr. Swinford enter into an agreement with the Company agreeing that all future intellectual property and patents developed by Mr. Swinford would automatically become the property of the Company in consideration for the salary payable to Mr. Swinford under the terms of his employment agreement entered into at the same time (the “At-Will Employment Agreement”). Notwithstanding the terms of the prior November 2010 agreement, the parties intended at the time of their entry into the original agreement, that in-process and non-commercialized intellectual property and technology owned by Mr. Swinford in November 2010 (the “In-Process Technology”), would be acquired by the Company at a future time subsequent to the date of the original agreements and for additional consideration, once such intellectual property and technology was fully-developed and commercialized, which the parties believe has occurred to date. The purchase of the In-Process Technology was further documented and memorialized by an Intellectual Property Assignment agreement (the “2015 IP Assignment Agreement”).

30
 

 

Pursuant to the 2015 IP Purchase Agreement, the parties amended the At-Will Employment Agreement to carve-out the In-Process Technology, which included various patents and pending patents in the Company’s name, which relate to the Company’s tools and products, which the parties agreed should never have been transferred to the Company in the first place. The Company agreed to purchase the In-Process Technology for $3,750,000 in the form of a promissory note payable to Mr. Swinford (the “2015 Swinford Note”). The Company obtained an independent valuation in order to determine the value of the In-Process Technology. Moving forward all patents, pending patents and other intellectual property whatsoever developed by Mr. Swinford while employed by the Company will automatically be owned by the Company for no additional consideration.

 

The 2015 Swinford Note has an effective date of December 1, 2014 and is due and payable on January 1, 2018. The 2015 Swinford Note bears interest at the rate of 3% per annum (12% upon the occurrence of an event of default), with payments of interest only due until January 1, 2017, and amortizing payments of $15,810 due monthly thereafter until maturity. The 2015 Swinford Note contains usual and standard events of defaults and further provides that in the event of a change of control transaction involving the Company, including the sale of 25% or more of the Company’s outstanding voting securities, a merger or consolidation where the Company is not the surviving entity, or a liquidation or dissolution, the Note is required to be repaid immediately. The 2015 Swinford Note can be prepaid at any time without penalty.

 

The Company also agreed to grant Mr. Swinford a security interest in the patents, pending patents and other intellectual property acquired by the Company pursuant to the 2015 IP Purchase Agreement in order to secure the repayment of the 2015 Swinford Note. Finally, Holdings and its subsidiaries and Excel Inspection, LLC (the Company’s 51% owned limited liability company) also agreed, pursuant to a Guaranty, to guaranty the repayment of the 2015 Swinford Note.

 

 

 

31
 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

Name   Age   Position   Date First
Appointed As
Director Or Officer
Jason L. Swinford   35   Chief Executive Officer and Director   December 2011
Jerry L. Swinford   66   Executive Vice President, Secretary, Treasurer and Director   August 2006
Richard R. Royall   68   Chief Financial Officer   March 2013

 

Biographical information for our officers and directors are set forth below:

 

Jason L. Swinford. Jason L. Swinford served as our Chief Operating Officer from November 1, 2010 to December 2011, when he was appointed as Chief Executive Officer. Mr. Swinford has served as a director of the Company since December 2011. Mr. Swinford’s career with the Company began as Operations Manager of Holdings in 1999 when Holdings was founded. Mr. Swinford was responsible for establishing and organizing the manufacturing operating procedures, supervision of employees and the marketing effort. In April 2005, Mr. Swinford left the Company to become President of Houston Vehicles Unlimited (“HVU”), a private equity company. Since August 2007, Mr. Swinford has served on the Board of Directors of and as the Secretary of Steplyn Holdings (“Steplyn”). Steplyn is a privately owned entity. Since returning to the Company in November 2010, Mr. Swinford has supervised the day to day operations, sales and manufacturing of the Company. During the last eighteen months, Mr. Swinford established and developed a successful sales force that not only services the initial sales territories of Texas, Oklahoma and Louisiana, but has extended the Company’s presence into California, Colorado, North Dakota, New Mexico, Pennsylvania, Utah, West Virginia, Wyoming and Canada.

 

Qualifications as Director:

 

Mr. Swinford’s significant experience as an officer and employee of the Company, as well as his other management experience gained through his time spent with HVU gives Mr. Swinford significant insight into the Company’s operations and provides him with unique experience which he uses as a member of the Board of Directors of the Company.

 

Jerry L. Swinford. Jerry L. Swinford served as our Chief Financial Officer from January 2006 until January 2013 and has served as our Secretary since 2006. Since December 2011, Mr. Swinford has served as our Executive Vice President. From January 2006 to December 2011, Mr. Swinford served as our Chief Executive Officer. From January 2006 to December 2011, Mr. Swinford served as our President. Since August 2006, Mr. Swinford has served as a director of the Company, serving as Chairman since December 2011. Since January 2006, Mr. Swinford has served as our Secretary. Mr. Swinford has served as the President of and as a Director of Steplyn since August 2007. Mr. Swinford served as the President and Chief Executive Officer of Holdings from July 1999 to June 2009 and from November 2010 to present (Mr. Swinford served as Vice President of Holdings from June 2009 to November 2010), and as Chief Financial Officer, Secretary and Treasurer of Holdings since May 2007. Mr. Swinford served as Director of Holdings from April 2002 until March 2005, and has served as sole director of Holdings from August 2006 to present. For more than fifteen years, Mr. Swinford was employed by Dresser Industries where he held various research and development and managerial positions.

 

Qualifications as Director:

 

As founder of Holdings, Mr. Swinford has over 40 years of expertise in the design and development of drilling tools. His diverse background in the Oil and Gas Industry includes responsibility of business policy implementation, product design, research and development, and field engineer. This experience provided the foundation for building the Company into a successful company that designs, develops, and patents proprietary drilling tools that are a widely respected brand of the industry. Mr. Swinford continues as an innovative force in the Oil and Gas Industry.

 

Richard R. Royall. Effective March 4, 2013, Richard R. Royall was appointed as the Chief Financial Officer of the Company. Mr. Royall has served as a director of ERF Wireless, Inc. (ERFB:OTCQB) since March 2008 and served as Chief Financial Officer of ERF Wireless, Inc. from March 2008 to March 2014. Mr. Royall is a certified public accountant and since 1972, has been engaged in the private practice of accounting with a concentration of expertise in accounting, mergers, acquisitions and SEC registrations and filings including implementation of SOX 404 compliance. Mr. Royall has been a partner in Royall & Fleschler since 1987, a private accounting firm focused on taxation and professional services to emerging companies. Mr. Royall holds a bachelors of business administration with a concentration on accounting from the University of Texas at Austin.

32
 

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, during the past ten years, none of our directors or executive officers were involved in any of the following: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being a named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, (5) being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Family Relationships:

 

Jason Swinford is the son of Jerry Swinford.

 

Board Leadership Structure

 

The roles of Chairman and Chief Executive Officer of the Company are currently held separately. Jerry Swinford serves as Chairman and Jason Swinford, his son, serves as Chief Executive Officer. The Board of Directors does not have a policy as to whether the Chairman should be an independent director, an affiliated director, or a member of management. Our Board of Directors believes that the Company’s current leadership structure is appropriate because it effectively allocates authority, responsibility, and oversight between management and the members of our Board of Directors. It does this by giving primary responsibility for the operational leadership and strategic direction of the Company to our Chief Executive Officer, while enabling Jerry Swinford, as Chairman to facilitate our Board of Directors’ oversight of management. The Board of Directors believes that its programs for overseeing risk, as described below, would be effective under a variety of leadership frameworks and therefore do not materially affect its choice of structure.

 

Board of Directors Meetings

 

The Company had four official meetings of the Board of Directors of the Company during the last fiscal year ended December 31, 2014. All of the Company’s directors attended at least 75% of the Company’s meetings. All other actions of the Board of Directors were taken via written consent. The Company did not hold an annual meeting of stockholders in fiscal 2014, 2013 or 2012. The Company encourages, but does not require all directors to be present at annual meetings of shareholders.

 

Risk Oversight

 

Effective risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business decision, the Board of Directors discusses risk throughout the year generally or in connection with specific proposed actions. The Board of Director’s approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight, and fostering an appropriate culture of integrity and compliance with legal responsibilities. The Board of Directors exercises direct oversight of strategic risks to the Company.

 

Arrangements between Officers and Directors

 

To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors, pursuant to which the officer was selected to serve as an officer.

33
 

 

Other Directorships

 

No directors of the Company are also directors of issuers with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (or which otherwise are required to file periodic reports under the Exchange Act).

 

Committees of the Board

 

Our Company currently does not have nominating, compensation or audit committees or committees performing similar functions nor does our Company have a written nominating, compensation or audit committee charter.

 

Our Company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The Board of Directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our Company does not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and we do not have any specific process or procedure for evaluating such nominees. The Board of Directors will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment.

 

A shareholder who wishes to communicate with our Board of Directors may do so by directing a written request addressed to our President, at the address appearing on the first page of this filing.

 

Code of Ethics

 

We have not adopted a formal Code of Ethics. The directors evaluated the business of the Company and the number of employees and determined that since the business is operated by only a small number of employees, general rules of fiduciary duty and federal and state criminal, business conduct and securities laws are adequate ethical guidelines. In the event our operations, employees and/or directors expand in the future, we may take actions to adopt a formal Code of Ethics.

 

Risk Oversight

 

Effective risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business decision, the Board of Directors discusses risk throughout the year generally or in connection with specific proposed actions. The Board of Directors’ approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight among the full Board of Directors, and fostering an appropriate culture of integrity and compliance with legal responsibilities.

 

Corporate Governance

 

The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the Securities and Exchange Commission (the “SEC”) and in other public communications made by the Company and strives to be compliant with applicable governmental laws, rules and regulations.

 

In lieu of an Audit Committee, the Company’s Board of Directors is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company's financial statements and other services provided by the Company’s independent public accountants. The Board of Directors reviews the Company's internal accounting controls, practices and policies.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

The following table sets forth certain information concerning compensation earned by or paid to certain persons who we refer to as our “Named Executive Officers” for services provided for the fiscal years ended December 31, 2014 and 2013. Our Named Executive Officers include persons who (i) served as our principal executive officer or acted in a similar capacity during 2013, (ii) were serving at fiscal year-end as our two most highly compensated executive officers, other than the principal executive officer, whose total compensation exceeded $100,000 (provided that our only executive officers are Jerry Swinford, Jason Swinford and Richard Royall), and (iii) if applicable, up to two additional individuals for whom disclosure would have been provided as a most highly compensated executive officer, but for the fact that the individual was not serving as an executive officer at fiscal year-end.

34
 

 

 

Name And

Principal Position

 Fiscal
Year
Ended
December 31

Salary

($)

Bonus

($)

Stock

Awards

($)

Option

Awards

($)

All Other

Compensation

($)

 Total ($)
Jerry L. Swinford Former President, Former CEO, Executive Vice President, 2014 120,000 84,793 – – 18,169 (4) 222,962
Former Chief Financial Officer and Chairman (1)(2) 2013 120,000 71,255 – 300,000 (3) 17,661 (5) 508,916

Jason L. Swinford

CEO,

 2014 200,000 84,793 – - –22,518 (6) 307,311
Former Chief Operating Officer, and Director (1) 2013 200,000 71,255 – 300,000 (3) 21,927 (7) 593,182

Richard R. Royall
CFO (2)

2014

180,000(8)

–

–

–

–

180,000

  2013 73,800(9) – – – – 73,800
John N. Bingham
Former CFO (2)

2014

 –

–

–

–

–

–

  2013 5,450 – – – – 5,450

 

This table does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000. No executive officer earned any non-equity incentive plan compensation or nonqualified deferred compensation during the periods reported above. There have been no changes in the Company’s compensation policies since December 31, 2014.

 

(1) Jason Swinford was appointed as Chief Operating Officer in November 2010 and as Chief Executive Officer in December 2011 upon the resignation of Jerry Swinford as Chief Executive Officer of the Company.
(2) From January 2006 to January 2013, Mr. Swinford served as our Chief Financial Officer.   Effective January 7, 2013, John N. Bingham was appointed as Acting Chief Financial Officer of the Company.  Effective February 28, 2013, Mr. Bingham was terminated as the Company’s Acting Chief Financial Officer.  Effective March 4, 2013, Richard R. Royall was appointed as the Chief Financial Officer of the Company.
(3) Represents the value of options to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.00 per share, calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. A total of 200,000 of the options to purchase shares of common stock vested to the individual as of December 31, 2013 and a total of 100,000 of the options to purchase shares of common stock vested to the individual as of December 31, 2014.
(4) Includes $10,800 ($900 per month for twelve months) paid as an automobile allowance to Mr. Swinford, which vehicle he drove for personal and work purposes and $7,369 in health insurance premiums for Mr. Swinford and his wife, which are paid for by the Company.
(5) Includes $10,800 ($900 per month for twelve months) paid as an automobile allowance to Mr. Swinford, which vehicle he drove for personal and work purposes and $6,861 in health insurance premiums for Mr. Swinford and his wife, which are paid for by the Company.
(6) Includes $10,800 ($900 per month for twelve months) paid as an automobile allowance to Mr. Swinford, which vehicle he drove for personal and work purposes and $11,718 in health insurance premiums for Mr. Swinford and his wife, which are paid for by the Company.
(7) Includes $10,800 ($900 per month for twelve months) paid as an automobile allowance to Mr. Swinford, which vehicle he drove for personal and work purposes and $11,127 in health insurance premiums for Mr. Swinford and his wife, which are paid for by the Company.
(8) Includes $45,000 ($5,000 per month for nine months) paid as compensation for financial related work and $28,800 paid for consulting services.
(9) Includes $60,000 ($5,000 per month for twelve months) paid as compensation for financial related work and $120,000 paid for consulting services.

 

35
 

 

Executive Employment Agreements

 

Jerry Swinford

 

In November 2010, the Company entered into an Executive Employment Agreement with Jerry Swinford, pursuant to which Mr. Swinford agreed to serve as Chief Executive Officer of the Company (which was subsequently amended by the parties entry into an amended agreement pursuant to which Mr. Swinford agreed to serve as Executive Vice President in December 2011 and was subsequently amended again in August 2012, October 2012 (effective August 2012) and March 2013 (effective October 2012), in each case to revise certain sections of the agreement, which amendments have been reflected in the discussion below) for five years (automatically renewable for additional one year terms unless terminated by either party as provided in the agreement) and the Company agreed to pay Mr. Swinford a base salary of not less than $120,000 per year ($108,000 per year from January 2011 to June 2012). The Company agreed to pay for Mr. Swinford’s and his wife’s health insurance through the end of the term of the agreement, regardless of whether such agreement is terminated as provided below. The Company also agreed to pay Mr. Swinford a bonus of $10,000 upon his entry into the agreement and provide him the right to earn an additional bonus (collectively, the “Bonuses”). One such Bonus shall be paid at the end of each calendar year during the term of the agreement (except for 2013, pursuant to which the Profit Sharing Bonus (described below) applies) in the event the Company has positive earnings before interest, taxes, depreciation and amortization (minus extraordinary items including stock buybacks, acquisitions and other extraordinary items as determined at the reasonable discretion of the Board of Directors of the Company, and legal fees associated with such items) (“EBITDA”) for the prior calendar year ended December 31 (the “Prior Year”). The Bonus is based on a percentage of Mr. Swinford’s annual base salary for the Prior Year (the “Prior Year’s Salary”, provided that if the annual base salary has changed during such Prior Year, the Prior Year’s Salary shall equal the annual base salary at the end of such Prior Year), as provided below. If EBITDA for the Prior Year is:

 

  i.   less than $2,000,000, no Bonus shall be due;
  ii.   between $2,000,000 and $3,000,000, the Bonus shall be equal to 20% of the Prior Year’s Salary;
  iii.   between $3,000,000 and $4,000,000, the Bonus shall be equal to 30% of the Prior Year’s Salary;
  iv.   between $4,000,000 and $5,000,000, the Bonus shall be equal to 40% of the Prior Year’s Salary;
  v.   between $5,000,000 and $6,000,000, the Bonus shall be equal to 50% of the Prior Year’s Salary;
  vi.   between $6,000,000 and $7,000,000 the Bonus shall be equal to 75% of the Prior Year’s Salary; or
  vii.   $7,000,000 or more, the Bonus shall be equal to 100% of the Prior Year’s Salary.

 

Mr. Swinford was provided the right to earn a profit sharing Bonus equal to 2.5% of the Company’s Gross Profit (the “Profit Bonus”) monthly in arrears for each month from January 2013 through December 2013 (each a “Profit Sharing Month”), which Profit Bonus is paid to Mr. Swinford by the Company based on the applicable Profit Sharing Month’s Profit. “Gross Profit” is defined as the Company’s gross profit (in the event the Company has a gross loss for any period, there shall be no Gross Profit for the applicable period) for each applicable period, calculated by taking the Company’s revenue for the applicable period and subtracting cost of revenues.

 

Additionally, pursuant to the Executive Employment Agreement, the Company also granted Mr. Swinford an option to purchase 401,667 shares of the Company’s common stock (the “Option”), with 1,667 options vesting upon the parties entry into the agreement (the “Initial Option”), with options to purchase the remaining amount of the Option vesting to Mr. Swinford as follows: 100,000 options on December 14, 2011 (the “2011 Option”); 200,000 options on December 31, 2013 (the “2013 Option”); and 100,000 options on December 31, 2014 (the “2014 Option”), provided that Mr. Swinford is still employed (either as an officer or director) by the Company on such vesting date(s). The Initial Option has an exercise price of $7.50 per share, the 2011 Option, 2013 Option and 2014 Option have an exercise price of $1.00 per share. The Options expire on November 30, 2020, include a cashless exercise provision and the 2011 Option is subject to the Company’s 2010 Stock Incentive Plan and the 2013, Option and 2014 Option are subject to the Company’s 2012 Stock Incentive Plan.

 

Finally, pursuant to the Executive Employment Agreement, Mr. Swinford agreed to cancel the 2,050,000 shares of common stock of Holdings which he was previously issued and any rights to additional shares pursuant to the employment agreement he previously entered into with Holdings as well as 1,000,000 shares of Series A Preferred Stock of the Company which he then held in consideration for 10,000 shares of the Company’s common stock. A required term and condition of the cancellation of the Series A Preferred Stock of the Company was the entry by Mr. Pohlmann (our majority shareholder) into a Voting Agreement with Mr. Swinford, pursuant to which Mr. Swinford has the right to direct Mr. Pohlmann to appoint two (2) out of every five (5) directors of the Company, as determined by Mr. Swinford in his sole discretion, pursuant to the Voting Agreement, which remains in effect until December 31, 2015.

 

If Mr. Swinford’s employment is terminated by the Company for “cause” as defined in the agreement, the Company is required to pay him the compensation earned by him through the date of termination, including any Bonus which is due (which is calculated pro rata through the end of the last full calendar quarter), within 10 days of such termination date. In the event the Company terminates Mr. Swinford’s employment for no reason or Mr. Swinford terminates the agreement for “good reason” as provided for in the agreement, including his death, the Company materially diminishing his responsibilities, his disablement, the Company breaching any term of the employment agreement, or a constructive termination (including Mr. Swinford being demoted, having his salary decreased or being forced to re-locate), the Company is required pay Mr. Swinford his salary for the remaining amount of the term of the agreement (at such times as the consideration would be due as if he was still employed by the Company), along with an additional $100,000 lump sum payment, due within 10 days of the termination date of the agreement.

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Concurrently with his entry into the employment agreement, Mr. Swinford also entered into an At-Will Employment, Non-Competition, Confidential Information, Invention Assignment and Arbitration Agreement (the “At-Will Agreement”). Pursuant to the At-Will Agreement, Mr. Swinford agreed that his employment is “at-will”; that he will not compete against the Company for a period of twelve months in south-eastern Texas following the termination of his employment agreement; that he would keep all of the Company’s confidential and proprietary information confidential following the termination of his employment agreement; that any inventions created by Mr. Swinford while employed by the Company belong to the Company; and that for twelve months following the termination of his employment agreement he will not solicit employees of the Company.

 

Jason Swinford

 

In November 2010, Jason Swinford, Jerry Swinford’s son, also entered into an Executive Employment Agreement with the Company, whereby Jason Swinford agreed to serve as the Chief Operating Officer of the Company (which agreement was revised and amended to provide for Mr. Swinford to serve as Chief Executive Officer in December 2011 and was subsequently amended again in August 2012, October 2012 (effective August 2012), March 2013 (effective October 2012), and July 2013 in each case to revise certain other sections of the agreement, which amendments have been reflected in the discussion below) in consideration for an annual base salary of $132,000 per year ($200,000 per year subsequent to the December 2011 amendment), for a term of six years (automatically renewable for additional one year terms unless terminated by either party as provided in the agreement). Jason Swinford also received a bonus of $10,000 upon his entry into the agreement, and substantially similar rights to receive Bonuses and Options as Jerry Swinford has as provided above. Jason Swinford’s employment agreement has substantially similar terms as Jerry Swinford’s as provided above, except for the higher yearly salary payable to Jason Swinford and the right to earn a Transaction Bonus (as defined below).

 

The Employment Agreement provides for Mr. Swinford to receive a bonus (the “Transaction Bonus”) in the event that a (a) Change of Control (as defined in the Employment Agreement) of the Company, Holdings, or CTT Texas; or (b) the sale by the Company of substantially all of the assets of the Company (or controlling interests in the Company’s subsidiaries), each in one or more related transactions (each a “Bonus Transaction”); occurs while Mr. Swinford is employed under the terms of the Employment Agreement or within six (6) months of the termination of such agreement by the Company for any reason other than cause, or by Mr. Swinford for good reason, subject to the below “Transaction Bonus Schedule”:

 

   (1) If the total consideration received by the Company and the Company’s shareholders in such Bonus Transaction, including the assumption of any liabilities of the Company in such transaction and the value of any securities received by the Company or its shareholders in connection with such Bonus Transaction (collectively the “Bonus Transaction Consideration”), exceeds $20 million, but is less than $25,000,000.01, Mr. Swinford is to receive a bonus of 2% of the total Bonus Transaction Consideration;

 

   (2) If the Bonus Transaction Consideration is between $25,000,000.01 and $35,000,000.01, Mr. Swinford is to receive a Transaction Bonus of 3% of the total Bonus Transaction Consideration; and

 

   (3) If the Bonus Transaction Consideration is above $35,000,000.01, Mr. Swinford is to receive a Transaction Bonus of 3.5% of the total Bonus Transaction Consideration.

 

Additionally, in connection with the Company’s entry into the employment agreement with Jason Swinford, he entered into an At-Will Agreement with substantially similar terms as Jerry Swinford’s At-Will Agreement as discussed above.

 

Consulting Agreements

 

Effective January 7, 2013, the Company engaged Agility Financial Partners (“Agility”) to provide financial reporting and corporate governance consulting upon commencement of its anticipated requirements of being a fully-reporting public company. On January 7, 2013, Agility provided John N. Bingham to the Company and he was appointed as the Acting Chief Financial Officer. On February 28, 2013, the Company terminated the services of Agility and Mr. Bingham. Agility received $5,450 under the terms of its engagement with the Company.

 

On March 5, 2013, and effective March 1, 2013, the Company agreed to the terms of a letter agreement with Royall & Fleschler, pursuant to which the Company will pay Royall & Fleschler $5,000 per month for accounting and consulting services rendered and the use of Royall & Fleschler’s employee, Richard R. Royall, who has been appointed as the Chief Financial Officer of the Company.

37
 

 

2014 Outstanding Equity Awards at Fiscal Year-End

 

The following table presents information regarding outstanding equity awards at December 31, 2014 for each of our executive officers who hold equity awards:

 

Name   Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable		     Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable		     Option Exercise Price ($)     Option Expiration
 Date
Jason L. Swinford     1,667       –     $ 7.50     11/30/2020
      400,000       –     $ 1.00     11/30/2020
                             
Jerry L. Swinford     1,667       –     $ 7.50     11/30/2020
      400,000       –     $ 1.00     11/30/2020

 

 

2014 Director Compensation

 

There were no non-executive directors during the last fiscal year.

 

We do not have any policy regarding the compensation of directors and paid no compensation for director services during the year ended December 31, 2014.

 

Executive Compensation Philosophy

 

Our Board of Directors determines the compensation given to our executive officers in its sole determination. Our Board of Directors also reserves the right to pay our executives a salary, and/or issue them shares of common stock in consideration for services rendered and/or to award incentive bonuses which are linked to our performance, as well as to the individual executive officer’s performance. This package may also include long-term stock based compensation to certain executives which is intended to align the performance of our executives with our long-term business strategies.

 

Incentive Bonus

 

The Board of Directors may grant incentive bonuses to our executive officers in its sole discretion, if the Board of Directors believes such bonuses are in the Company’s best interest, after analyzing our current business objectives and growth, if any, and the amount of revenue we are able to generate each month, which revenue is a direct result of the actions and ability of such executives. Such incentive bonuses will be separate from the bonuses, if any, provided for in our executive’s employment agreements with the Company.

 

Long-term, Stock Based Compensation

 

In order to attract, retain and motivate executive talent necessary to support the Company’s long-term business strategy we may award certain executives with long-term, stock-based compensation in the future, in the sole discretion of our Board of Directors.

 

Criteria for Compensation Levels

 

The Company seeks to attract and retain qualified executives and employees to positively contribute to the success of the Company for the benefit of its various stakeholders, the most important of which is its shareholders, but also including its officers, employees, and the communities in which the Company operates.

 

The Board of Directors (in establishing compensation levels for the Company’s Chief Executive Officer) and the Company (in establishing compensation levels for other executives, if any) may consider many factors, including, but not limited to, the individual’s abilities and performance that results in: the advancement of corporate goals of the Company, execution of the Company’s business strategies, contributions to positive financial results, and contributions to the development of the management team and other employees. In determining compensation levels, the Board of Directors may also consider the experience level of each particular individual and/or the compensation level of executives in similarly situated companies in our industry.

 

Compensation levels for executive officers are generally reviewed annually, but may be reviewed more often as deemed appropriate.

38
 

 

Compensation Philosophy and Strategy

 

In addition to the “Criteria for Compensation Levels” set forth above, the Company has a “Compensation Philosophy” for all employees of the Company (set forth below).

 

Compensation Philosophy

 

The Company’s compensation philosophy is as follows:

 

  • The Company believes that compensation is an integral component of its overall business and human resource strategies. The Company’s compensation plans will strive to promote the hiring and retention of personnel necessary to execute the Company’s business strategies and achieve its business objectives.

 

  • The Company’s compensation plans will be strategy-focused, competitive, and recognize and reward individual and group contributions and results. The Company’s compensation plans will strive to promote an alignment of the interests of employees with the interests of the shareholders by having a portion of compensation based on financial results and actions that will generate future shareholder value.
     
  • In order to reward financial performance over time, the Company’s compensation programs generally will consist of base compensation, and may also consist of short-term variable incentives and long-term variable incentives, as appropriate.
     
  • The Company’s compensation plans will be administered consistently and fairly to promote equal opportunities for the Company’s employees.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table sets forth, as of March 30, 2015, the number and percentage of outstanding shares of our common stock beneficially owned by: (a) each person who is known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; (b) each of our directors; (c) the Named Executive Officers (as defined in “Item 11. Executive Compensation”); and (d) all current directors and executive officers, as a group. As of March 30, 2015, there were 15,632,425 shares of common stock issued and outstanding. Other than our common stock, we have no other series of stock outstanding.

 

Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date.

 

To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, (a) the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to applicable community property laws; and (b) no person owns more than 5% of our common stock.

 

Name and Address of Beneficial Owner (1)   Number of
Shares Owned		     Percentage
of Class		  
Beneficial Owners of more than 5%:                
Herbert C. Pohlmann     14,340,648 (2)     81.8%  
                 
Officers and Directors(5):                
Jason L. Swinford     401,667 (3)     2.51%  
Jerry L. Swinford     411,667 (4)     2.57%  
Richard R. Royall     –       –  
All directors and executive officers as a group (3 persons)     813,334       5.08%  

 

  (1) Unless otherwise indicated in the footnotes, the mailing address of the beneficial owner is c/o Coil Tubing Technology, Inc., 22305 Gosling Road, Spring, Texas 77389.
  (2) Consisting of (i) 12,242,397 shares of common stock held personally; (ii) 198,251 held in a family trust managed by Mr. Pohlmann, (iii) 1,600,000 shares underlying exercisable warrants (which have an exercise price of $1.00 per share and an expiration date of December 14, 2016); and (iv) 300,000 shares underlying exercisable options (which have an exercise price of $1.00 per share and expire in August 2022). Does not include options to purchase 100,000 shares of the Company’s common stock which vest to Mr. Pohlmann on December 31, 2015.
39
 

 

  (3) Consisting of 401,667 shares underlying exercisable options (1,667 of which have an exercise price of $7.50 per share and 400,000 of which have an exercise price of $1.00 per share, all of which options expire if unexercised on November 30, 2020).
  (4) Consisting of (i) 10,000 shares of common stock held and 401,667 shares underlying exercisable options (1,667 of which have an exercise price of $7.50 per share and 400,000 of which have an exercise price of $1.00 per share, all of which options expire if unexercised on November 30, 2020).
  (5) John N. Bingham, our former Chief Financial Officer, is not included in the table above even though he is a Named Executive Officer, as the Company is not aware of Mr. Bingham owning any voting securities of the Company, and Mr. Bingham resigned in February 2013.

 

Changes in Control

 

The Company is not aware of any arrangements which may at a subsequent date result in a change of control of the Company.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

 

During the past two fiscal years there have been no transactions between us and any officer, director, or any stockholder owning greater than five percent (5%) of our outstanding voting shares, nor any member of the above referenced individual’s immediate family, except as set forth below or otherwise disclosed above under “Item 11. Executive Compensation”.

 

In January 2013, the Company’s former director and majority shareholder, Herbert C. Pohlmann, gifted 1,650,000 shares of restricted common stock of the Company which he held to two irrevocable family trusts in the names of his daughters (825,000 shares in total to each trust).

 

In March 2013, and effective as of October 10, 2012, Jerry and Jason Swinford each entered into fourth amendments to their employment agreements with the Company, pursuant to which they agreed to modify the vesting date of stock options to purchase 100,000 shares of the Company’s common stock from December 31, 2012 to December 31, 2013, and as a result they each now have 200,000 stock options to purchase shares of the Company’s common stock which vest on December 31, 2013, provided that such amendments did not otherwise change or modify the terms of their employment agreements.

 

On July 30, 2013, Jason Swinford entered into a fifth amendment to his employment agreement with the Company, whereby the Company agreed to change the bonus payments payable to Mr. Swinford upon a change of control or sale of substantially all of the Company’s (or certain of its subsidiaries) assets, and Mr. Swinford agreed to extend his employment agreement for an additional year.

 

Effective November 1, 2014, the Company entered into a contract to purchase a 6,000 square foot office/warehouse building and associated land located at 22315 Gosling Road, Spring, Texas 77389 at a purchase price of $1,060,000. The Company leased the building at a monthly rate of $6,500, until March 1, 2015, at which time the Company purchased the property. The Company paid $300,000 in cash and issued a fifteen year 7% note to the seller totaling $760,000 which is payable in monthly principal and interest payments of $6,831. The land and building is pledged as security for the note, and our Chief Executive Officer, Jason Swinford, also provided the seller a personal guaranty.

 

On March 25, 2015, and effective in December 2014, the Company entered into an Intellectual Property Purchase Agreement (the “2015 IP Purchase Agreement”) with Jerry Swinford, the Company’s Executive Vice President and Chairman. The Company had originally purchased various intellectual property and patents from Mr. Swinford in November 2010 for $1.2 million, which purchase agreement also required that Mr. Swinford enter into an agreement with the Company agreeing that all future intellectual property and patents developed by Mr. Swinford would automatically become the property of the Company in consideration for the salary payable to Mr. Swinford under the terms of his employment agreement entered into at the same time (the “At-Will Employment Agreement”). Notwithstanding the terms of the prior November 2010 agreement, the parties intended at the time of their entry into the original agreement, that in-process and non-commercialized intellectual property and technology owned by Mr. Swinford in November 2010 (the “In-Process Technology”), would be acquired by the Company at a future time subsequent to the date of the original agreements and for additional consideration, once such intellectual property and technology was fully-developed and commercialized, which the parties believe has occurred to date. The purchase of the In-Process Technology was further documented and memorialized by an Intellectual Property Assignment agreement (the “2015 IP Assignment Agreement”).

 

Pursuant to the 2015 IP Purchase Agreement, the parties amended the At-Will Employment Agreement to carve-out the In-Process Technology, which included various patents and pending patents in the Company’s name, which relate to the Company’s tools and products, which the parties agreed should never have been transferred to the Company in the first place. The Company agreed to purchase the In-Process Technology for $3,750,000 in the form of a promissory note payable to Mr. Swinford (the “2015 Swinford Note”). The Company obtained an independent valuation in order to determine the value of the In-Process Technology. Moving forward all patents, pending patents and other intellectual property whatsoever developed by Mr. Swinford while employed by the Company will automatically be owned by the Company for no additional consideration.

40
 

 

The 2015 Swinford Note has an effective date of December 1, 2014 and is due and payable on January 1, 2018. The 2015 Swinford Note bears interest at the rate of 3% per annum (12% upon the occurrence of an event of default), with payments of interest only due until January 1, 2017, and amortizing payments of $15,810 due monthly thereafter until maturity. The 2015 Swinford Note contains usual and standard events of defaults and further provides that in the event of a change of control transaction involving the Company, including the sale of 25% or more of the Company’s outstanding voting securities, a merger or consolidation where the Company is not the surviving entity, or a liquidation or dissolution, the Note is required to be repaid immediately. The 2015 Swinford Note can be prepaid at any time without penalty.

 

The Company also agreed to grant Mr. Swinford a security interest in the patents, pending patents and other intellectual property acquired by the Company pursuant to the 2015 IP Purchase Agreement in order to secure the repayment of the 2015 Swinford Note. Finally, Holdings and its subsidiaries and Excel Inspection, LLC (the Company’s 51% owned limited liability company) also agreed, pursuant to a Guaranty, to guaranty the repayment of the 2015 Swinford Note.

 

Review, Approval and Ratification of Related Party Transactions

 

Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of transactions, such as those described above, with our executive officers, directors and significant stockholders. However, all of the transactions described above were approved and ratified by our directors. In connection with the approval of the transactions described above, our directors took into account various factors, including their fiduciary duty to the Company; the relationships of the related parties described above to the Company; the material facts underlying each transaction; the anticipated benefits to the Company and related costs associated with such benefits; whether comparable products or services were available; and the terms the Company could receive from an unrelated third party.

 

We intend to establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional directors. On a moving forward basis, our directors will continue to approve any related party transaction based on the criteria set forth above.

 

Independence of Directors

 

The Company is not required to maintain independent directors at this time. The Company will seek to appoint independent directors, if and when it is required to do so.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

During the fiscal years ended December 31, 2014, and 2013, the aggregate fees billed by the Company’s principal independent auditors, LBB & Associates Ltd., LLP (“LBB”) were as follows:

 

   December 31,
2014		   December 31,
2013		 
Audit fees  $58,900   $63,750 
Audit related fees  $–   $– 
Tax fees  $–   $– 
All other fees  $–   $– 

 

Audit Fees

 

Consist of fees billed for professional services rendered for the audit of our annual consolidated financial statements and review of the quarterly condensed consolidated financial statements and services that are normally provided by LBB, in connection with statutory and regulatory filings or engagements.

 

The Board of Directors has considered the nature and amount of fees billed by LBB and believes that the provision of services for activities unrelated to the audit is compatible with maintaining LBB’s independence.

41
 

 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES

 

(a)(1) Financial Statements

The consolidated financial statements filed as part of this Form 10-K are listed and indexed in Part II, Item 8.

 

(a)(2) Schedules

All schedules have been omitted since the information required by the schedule is not applicable, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.

 

(a)(3) Exhibits

See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.

 

42
 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

  Coil Tubing Technology, Inc.
   
Dated: March 30, 2015  
   
  By: /s/ Jason L. Swinford
  Jason Swinford
  Chief Executive Officer
  (Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 

 

 

 

By: /s/ Jason L. Swinford

Jason Swinford

Chief Executive Officer (Principal Executive Officer) and Director

 

Dated: March 30, 2015

 

By: /s/ Richard R. Royall

Richard R. Royall

Chief Financial Officer (Principal Financial/Accounting Officer)

 

Dated: March 30, 2015

 

By: /s/ Jerry L. Swinford

Jerry Swinford

Executive Vice President, Chairman, Secretary and Treasurer

 

Dated: March 30, 2015

 

 

 

 

43
 

 

EXHIBIT INDEX

 

      Incorporated by Reference
Exhibit Number Description of Exhibit Filed/Furnished Herewith Form Exhibit Filing Date/Period End Date
 2.1 Definitive Acquisition Purchase Agreement   10 2.1 1/23/12
 2.2 Agreement For Exchange of Common Stock between Grifco and Coil Tubing   10 2.2 1/23/12
 2.3 Plan and Agreement of Merger and Reorganization   10 2.3 1/23/12
 3.1 Articles of Incorporation   10 3.1 1/23/12
 3.2 Articles of Merger   10 3.2 1/23/12
 3.3 Series A Preferred Stock Designation   10 3.3 1/23/12
 3.4 Series B Preferred Stock Designation   10 3.4 1/23/12
 3.5 Certificate of Amendment (increasing authorized shares to 750,000,000 shares of common stock)   10 3.5 1/23/12
 3.6 Certificate of Amendment (increasing authorized shares to 1,990,000,000 shares of common stock)   10 3.6 1/23/12
 3.7 Certificate of Amendment (increasing authorized shares to 4,990,000,000 shares of common stock)   10 3.7 1/23/12
 3.8 Certificate of Amendment (affecting 1:300 reverse split and authorization of 200,000,000 shares of common stock and 5,000,000 shares of preferred stock)   10 3.8 1/23/12
 3.9 Bylaws (Nevada)   10 3.9 1/23/12
 4.1 Coil Tubing Technology, Inc. 2010 Stock Incentive Plan**   10 4.1 1/23/12
 4.2 Coil Tubing Technology, Inc. 2012 Stock Incentive Plan**   10 4.2 1/23/12
 10.1 Hammelmann Statement of Understanding Coil Tubing Cleaner   10 10.1 1/23/12
 10.2 Hammelmann Statement of Understanding 5 1/8” RotorJet and TurboJet   10 10.2 1/23/12
 10.3 Agreement and Release between Grifco and Coil Tubing   10 10.3 1/23/12
 10.4 Restatement and Novation of Agreement for Exchange of Common Stock between Grifco and Coil Tubing   10 10.4 1/23/12
 10.5 Employment Agreement with Jerry Swinford**   10 10.5 1/23/12
 10.6 At-Will Employment, Non-Competition, Confidential information, Invention Assignment and Arbitration Agreement with Jerry Swinford**   10 10.6 1/23/12
 10.7 Employment Agreement with Jason Swinford**   10 10.7 1/23/12
 10.8 At-Will Employment, Non-Competition, Confidential information, Invention Assignment and Arbitration Agreement with Jason Swinford**   10 10.8 1/23/12
 10.9 Intellectual Property Purchase Agreement Between Jerry Swinford and the Company**   10 10.9 1/23/12
 10.10 Secured Promissory Note ($475,000) – November 30, 2010**   10 10.10 1/23/12
 10.11 Secured Promissory Note ($700,000) – November 30, 2010**   10 10.11 1/23/12
 10.12 Guaranty Agreement, Whereby Holdings Guaranteed The Repayment of Jerry Swinford’s Notes**   10 10.12 1/23/12
 10.13 Cancellation, Resignation, Repayment and Issuance Agreement with Charles Wayne Tynon**   10 10.13 1/23/12
 10.14 Voting Agreement Between Herbert C. Pohlmann and Jerry Swinford**   10 10.14 1/23/12
 10.15 Anti-Dilution and Make Whole Agreement with Herbert C. Pohlmann**   10 10.15 1/23/12
 10.16 First Amendment to Anti-Dilution and Make Whole Agreement with Herbert C. Pohlmann**   10 10.16 1/23/12

 

 10.17 First Amendment to Employment Agreement with Jerry Swinford**   10 10.17 1/23/12
 10.18 First Amendment to Employment Agreement with Jason Swinford**   10 10.18 1/23/12
 10.19 Intellectual Property Assignment Agreement between Jerry Swinford and the Company**   10 10.19 1/23/12
44
 

 

 10.20 Form of Common Stock Purchase Warrant (granted in connection with the January 2012 sale of Units)**   10 10.21 1/23/12
 10.21 Distribution Agreement with Supreme Oilfield Services   S-1 10.22 10/16/12
 10.22 Second Amendment to Employment Agreement with Jerry Swinford**   S-1 10.23 10/16/12
 10.23 Second Amendment to Employment Agreement with Jason Swinford**   S-1 10.24 10/16/12
 10.24 Stock Option Agreement – Jerry Swinford**   S-1 10.25 10/16/12
 10.25 Stock Option Agreement – Jason Swinford**   S-1 10.26 10/16/12
 10.26 Stock Option Agreement – Herbert C. Pohlmann**   S-1 10.27 10/16/12
 10.27 Third Amendment to Employment Agreement with Jerry Swinford**   S-1 10.28 10/16/12
 10.28 Third Amendment to Employment Agreement with Jason Swinford**   S-1 10.29 10/16/12
 10.29 Series A Preferred Stock Cancellation Agreement**   S-1 10.29 12/13/12
 10.30 Fourth Amendment to Employment Agreement with Jerry Swinford**   10-K 10.30 12/31/12
 10.31 Fourth Amendment to Employment Agreement with Jason Swinford**   10-K 10.31 12/31/12
 10.32 Letter Agreement with Royall and Fleschler (March 5, 2013)**   10-K 10.32 12/31/12
 10.33 Fifth Amendment to Executive Employment Agreement with Jason Swinford (July 30, 2013)**   8-K 10.1 8/5/13
 10.34 Promissory Note with Bank of Houston (October 25, 2013)   8-K 10.1 10/31/13
 10.35* Promissory Note with Arnold & Norma Rodriguez Family Limited Partnership (February 27, 2015) X      
 10.36* Intellectual Property Purchase Agreement Between Jerry Swinford and the Company (March 25, 2015)** X      
 10.37* Secured Promissory Note ($3.75 Million) – Coil Tubing Technology, Inc. and Jerry Swinford - March 25, 2015** X      
 10.38* Guaranty Agreement – Coil Tubing Technology Holdings, Inc., Total Downhole Solutions, Inc., Coil Tubing Technology, Inc., Coil Tubing Technology Canada Inc. and Excel Inspection, LLC, in favor of Jerry Swinford - March 25, 2015** X      
 10.39* Intellectual Property Assignment Agreement between Jerry Swinford and the Company - March 25, 2015** X      
 21.1* Subsidiaries X      
 31.1* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X      
 31.2* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X      
 32.1*** Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X      
 32.2*** Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X      
 101.INS# XBRL Instance Document X      
 101.SCH# XBRL Taxonomy Extension Schema Document X      
 101.CAL# XBRL Taxonomy Extension Calculation Linkbase Document X      
 101.DEF# XBRL Taxonomy Extension Definition Linkbase Document X      
 101.LAB# XBRL Taxonomy Extension Label Linkbase Document X      
 101.PRE# XBRL Taxonomy Extension Presentation Linkbase Document X      
           

* Filed herewith.

 

** Indicates management contract or compensatory plan or arrangement.

 

*** Furnished herewith.

 

# XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.



Exhibit 10.35

 

Promissory Note

 

Date: February 27, 2015

 

Borrower: Coil Tubing Technology, Inc.

 

Borrower's Mailing Address:

 

22305 Gosling Rd.

Spring, Harris County, Texas 77389

 

Lender: Arnold & Norma Rodriguez Family Limited Partnership, a Texas limited partnership

 

Place for Payment:

 

6811 Theall Rd., Suite A, Houston, Harris County, Texas 77066, or any other place

that Lender may designate in writing.

 

Principal Amount: $760,000.00

 

Annual Interest Rate: Seven Percent (7.00%)

 

Maturity Date: March 1, 2030

 

Annual Interest Rate on Matured, Unpaid Amounts: Seven Percent (7.00%)

 

Terms of Payment (principal and interest):

 

The Principal Amount is due and payable in one hundred eighty (180) equal monthly installments of SIX THOUSAND EIGHT HUNDRED THIRTY-ONE AND 09/100 DOLLARS ($6,831.09), beginning April 1,2015and continuing on the same day of each month until the unpaid principal and accrued, unpaid interest have been paid in full.

 

Security for Payment: This note is secured by a vendor's lien and superior title retained in a deed from Arnold & Norma Rodriguez Family Limited Partnership, a Texas limited partnership to Borrower dated February 27, 2015 and by a deed of trust of even date from Coil Tubing Technology, Inc. to Keavin D. McDonald, Trustee, 17347 Village Green Dr., Suite 103, Houston. Texas 77040, both of which cover the following real property:

 

See Exhibit “A” attached hereto and made a part hereof.

 

Other Security for Payment: None

 

Borrower promises to pay to the order of Lender the Principal Amount. This note is payable at the Place for Payment and according to the Terms of Payment. All unpaid amounts are due by the Maturity date. After maturity, Borrower promises to pay any unpaid principal balance plus interest at the Annual Interest Rate on Matured, Unpaid Amounts.

 

If Borrower defaults in the payment of this note or in the performance of any obligation in any instrument securing or collateral to this note, Lender may declare the unpaid principal balance, earned interest, and any other amounts owed on the note immediately due. Notwithstanding any other provision of this note, in the event of a default, before exercising any of Lender's remedies under this note or any deed of trust or warranty deed with vendor's lien securing it, Lender will first give Borrower written notice of default and Borrower will have ten days after notice is given in which to cure the default. If the default is not cured ten days after notice, Borrower and each surety, endorser, and guarantor waive all demand for payment, presentation for payment, notice of intention to accelerate maturity, notice of acceleration of maturity, protest, and notice of protest, to the extent permitted by law.

 

1
 

 

Borrower also promises to pay reasonable attorney's fees and court and other costs if this note is placed in the hands of an attorney to collect or enforce the note. These expenses will bear interest from the date of advance at the Annual Interest Rate on Matured, Unpaid Amounts. Borrower will pay Lender these expenses and interest on demand at the Place for Payment. These expenses and interest will become part of the debt evidenced by the note and will be secured by any security for payment.

 

Prepayment: Borrower may prepay this note in any amount at any time before the Maturity Date without penalty or premium.

 

Interest on the debt evidenced by this note will not exceed the maximum rate or amount of nonusurious interest that may be contracted for, take reserved, charged, or received under law. Any interest in excess of that maximum amount will be credited on the Principal Amount or, if the Principal Amount has been paid, refunded. On any acceleration or required or permitted prepayment, any excess interest will be canceled automatically as of the acceleration or prepayment or, if the excess interest has already been paid, credited on the Principal Amount or, if the Principal Amount has been paid, refunded. This provision overrides any conflicting provisions in this note and all other instruments concerning the debt.

 

Each Borrower is responsible for all obligations represented by this note.

 

When the context requires, singular nouns and pronouns include the plural.

 

If any installment becomes overdue for more than fifteen days, at Lender's option a late payment charge of $25.00 maybe charged in order to defray the expense of handling the delinquent payment.

 

A default exists under this note if (1) (a) Borrower or (b) any other person liable on any part of this note or who grants a lien or security interest on property as security for any part of this note (an "Other Obligated Party") fails to timely pay or perform any obligation or covenant in any written agreement between Lender and Borrower or any Other Obligated Party; (2) any warranty, covenant, or representation in this note or in any other written agreement between Lender and Borrower or any Other Obligated Party is materially false when made;(3) a receiver is appointed for Borrower, any Other Obligated Party, or any property on which a lien or security interest is created as security (the "Collateral Security") for any part of this note;(4)any Collateral Security is assigned for the benefit of creditors;(5) a bankruptcy or insolvency proceeding is commenced by Borrower, a partnership of which Borrower is a general partner, or an Other Obligated Party; (6) (a) a bankruptcy or insolvency proceeding is commenced against Borrower, a partnership of which Borrower is a general partner, or an Other Obligated Party and (b) the proceeding continues without dismissal for sixty days, the party against whom the proceeding is commenced admits the material allegations of the petition against it, or an order for relief is entered; (7) any of the following parties is dissolved, begins to wind up its affairs, is authorized to dissolve or wind up its affairs by its governing body or persons, or any event occurs or condition exists that permits the dissolution or winding up of the affairs of any of the following parties: Borrower, a partnership of which Borrower is a general partner, or an Other Obligated Party; and (8) any Collateral Security is impaired by loss, theft, damage, levy and execution, issuance of an official writ or order of seizure, or destruction, unless it is promptly replaced with collateral security of like kind and quality or restored to its former condition.

 

If any provision of this note conflicts with any provision of a loan agreement, deed of trust, or security agreement of the same transaction between Lender and Borrower, the provisions of the deed of trust will govern to the extent of the conflict.

 

This note will be construed under the laws of the state of Texas, without regards to choice-of laws rules of any jurisdiction.

 

 

By: /s/Jason Swinford

 

Name: Jason Swinford

Title: Chief Executive Officer

 

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Exhibit 10.36

  

INTELLECTUAL PROPERTY PURCHASE AGREEMENT

 

This Intellectual Property Purchase Agreement (this “Agreement”) is made and entered into on the 25th day of March 2015, to be effective as of December 1, 2014 (the “Effective Date”), by and among Jerry Swinford, an individual (the “Seller”), and Coil Tubing Technology, Inc., a Nevada corporation (the “Purchaser”), each a “Party” and collectively the “Parties.”

 

W I T N E S S E T H:

 

WHEREAS, on or around November 30, 2010, the Purchaser and the Seller entered into an Intellectual Property Purchase Agreement (the “Original IP Purchase Agreement”), pursuant to which the Seller sold and the Purchaser purchased, certain patents, pending patents and associated rights then owned by the Seller, described in greater detail on Exhibit A hereto (the “Original Assets”) in consideration for $1.2 million payable in cash and pursuant to the terms of two secured notes, of which $90,739 remains outstanding as of the date of this Agreement;

 

WHEREAS, on or around November 30, 2010, Seller entered into an Executive Employment Agreement (the “Employment Agreement”) with the Purchaser pursuant to which Seller agreed to serve as the Chief Executive Officer and President of the Purchaser, provided that since that date the Employment Agreement has been amended several times, and the Seller currently serves as the Executive Vice President of the Purchaser;

 

WHEREAS, in connection with the Parties’ entry into the Original IP Purchase Agreement, and on or around November 30, 2010, Seller entered into an At-Will Employment, Non-Competition, Confidential Information, Invention Assignment And Arbitration Agreement (the “At-Will Agreement”), pursuant to which, among other things, Seller agreed that all future inventions and intellectual property created by Seller during Seller’s employment with the Purchaser (the “Future Intellectual Property”) would become the property of the Purchaser for no additional consideration;

 

WHEREAS, on or around January 18, 2012, but effective on November 30, 2010, in connection with and in furtherance of the Original IP Purchase Agreement, Seller and Purchaser entered into an Intellectual Property Assignment Agreement (the “Property Assignment Agreement”), pursuant to which Seller assigned Purchaser all rights and interest he had in the Original Assets, and certain other intellectual property described therein and set forth in greater detail on Exhibit B attached hereto (collectively with the Original Assets, the “Original Intellectual Property”);

 

WHEREAS, the Original IP Purchase Agreement, Property Assignment Agreement and At-Will Agreement (collectively, the “Original Agreements”), did not correctly set forth the intended terms and conditions relating to the acquisition by the Purchaser from the Seller of the Original Intellectual Property and Future Intellectual Property and/or the original understanding of the Parties in connection therewith;

 

WHEREAS, notwithstanding the terms and conditions of the Original Agreements, the Parties intended at the time of their entry into the Original Agreements, that in-process and non-commercialized intellectual property and technology owned by Seller at the time of the Parties’ entry into the Original Agreements (the “In-Process Technology”) would be acquired by the Purchaser in the future subsequent to the date of the Original Agreements and for additional consideration, once such intellectual property and technology was fully-developed and commercialized, which the Parties believe has occurred to date;

 

WHEREAS, the Purchaser has obtained a valuation of the In-Process Technology, which was not intended to be acquired by the Purchaser pursuant to the Original IP Purchase Agreement or At-Will Agreement, which the Purchaser nonetheless has been using in connection with its products and operations, working to commercialize and monetize since the date of the Original Agreements;

 

WHEREAS, the valuation of such In-Process Technology has been obtained from Doty Scott Enterprises, Inc. (the “Valuation Firm”), which Valuation Firm has valued such In-Process Technology at $3.75 million;

 

WHEREAS, the Parties desire to enter into this Agreement to amend the terms of the At-Will Agreement, correct the prior misunderstandings set forth in the Original Agreements, and provide for the Seller to sell and the Purchaser to purchase all rights to the In-Process Technology, intellectual property and other assets of the Seller described in greater detail on Exhibit C, attached hereto (the “Assets”) subject to the terms and conditions of this Agreement.

 

 

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NOW, THEREFORE, in consideration of the foregoing and of the representations, warranties and covenants contained in this Agreement, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties hereby agree as follows:

 

ARTICLE I

AMENDMENTS TO ORIGINAL AGREEMENTS

 

1.1 Modification of At-Will Agreement. Effective as of the Effective Date, the At-Will Agreement is hereby amended and modified to exclude the Assets from the Inventions (as defined therein), which were either (i) sold to the Purchaser as Prior Inventions pursuant to the Original IP Purchase Agreement; or (ii) owned by the Purchaser as Future Intellectual Property and/or in “works made for hire” pursuant to the terms and conditions of the At-Will Agreement. For the sake of clarity and in an abundance of caution, the Parties agree that all rights and ownership of the Assets shall, effective as of the Effective Date, be treated as though they have been held solely by the Seller since the earlier of (a) November 30, 2010; and (b) the date such Asset was created or invented by the Seller, and that the Purchaser has been provided a royalty-free license to use and develop such Assets since such applicable date of use by the Purchaser (the “Asset Carve-out”). Notwithstanding the above, the Parties agree and confirm that because such modifications described in this Section 1.1 are only effective upon the Effective Date, none of the disclosures previously set forth in the Purchaser’s filings with the Securities and Exchange Commission relating to the Assets were incorrect at the time disclosed.

 

1.2 Modification of other Original Agreements. Without limiting the scope of Section 1.1 above, the Parties agree that the Original Agreements, and any other agreements between the Parties relating to the Assets, shall be deemed amended and updated effective as of the Effective Date, and without any required action by either Party hereto, to affect and reflect the Asset Carve-out and the terms and conditions thereof, such that all Original Agreements, and other agreements entered into between the Parties shall, effective as of the Effective Date, be automatically modified and amended such that the terms thereof, if any, which would otherwise conflict with the terms of the Asset Carve-out, shall be deemed to have been modified to conform to the terms of such Asset Carve-out.

 

1.3 Original IP Purchase Agreement. Notwithstanding Section 1.1 and 1.2 above, the Parties agree that nothing in this Agreement shall modify or affect the purchase of the Original Intellectual Property by the Purchaser from the Seller pursuant to the terms of the Original IP Purchase Agreement and Property Assignment Agreement, which agreements and the terms and conditions thereof shall remain in full force and effect following the Parties’ entry into this Agreement and the terms and conditions hereof.

 

ARTICLE II

SALE AND PURCHASE OF ASSETS

 

2.1 Sale and Purchase. Subject to the terms and conditions contained herein, and effective on the Effective Date, Seller hereby agrees to sell, transfer, assign, convey and deliver to Purchaser, and Purchaser agrees to accept from Seller, all of Seller’s right, title and interest in and to the Assets, as set forth in greater detail on Exhibit C, attached hereto, free and clear of any liens, pledges, security interests, claims or encumbrances of any kind, except for those specifically assumed hereunder. Purchaser shall also assume any and all liabilities, costs, expenses, responsibilities and payments associated with, incurred by Seller in connection or which affect the Assets (the “Assumed Liabilities”), which Assumed Liabilities shall become the sole responsibility of Purchaser following the Closing and the consummation of the transactions contemplated herein. The Parties agree that the components of the Assets shall have the values assigned to such components as set forth on Exhibit C. Any and all assets or intellectual property of Seller not included in the Assets, or already sold to the Purchaser in connection with the Original Agreements, shall remain the sole and exclusive property of Seller.

 

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2.2 The Purchase Price. The total purchase price for the Assets (the “Purchase Price”) shall be $3,750,000 which shall be payable to the Seller by the Purchaser at the Closing by the issuance to the Seller at Closing of a Secured Promissory Note in the amount of $3,750,000, in the form of Exhibit D, attached hereto (the “Note”), which Note shall be guaranteed by Coil Tubing Technology Holdings, Inc., a Nevada corporation (“Holdings”), the Purchaser’s wholly-owned subsidiary, a Holdings’ wholly-owned subsidiaries Total Downhole Solutions, Inc., a Texas corporation, Coil Tubing Technology, Inc., a Texas corporation and Coil Tubing Technology Canada Inc., an Alberta Canada corporation, and Excel Inspection, LLC, a Texas limited liability company which is a majority-owned subsidiary of Purchaser (collectively with Holdings, the “CTT Subsidiaries”) pursuant to the Guaranty, attached hereto as Exhibit E (the “Guaranty”).

 

2.3 Grant of a Security Interest. As security for (a) the full and punctual payment (in lawful money of the United States and in immediately available funds), as and when due, of all principal, interest, attorneys’ fees, costs, expenses and other amounts which are or may become payable by Purchaser under the Note and (b) the full and punctual performance of all other obligations of Purchaser under the Note, Purchaser hereby grants to Seller a continuing and first-priority security interest (the “Security Interest”) in the following (collectively, the “Collateral”): all right, title and interest of Purchaser in and to the Assets; all cash and other consideration paid or payable with respect to the Assets; all of Purchaser’s books and records pertaining to the foregoing; and all proceeds from sales, transfers or other dispositions of the foregoing, as described in greater detail in the Note.

 

2.4 Change of Control and Payment of Note. In the event the Purchaser issues, sells, exchanges or transfers 25% or more of the Purchaser’s then outstanding shares of common stock or voting securities in any Change of Control transaction, not approved by the Seller in writing (each a “Change in Control Transaction”), the Purchaser agrees to use any and all of such funds received in connection with such Change in Control Transaction to pay down amounts owed to Seller under the Note.

 

(a) A “Change in Control” for purposes of this Agreement shall mean any of the following events not approved by the Seller in writing:

 

(1) any person (as that term is used in Rule 13d-5 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) or group (as that term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) who is not, as of the date of this Agreement, the beneficial owner of securities of the Purchaser representing 25% or more of the combined voting power or common stock of the Purchaser’s then outstanding securities becomes the beneficial owner of securities of the Purchaser representing 25% or more of the combined voting power or common stock of the Purchaser’s then outstanding securities;

 

(2) the shareholders of the Purchaser approve a merger or consolidation of the Purchaser with any other entity, other than (i) a merger or consolidation which would result in the voting securities of the Purchaser outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the combined voting power of the voting securities of the Purchaser or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Purchaser (or similar transaction) in which no person who did not own more than 50% of the combined voting power of the Purchaser’s securities acquires no more than 50% of the combined voting power of the Purchaser’s then outstanding securities; or

 

(3) the shareholders of the Purchaser approve a plan of complete liquidation of the Purchaser or an agreement for the sale or disposition by the Purchaser of all or substantially all of the Purchaser’s assets.

 

2.5 No Other Intellectual Property or Inventions. Other than the Assets, the Original Intellectual Property previously acquired from the Seller by the Purchaser pursuant to the Original IP Purchase Agreement, and the Future Intellectual Property which is already owned by the Purchaser pursuant to the terms of the At-Will Agreement after reflecting the Asset Carve-Out, the Seller is not aware of and has no knowledge of any other (a) intellectual property, (b) non-commercialized or in process intellectual property, or (c) Inventions (as such term is defined in the At-Will Agreement)(collectively (a) through (c), “Other Intellectual Property”) relating to the business or the operations of the Purchaser, which is owned or known by Seller. Notwithstanding the above, the Seller agrees and confirms that any Other Intellectual Property, if any, shall, effective as of the Effective Date, and without any required action by either Party, be considered acquired by the Purchaser as part of the Assets and in consideration for the Purchase Price, and shall be governed by the terms and conditions of the At-Will Agreement as if such Other Intellectual Property was an Invention (as defined therein) thereunder.

 

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ARTICLE III

CLOSING; CONDITIONS TO CLOSING; DELIVERIES

 

3.1 Closing. The closing of the sale of the Assets (the “Closing”) shall occur on March 6, 2015, subject to the satisfaction or waiver of the conditions to closing set forth in Sections 3.2 and 3.3, below, or at such other time and place upon which the Parties shall mutually agree.

 

3.2 Conditions to Purchaser’s Obligation. Purchaser’s obligation hereunder to purchase and pay for the Assets is subject to the satisfaction, on or before the Closing, of the following conditions, any of which may be waived, in whole or in part, by Purchaser in its sole discretion, and Seller shall use his best efforts to cause such conditions to be fulfilled:

 

(a) Representations and Warranties Correct; Performance. The representations and warranties of Seller contained in this Agreement (including the exhibits and schedules hereto) shall be true, complete and accurate when made and on and as of the date hereof. Seller shall have duly and properly performed, complied with and observed its covenants, agreements and obligations contained in this Agreement to be performed, complied with and observed on or before the Closing.

 

(b) Purchase Permitted by Applicable Laws. The purchase of the Assets to be acquired by Purchaser hereunder shall not be prohibited by any applicable law or governmental regulation and shall not subject Purchaser or its affiliates to any tax (not otherwise expressly assumed by Purchaser under this Agreement), penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation.

 

(c) Proceedings; Receipt of Documents. All corporate and other proceedings taken or required to be taken by Seller in connection with the transactions contemplated hereby and all documents incident thereto shall have been taken and shall be reasonably satisfactory in form and substance to Purchaser, and Purchaser shall have received all such information and such counterpart originals or certified or other copies of such documents as Purchaser may reasonably request.

 

(d) Seller’s Closing Deliveries. Seller shall have delivered, or caused to be delivered, to Purchaser the following, unless the delivery of which has been (i) waived by Purchaser; or (ii) the delivery of which will be made by the Seller subsequent to Closing:

 

(1) documents evidencing title to any Assets for which title or ownership documents exist and any other documentation as may be reasonably requested by Purchaser evidencing the purchase by Purchaser of the Assets;

 

(2) an Intellectual Property Assignment Agreement in the form of Exhibit F hereto, and other title documentation relating to the transfer of the Assets as may be requested by the Purchaser;

 

(3) documents, if any, evidencing the rights to any intellectual property rights associated with the Assets;

 

(4) an executed copy of the Note;

 

(5) an executed copy of the Guaranty; and

 

(6) all materials and/or documents listed with the Assets, as attached hereto as Exhibit C, if any;

 

(e) No Adverse Decision. There shall be no action, suit, investigation or proceeding pending or threatened by or before any court, arbitrator or administrative or governmental body which seeks to restrain, enjoin, prevent the consummation of or otherwise affect the transactions contemplated by this Agreement or questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions.

 

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(f) Approvals and Consents. Seller shall have duly obtained all authorizations, consents, rulings, approvals, licenses, franchises, permits and certificates, or exemptions therefrom, by or of all federal, state and local governmental authorities and non-governmental administrative or regulatory agencies having jurisdiction over the Parties hereto, this Agreement, the Assets, or the transactions contemplated hereby.

 

3.3 Conditions to the Obligation of Seller. The obligation of Seller to consummate the transactions contemplated hereby is subject to the fulfillment of the following conditions on or prior to the Closing, any of which may be waived, in whole or in part, by Seller in his sole discretion, and Purchaser shall use its best efforts to cause such conditions to be fulfilled:

 

(a) Representations and Warranties Correct; Performance. The representations and warranties of Purchaser in this Agreement shall be true, complete and accurate when made on and as of the Closing. Purchaser shall have duly and properly performed, complied with and observed each of its covenants, agreements and obligations contained in this Agreement to be performed, complied with and observed on or before the Closing.

 

(b) Purchase Permitted by Applicable Laws. The purchase of and payment for the Assets to be delivered by Seller hereunder shall not be prohibited by any applicable law or governmental regulation.

 

(c) Proceedings; Receipt of Documents. All corporate and other proceedings taken or required to be taken by Purchaser in connection with the transactions contemplated hereby and all documents incident thereto shall have been taken and shall be reasonably satisfactory in form and substance to Seller, and Seller shall have received all of such information and such counterpart originals or certified or other copies of such documents as Seller may reasonably request.

 

(d) Purchaser’s Closing Deliveries. Purchaser shall have delivered, or caused to be delivered, to Seller the following:

 

(1) resolutions of the Purchaser’s Board of Directors approving this Agreement and the transactions contemplated herein;

 

(2) an executed copy of the Note;

 

(3) an executed copy of the Guaranty;

 

(4) resolutions of the CTT Subsidiaries’ Board of Directors approving the CTT Subsidiaries’ entry into and the transactions contemplated by the Guaranty;

 

(e) No Adverse Decision. There shall be no action, suit, investigation or proceeding pending or threatened by or before any court, arbitrator or administrative or governmental body which seeks to restrain, enjoin, prevent the consummation of or otherwise affect the transactions contemplated by this Agreement or questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions.

 

ARTICLE IV

SELLER’S REPRESENTATIONS AND WARRANTIES

 

Seller represents and warrants to Purchaser as follows:

 

4.1 Authority. Seller has full authority to execute and to perform this Agreement in accordance with its terms and the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby does not and will not result in a breach, violation or default or give rise to an event which with the giving of notice or after the passage of time, or both, would result in a breach, violation or default of any of the terms or provisions of any indenture, agreement, judgment, decree or other instrument or restriction to which Seller is a party or by which Seller or any of the Assets may be bound or affected.

 

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4.2 Title to Assets.

 

(a) Seller has good and marketable title to all of the Assets and the full right and power to transfer the Assets. The Assets are owned by Seller free and clear of all mortgages, pledges, liens, security interests, encumbrances, conditional sale agreements, charges, claims and restrictions of any kind and nature known to Seller, other than what has previously been disclosed to Purchaser; and Purchaser will acquire good and valid title to the Assets free and clear of all mortgages, pledges, liens, security interests, encumbrances, conditional sale agreements, charges, claims and restrictions of any kind and nature known to Seller, other than what has previously been disclosed to Purchaser; and

 

(b) Seller has no present or future obligation or requirement to compensate any person with respect to any of the Assets, whether by the payment of royalties or not, or whether by reason of the ownership, use, license, lease, sale or any commercial use or any disposition whatsoever of any of the Assets.

 

4.3 Compliance With Law. Seller is not in violation of any laws, governmental orders, rules or regulations, whether federal, state or local, to which he or any of his assets or properties are subject, which may have a material adverse effect as to the Assets.

 

4.4 Absence of Changes.

 

(a) At the time of Closing there will not be any obligation or liability for the payment of money (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, any transaction, contract or commitment entered into by Seller or any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or commitment entered into by Seller affecting the Assets other than those specifically agreed to in writing by the Purchaser and/or which are part of the Assumed Liabilities; and

 

(b) No lien of record or guarantee, affecting the Assets (each a “Lien”), if any, will remain at Closing.

 

4.5 Litigation. To the knowledge of Seller there are no actions, suits, proceedings or investigations (including any purportedly on behalf of Seller) pending or, to the knowledge of Seller, threatened against or affecting the Assets; Seller is not operating under, subject to, in violation of or in default with respect to, any judgment, order, writ, injunction or decree of any court or federal, state, municipal or other governmental department, commission, board, agency or instrumentality domestic or foreign in connection with the Assets. No inquiries have been made directly to Seller by any governmental agency which might form the basis of any such action, suit, proceeding or investigation, or which might require Seller to undertake a course of action which would involve any expense in connection with the Assets.

 

4.6 Taxes. Seller has filed, or caused to be filed, with the appropriate U.S. federal, state, local and foreign governmental agencies all required tax and information returns. Seller does not have any liability, contingent or otherwise, for any taxes, excise taxes, assessments, charges, penalties or interest, including, without limitation, any which may arise as a result of the this Agreement (but not including sales taxes, if any, payable as a result of the sale of the Assets as contemplated by this Agreement), other than amounts adequately reserved for. Seller has not received directly or indirectly notice of, nor is he otherwise aware of any tax audit or examination; Seller is not a party directly or indirectly to any action or proceeding by any governmental authority for assessment or collection of taxes, excise taxes, charges, penalties or interest, nor has any claim for assessment and collection been asserted against Seller directly or indirectly; nor has Seller executed a waiver of any statute of limitations with respect thereto. Seller has not received notices nor is otherwise aware of any deficiencies, adjustments or changes in assessments with respect to any such taxes. No extensions of time are in effect for the assessment of deficiencies for such taxes in respect of any period.

 

4.7 Brokers. There has been no broker or finder involved in any manner in the consummation of any transactions contemplated hereby, and Seller agrees to indemnify Purchaser, its officers, directors and affiliates against and hold Purchaser, its officers, directors and affiliates harmless from any claim made by a party for a broker’s or finder’s fee or other similar payment based upon any agreements, arrangements or understandings made by the Seller.

 

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4.8 No Untrue Representation or Warranty. No representation or warranty contained in this Agreement or any attachment, written statement, schedule, exhibit, certificate or instrument furnished or to be furnished to Purchaser by Seller pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements contained herein or therein not misleading.

 

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF PURCHASER

 

Purchaser hereby represents and warrants to Seller as follows:

 

5.1 Organization and Good Standing. Purchaser is a corporation duly organized and validly existing under the laws of the State of Nevada.

 

5.2 Authority. Purchaser has full authority or capacity to execute and to perform this Agreement in accordance with its terms; the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby does not and will not result in a breach, violation or default or give rise to an event which, with the giving of notice or after the passage of time, would result in a breach, violation or default of any of the terms or provisions or of any indenture, agreement, judgment, decree or other instrument or restriction to which Purchaser is a party or by which Purchaser may be bound or affected; and no further authorization or approval, whether of governmental bodies or otherwise, is necessary in order to enable Purchaser to enter into and perform the same; and this Agreement constitutes a valid and binding obligation enforceable against Purchaser in accordance with its terms.

 

5.3 Brokers. There has been no broker or finder involved in any manner in the consummation of any transactions contemplated hereby, and Purchaser agrees to indemnify Seller against and hold Seller harmless from any claim made by a party for a broker’s or finder’s fee or other similar payment based upon any agreements, arrangements or understanding made by Purchaser.

 

5.4 No Untrue Representation or Warranty. No representation or warranty contained in this Agreement or any attachment, written statement, schedule, exhibit, certificate or instrument furnished or to be furnished to Seller by Purchaser pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements contained herein or therein not misleading.

 

ARTICLE VI

COVENANTS OF THE PARTIES

 

6.1 Further Assurances. Seller agrees that, at any time after the Closing, upon the request of Purchaser, Seller will do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acknowledgments, deeds, assignments, bills of sale, transfers, conveyances, instruments, consents and assurances as may reasonably be required for the better assigning, transferring, granting, conveying, assuring and confirming to Purchaser, their successors and assigns, the Assets to be sold or assigned to Purchaser as provided herein.

 

6.2 Cooperation. The Parties shall cooperate with each other fully with respect to actions required or requested to be undertaken with respect to tax audits, administrative actions or proceedings, litigation and any other matters that may occur after the Closing, and each Party shall maintain and make available to the other Party upon request all corporate, tax and other records required or requested in connection with such matters.

 

6.3 Publicity. Each of the Parties hereto agrees that no publicity release or announcement concerning the transactions contemplated hereby or the terms and conditions of this Agreement shall be issued without the advance approval of the form and substance thereof by each of the Parties.

 

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ARTICLE VII

SURVIVAL; INDEMNIFICATION

 

7.1 Survival of Covenants, Representations and Warranties. All representations and warranties and covenants set forth in this Agreement shall survive and remain in effect for one year following the Closing. The Parties shall be entitled to rely upon the representations and warranties, without any obligation of independent verification and to enforce any remedies available to it for a breach of the representations, warranties or covenants at any time.

 

7.2 Indemnity Against Claims.

 

(a) Seller hereby jointly and severally agrees to indemnify and hold Purchaser, its officers, directors, partners, employees, attorneys, affiliates and assigns (collectively the “Purchaser Indemnified Parties”), harmless from and against the following:

 

(1) Excluding the Assumed Liabilities and any other liability expressly assumed by Purchaser hereunder in writing, any and all liabilities, losses, damages, claims, costs and reasonable expenses suffered by the Purchaser Indemnified Parties (whether awarded against the Purchaser Indemnified Parties or paid by the Purchaser Indemnified Parties in settlement of a claim as provided in Section 7.2 or otherwise suffered), (A) incurred or created in connection with the Assets prior to the Closing from any action taken by Seller which constituted willful misconduct, bad faith or gross negligence, or (B) resulting from any material misrepresentation, material breach of any warranty, or material non-fulfillment of any covenant or agreement on the part of Seller contained in this Agreement or in any written statement, attachment, schedule, exhibit or certificate furnished or to be furnished by Seller to Purchaser pursuant hereto; and

 

(2) Any and all actions, suits, proceedings, demands, assessments or judgments, costs and reasonable expenses (including reasonable attorneys’ fees) incident to any of the foregoing.

 

(b) Purchaser hereby agrees to indemnify and hold the Seller, his employees, attorneys, affiliates and assigns (collectively the “Seller Indemnified Parties” and collectively with the Purchaser Indemnified Parties, the “Indemnified Parties”), harmless from and against the following:

 

(1) Any and all liabilities, losses, damages, claims, costs and reasonable expenses suffered by the Seller Indemnified Parties (whether awarded against the Seller Indemnified Parties or paid by the Seller Indemnified Parties in settlement of a claim as provided in Section 7.2 or otherwise suffered), (A) incurred or created in connection with the Assets (whether incurred or created prior to or subsequent to the Closing or resulting from any action taken by Seller or Purchaser subsequent to or prior to the Closing, except for actions of Seller which constitute willful misconduct, bad faith or gross negligence), (B) relating to the Assumed Liabilities and any other liabilities of the Seller expressly assumed by the Purchaser herein, or (C) resulting from any material misrepresentation, material breach of any warranty, or material non-fulfillment of any covenant or agreement on the part of Purchaser contained in this Agreement or in any written statement, attachment, schedule, exhibit or certificate furnished or to be furnished by Purchaser pursuant hereto; and

 

(2) Any and all actions, suits, proceedings, demands, assessments or judgments, costs and reasonable expenses (including reasonable attorneys’ fees) incident to any of the foregoing.

 

(c) The amount of any loss subject to indemnification hereunder shall be calculated net of any amounts which have been previously recovered by the Indemnified Parties under insurance policies or other collateral sources, and the Indemnified Parties hereby covenant that they will not release any such collateral sources from any obligations they may have. In the event any such insurance proceeds or other payments are not received before any claim for indemnification is paid pursuant to this Agreement, then the Indemnified Parties shall have the right (but not the obligation) to exclusively pursue such collateral sources, provided they do so with reasonable diligence, and in the event they receive any recovery, then the amount of such recovery shall be applied first to reimburse the Indemnified Party for their out of pocket expenses expended in pursuing such recovery, second to refund any payment made which would not have been paid had such recovery from the collateral source been obtained prior to such payment, and third, any excess to the Indemnified Parties.

 

Page 8 of 13
 

 

7.3 Notice of Claim, Assumption of Defense and Settlement of Claims.

 

(a) Any person entitled to indemnification under this Agreement (the “Indemnitee”) shall promptly give notice (an “Indemnification Notice”) in accordance with Section 7.3 hereof to the parties required to provide indemnification (collectively the “Indemnifying Party”) after the Indemnitee shall have knowledge of any demands, claims, actions or causes of action (singly, a “Claim” and hereinafter referred to collectively as “Claims”) which might give rise to a Claim by the Indemnitee against the Indemnifying Party stating the nature and basis of said Claim and amount thereof, to the extent known. A failure to give notice hereunder shall not relieve the Indemnifying Party from any obligation hereunder unless such failure to give notice shall materially and adversely affect Indemnifying Party’s ability to defend the Claim. Each such Indemnification Notice shall specify in reasonable detail the nature and amount of the Claim and shall, to the extent available to the Indemnitee, include such supporting documentation as shall reasonably be necessary to apprise the Indemnifying Party of the facts giving rise to the Claim. After the delivery of an Indemnification Notice certifying that the Indemnitee has incurred or had asserted against it any liabilities, claims, losses, damages, costs or expenses for which indemnity may be sought in accordance with the terms of this Article VII (the “Damages”), the Indemnitee shall make a claim in an amount equal to the incurred Damages or asserted Damages, as the case may be (which, in the case of any asserted Damages shall include the Indemnitee’s reasonably estimated cost of the defense thereof, hereinafter the “Estimated Defense Costs”) and the Indemnifying Party shall promptly reimburse the Indemnitee for the Damages for which the Indemnitee has incurred and not been indemnified. In the event the amount of such Damages are not promptly reimbursed by Indemnifying Party as aforesaid, the amount of such unreimbursed Damages shall accrue interest at a rate equal to two percent (2%) above the applicable prime rate of Citibank, N.A.

 

(b) With respect to any third party Claims made subsequent to the Closing, the following procedures shall be observed:

 

(1) Promptly after delivery of an Indemnification Notice in respect of a Claim, the Indemnified Party may elect, by written notice to the Indemnitee, to undertake the defense thereof with counsel reasonably satisfactory to the Indemnitee and at the sole cost and expense of the Indemnifying Party. In the event the Indemnifying Party elects to assume the defense of any such Claim, it shall not, except as provided in Section 7.3(b)(2), be liable to the Indemnitee for any legal fees, costs and expenses incurred by the Indemnitee after the date thereof, in connection with such defense. The Indemnitee shall have the right to participate in, but not control the conduct of, any such action through counsel of its own choosing, at its own expense.

 

(2) Unless and until the Indemnifying Party assumes the defense of the third party Claim as provided in Section 7.3(b)(1), or in the event the Indemnifying Party ceases to conduct such defense, the Indemnified Party may defend against the third party Claim in any manner it reasonably may deem appropriate, at the expense of the Indemnifying Party.

 

(3) Failure by the Indemnifying Party to notify the Indemnitee of its election to defend any such action within 30 days of receipt of the Indemnification Notice shall be deemed a waiver by the Indemnifying Party of its right to defend such action. If the Indemnifying Party assumes the defense of any such Claim, its obligations hereunder as to such Claim shall be limited to taking all steps necessary in the defense or settlement of such Claim and to holding the Indemnitee harmless from and against any and all losses, damages, expenses and liabilities awarded in any such proceeding or arising out of any settlement approved by the Indemnifying Party or any judgment in connection with such Claim.

 

(4) The Indemnifying Party shall not, in the defense of any such Claim, consent to the entry of any judgment or enter into any settlement with respect to the third party Claim without the prior written consent of Indemnitee (which consent shall not be unreasonably withheld, conditioned or delayed), except that no consent of the Indemnitee shall be required if the judgment or proposed settlement (1) involves only the payment of money damages to be paid by the Indemnifying Party and does not impose any injunction or other equitable relief upon the Indemnitee, (2) includes as an unconditional term thereof a full dismissal of the litigation or proceeding with prejudice and the delivery by the claimant or plaintiff to the Indemnitee of a release from all liability with respect to such claim or litigation, and (3) does not by its terms attribute liability to the Indemnitee.

 

Page 9 of 13
 

 

(5) In no event will the Indemnitee consent to the entry of any judgment or enter into any settlement with respect to the third party Claim without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld, conditioned or delayed.

 

(6) The Indemnitee will cooperate fully with the Indemnifying Party in the conduct of any proceeding as to which the Indemnifying Party assumes the defense hereunder. Such cooperation shall include but not necessarily be limited to, assisting with discovery and investigation by (1) providing the Indemnifying Party and its counsel access to all books and records of the Indemnitee to the extent reasonably related to such proceeding, (2) furnishing information about the Indemnitee to the Indemnifying Party and their counsel, (3) making employees available to counsel to the Indemnifying Party, and (4) preserving the existence of and maintaining all books and records of the Indemnitee or any other Indemnified Party that is an entity that may reasonably be deemed to be potentially relevant to any such proceeding until the proceeding is finally concluded.

 

7.4 Remedies Cumulative. The remedies provided to an Indemnified Party herein shall be cumulative and shall not preclude an Indemnified Party from asserting any other rights or seeking any other remedies against an Indemnifying Party or his or its respective heirs, successors or assigns. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent or subsequent assertion or employment of any other appropriate right or remedy.

 

ARTICLE VIII

CONFIDENTIALITY

 

8.1 Confidentiality. At all times after the Closing, the Parties hereto shall retain in strictest confidence, and shall not disclose to any third parties or use for their benefit (other than in order to fulfill the terms and conditions of this Agreement and the transactions contemplated by this Agreement) or for the benefit of others any confidential information comprising or related to the other parties hereto and their affiliates including, without limitation, intellectual property, trade secrets, customer lists, marketing plans or strategies, product development techniques or plans, or technologies, in connection with the Assets, Purchaser or any affiliate thereof (collectively “Confidential Information”), except as otherwise required by law or in the Company’s public filings. Confidential Information shall not include information which (i) is or becomes part of the public domain without breach of this Agreement, (ii) was known to the receiving party on a non-confidential basis prior to disclosure by the other party, (iii) is independently received by the receiving party without the use of confidential information, or (iv) is explicitly approved for release by written authorization of the disclosing party. In the event that the receiving party is legally required to disclose any confidential information, the receiving party shall promptly notify the disclosing party of such requirement and, if requested by the disclosing party, shall reasonably cooperate in the disclosing party’s efforts to prevent or limit such disclosure. The requirements of this Section 8.1 shall terminate as to Seller in the event of Purchaser’s default in the payment of the Note and the Seller’s purchase of the Collateral at any public sale as described in the Note.

 

8.2 Enforceability.

 

(a) It is the desire and intent of the Parties that the provisions of Article VIII shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. If any particular provision or portion of Article VIII shall be adjudicated to be invalid or unenforceable in any jurisdiction, Article VIII shall be deemed amended to delete therefrom such provision or portion adjudicated to be invalid or unenforceable, such amendment to apply only with respect to the operation of this subsection (b) in the particular jurisdiction in which such adjudication is made. The Seller agrees that it would be difficult to measure the damages to Purchaser and its affiliates from the breach by the Seller of the provisions of Article VIII, that injury to Purchaser from such breach would be impossible to calculate, and that monetary damages would therefore be an inadequate remedy; accordingly, the Seller agrees that Purchaser shall be entitled, in addition to all other remedies it might have, to injunctions or other appropriate orders to restrain any such breach without showing or proving any actual damages.

 

(b) The undertakings and covenants of the Seller contained in Article VIII are an integral part of the transactions set forth in this Agreement and the consideration paid by Purchaser pursuant to this Agreement shall be consideration not only for the Assets but also for such undertakings and covenants.

 

Page 10 of 13
 

 

ARTICLE IX

GENERAL PROVISIONS

 

9.1 Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be delivered: (a) personally; (b) by facsimile transmission; (c) by a commercial overnight delivery service (e.g., Federal Express, UPS, Airborne, etc.) and paid for by the sender; or (d) by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered: (i) personally, upon such service or delivery; (ii) if sent by facsimile transmission, on the day so transmitted, if the sender calls to confirm that such notice has been received by facsimile and has a printed report which indicates that such transmission was, in fact, sent to the facsimile number indicated below; (iii) if sent by commercial overnight delivery service, on the date reflected by such service as delivered to the addressee; or (iv) if mailed by certified or registered mail, five business days after the date of deposit in the United States mail. In each instance, such notice, request, demand or other communications shall be addressed as follows:

 

(a) in the case of the Seller:

 

Jerry L. Swinford

22305 Gosling Road

Spring, Texas 77389

Phone: (281) 651-0200

Fax: (281) 288-0400

 

(b) in the case of Purchaser:

 

Coil Tubing Technology, Inc.

Attn: Jason L. Swinford

22305 Gosling Road

Spring, Texas 77389

Phone: (281) 651-0200

Fax: (281) 288-0400

 

with a copy to:

 

The Loev Law Firm, PC

Attn: David M. Loev, Esq.

6300 West Loop South, Suite 280

Bellaire, Texas 77401

Telephone: (713) 524-4110

Fax: (713) 524-4122

 

or to such other address or to such other person as Purchaser or Seller, shall have last designated by written notice given as herein provided.

 

9.2 Modification. This Agreement and the exhibits and schedules annexed hereto contain the entire agreement between the Parties hereto and (i) there are no agreements, warranties or representations which are not set forth herein and (ii) all prior negotiations, agreements and understandings are superseded hereby. This Agreement may not be modified or amended except by an instrument in writing duly signed by or on behalf of the Parties hereto.

 

9.3 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the local laws of the State of Texas applicable to agreements made and to be performed entirely within the State, without regard to conflict of laws principles. Seller and Purchaser hereby irrevocably consent and submit to the jurisdiction of any State or Federal court located in Harris, Texas over any action or proceeding arising out of any dispute between Seller and Purchaser, and waive any right they have to bring an action or proceeding with respect thereto in any other jurisdiction. Each Party further irrevocably consents to the service of process against them in any such action or proceeding by the delivery of a copy of such process at the address set forth above.

 

Page 11 of 13
 

 

9.4 Binding Effect; Assignment. This Agreement shall be binding upon the Parties and inure to the benefit of the successors and assigns of the respective Parties hereto; provided, however, that this Agreement and all rights hereunder may not be assigned by either Party without the prior written consent of the other Party.

 

9.5 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

 

9.6 Transaction Expenses. Each Party shall be responsible for the payment of any and all of its own expenses, including without limitation the fees and expenses of counsel, accountants and other advisers, arising out of or relating directly or indirectly to the transactions contemplated by this Agreement, whether or not such transactions are consummated in whole or in part.

 

9.7 Waiver. The waiver of one breach or default hereunder shall not constitute the waiver of any other or subsequent breach or default.

 

9.8 No Agency. This Agreement shall not constitute either Party the legal representative or agent of the other, nor shall either Party have the right or authority to assume, create, or incur any liability or any obligation of any kind, express or implied, against or in the name of or on behalf of the other Party.

 

9.9 Severability. Every provision of this Agreement is intended to be severable. If, in any jurisdiction, any term or provision hereof is determined to be invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired, (b) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such term or provision in any other jurisdiction, and (c) the invalid or unenforceable term or provision shall, for purposes of such jurisdiction, be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. If a court of competent jurisdiction determines that any covenant or restriction, by the length of time or any other restriction, or portion thereof, set forth in this Agreement is unreasonable or unenforceable, the court shall reduce or modify such covenants or restrictions to those which it deems reasonable and enforceable under the circumstances and, as so reduced or modified, the parties hereto agree that such covenants and restrictions shall remain in full force and effect as so modified. In the event a court of competent jurisdiction determines that any provision of this Agreement is invalid or against public policy and cannot be so reduced or modified so as to be made enforceable, the remaining provisions of this Agreement shall not be affected thereby, and shall remain in full force and effect.

 

9.10 Waiver of Conflict. The Loev Law Firm, PC (the “Law Firm”) has exclusively represented the Purchaser in the preparation of this Agreement (and the exhibits hereto), and has not undertaken to assist or render legal advice to any other Party in regards to this Agreement (or any of the exhibits hereto). Each other Party hereto (including the Seller) does hereby acknowledge that the Law Firm has directed that he seek outside counsel and business advice other than from the Law Firm, as to the effects, consequences and legalities of this Agreement.

 

9.11 Construction. When used in this Agreement, unless a contrary intention appears: (i) a term has the meaning assigned to it; (ii) “or” is not exclusive; (iii) “including” means including without limitation; (iv) words in the singular include the plural and words in the plural include the singular, and words importing the masculine gender include the feminine and neuter genders; (v) any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; (vi) the words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision hereof; (vii) references contained herein to Article, Section, Schedule and Exhibit, as applicable, are references to Articles, Sections, Schedules and Exhibits in this Agreement unless otherwise specified; (viii) references to “writing” include printing, typing, lithography and other means of reproducing words in a visible form, including, but not limited to email; (ix) references to “dollars”, “Dollars” or “$” in this Agreement shall mean United States dollars; (x) reference to a particular statute, regulation or law means such statute, regulation or law as amended or otherwise modified from time to time; (xi) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein); (xii) unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding”; (xiii) references to “days” shall mean calendar days; and (xiv) the paragraph headings contained in this Agreement are for convenience only, and shall in no manner be construed as part of this Agreement.

 

Page 12 of 13
 

 

9.12 Review of Agreement; Voluntarily Entering Into Agreement. Each Party herein expressly represents and warrants to all other Parties hereto that (a) before executing this Agreement, said Party has fully informed itself of the terms, contents, conditions and effects of this Agreement; (b) said Party has relied solely and completely upon its own judgment in executing this Agreement; (c) said Party has had the opportunity to seek and has obtained the advice of its own legal, tax and business advisors before executing this Agreement; (d) said Party has acted voluntarily and of its own free will in executing this Agreement; and (e) this Agreement is the result of arm’s length negotiations conducted by and among the Parties and their respective counsel.

 

9.13 No Presumption from Drafting. This Agreement has been negotiated at arm’s-length between persons knowledgeable in the matters set forth within this Agreement. Accordingly, given that all Parties have had the opportunity to draft, review and/or edit the language of this Agreement, no presumption for or against any Party arising out of drafting all or any part of this Agreement will be applied in any action relating to, connected with or involving this Agreement. In particular, any rule of law, legal decisions, or common law principles of similar effect that would require interpretation of any ambiguities in this Agreement against the Party that has drafted it, is of no application and is hereby expressly waived.

 

9.14 Electronic Signatures. This Agreement and any signed agreement or instrument entered into in connection with this Agreement, and any amendments hereto or thereto, may be executed in one or more counterparts, all of which shall constitute one and the same instrument. Any such counterpart, to the extent delivered by means of a facsimile machine or by .pdf, .tif, .gif, .peg or similar attachment to electronic mail (any such delivery, an “Electronic Delivery”) shall be treated in all manner and respects as an original executed counterpart and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any Party, each other Party shall re-execute the original form of this Agreement and deliver such form to all other Parties. No Party shall raise the use of Electronic Delivery to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of Electronic Delivery as a defense to the formation of a contract, and each such Party forever waives any such defense, except to the extent such defense relates to lack of authenticity.

 

IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement to be effective as of the Effective Date.

 

 

PURCHASER:

 

Coil Tubing Technology, Inc.

 

By: /s/Jason L. Swinford

 

Printed Name: Jason L. Swinford

 

Its: Chief Executive Officer

 

Date: March 25, 2015

 

 

 

SELLER:

 

By: /s/Jerry L. Swinford

Jerry L. Swinford

 

Date: March 25, 2015

 

 

Page 13 of 13
 

 

EXHIBIT A

ORIGINAL ASSETS

 

Type of Intellectual Property Registered Number (or Provisional Number) Valuation For the Purposes of the Agreement
     
Subterranean Rotation Inducing Device and Method No. 5584342 $250,000
     

Jet Motor For Providing Rotation In A Downhole Tool

U.S. Patent # 7686102

Singapore Patent # 146369

 $300,000
     
Rotation Tool No. 11/848,614 $200,000
     

Drilling Jar

 No. 12/437,525 $250,000
     
Jet Hammer No. 12/480,680 $200,000
     
  TOTALS $1,200,000

 

All intellectual property rights associated with or related to the above, including but not limited to:

 

(i) Technical documentation reflecting engineering, maintenance, servicing and production data, design data, plans, specifications, drawings, technology, know how, trade secrets, confidential business information, research and development, servicing and maintenance processes, customer and supplier lists, pricing and cost information and business and marketing plans and proposals, relating to the above or to the maintenance of the above and all documentary evidence thereof, including without limitation the technical information incorporated in such documentation; and

 

(ii) To the extent that intellectual property is entered in pertinent patent, copyright and trademark registers or offices, to the full extent permitted by law, all related files in Seller’s direct and indirect possession and all documents, certificates and declarations necessary to enable Purchaser to register such intellectual property in its name.

 

All rights, liabilities, requirements, and obligations of Seller under any agreements, documents, understandings or contracts, associated with the above.

 

The goodwill of Seller relating to the above, all information in the possession of Seller relating to the operations of the Original Assets, the exclusive right of the Purchaser to represent itself as carrying on the business of the Original Assets as well as all corporate business opportunities of Seller relating to the above.

 

 
 

 

EXHIBIT B

 

TRANSFERRED ASSETS

 

Country

Patent Number or

Application Number

Title

 

Canada 2,646,326

Jet Motor and Method for Providing Rotation in a

Downhole Tool

Canada 2,723,420

Drilling Jar

Canada 2,734,285 Rotation Tool
Indonesia W00201001371 Rotation Tool
Indonesia W00201004067 Drilling Jar

Patent Cooperation

Treaty

 PCT/US2011/028241

Method and Apparatus for Washing Downhole

Tubing and Equipment

Singapore 146369

Jet Motor and Method for Providing Rotation in a

Downhole Tool

United States 5,584,342

Subterranean Rotation-Inducing Device and

Method

United States 7,686,102

Jet Motor for Providing Rotation in a Downhole

Tool

United States 7,946,348 Rotation Tool
United States 12/480,680 Jet Hammer
United States 12/437,525 Drilling Jar
United States 13/046,662

Method and Apparatus for Washing Downhole

Tubulars and Equipment

United States 61/468,637 Downhole Oscillator

 

 

 
 

 

EXHIBIT C

 

ASSETS

 

COUNTRY

PATENT OR

APPLICATION

NO.

 FILING DATE REMAINING TERM

REGISTRATION

DATE

PRIORITY DATE,

IF ANY

 TOOL NOTES LISTED OWNER
US 5,584,342 6/6/1995 2.04 12/17/1996   Subterranean Rotation- Inducing Device and Method All maintenance done - will expire on 6/6/2015 Coil Tubing Technology, Inc.
US 7,686.102 3/29/2007 15.33 3/30/2010 3/31/2006 Jet Motor for Providing Rotation in a Downhole Tool Next maintenance window opens 3/30/2017. Coil Tubing Technology, Inc.
US 8,151.908 12/4/2009- Continuation 17.36 4/10/2012 3/31/2006 Jet Motor for Providing Rotation in a Downhole Tool Next maintenance window opens 4/10/2015. Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
Canada 2,646.326 9/23/2008 (national entry date) 18.18 2/5/2013 3/31/2006 Jet Motor and Method for Providing Rotation in a Downhole Tool Next annuity due by 3/30/2015 Coil Tubing Technology, Inc.
Canada 2,797,565 3/29/2007 - Divisional app. 12.32 3/29/2007 3/31/2006 Jet Motor and Method for Providing Rotation in a Downhole Tool Notice of Allowance has issued Next annuity due by 3/29/2015 Coil Tubing Technology, Inc.
Singapore 146,369 9/26/2008 15.45 5/14/2010 3/31/2006 Jet Motor and Method for Providing Rotation in a Downhole Tool Next annuity due by 3/29/2015 Coil Tubing Technology, Inc.
US 7,946,348 8/31/2007 16.48 5/24/2011   Rotation Tool First maintenance window opens 5/24/2014 Coil Tubing Technology, Inc.
Canada 2,734,285 2/15/2011 (national entry date) 18.51 6/5/2013 8/31/2007 Rotation Tool Next annuity due by 7/16/2014 Coil Tubing Technology, Inc.
Indonesia W00201001371 4/28/2010 17.41 4/30/2012 8/31/2007 Rotation Tool Is still being examined Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
US 12/480.680 6/8/2009 16.58 6/30/2011 6/6/2008 Jet Hammer Awaiting appeal decision - Coil Tubing Technology. Inc.
US 8,151.910 5/7/2009 17.36 4/10/2012 5/7/2008 Drilling Jar First maintenance window opens 4/10/2015 Coil Tubing Technology, Inc.
US 5,584.342 6/6/1995 2.04 12/17/1996   Subterranean Rotation- Inducing Device and Method All maintenance done - will expire on 6/6/2015 Coil Tubing Technology. Inc.

 

 
 

 

Canada 2,723,420 11/2/2010 (national entry date) 19.16 1/28/2014 5/7/2008 Drilling Jar Next annuity due by 5/7/2014 Coil Tubing Technology. Inc.
Indonesia ID P0029982 11/26/2010 (national entry date) 17.13 1/16/2012 5/7/2008 Drilling Jar Next annuity due by 1/16/2015 Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
US 13/046.662 3/11/2011 18.33 3/31/2013 3/11/2010 Method and Apparatus for Washing Downhole Tubulars and Equipment Undergoing examination Coil Tubing Technology, Inc.
Norway 20,120,910 8/15/2012 19.75 8/31/2014 3/11/2010 Method and Apparatus for Washing Downhole Tubulars and Equipment Based on PCT/US11/28241 Undergoing examination Next annuity due 3/31/2015 Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
UK/Scotland 1216072.7 9/10/2012 19.83 9/30/2014 3/11/2010 Method and Apparatus for Washing Downhole Tubulars and Equipment Based on PCT/US11/28241 Undergoing examination Next annuity due 3/31/2015 Jerry L. Swinford -will file assignment to Coil Tubing Technology. Inc.
US 13'434.812 3/29/2012 19.33 3/31/2014 3/29/2011 Downhole Oscillator Waiting for examination Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
US 5,584,342 6/6/1995 2.04 12/17/1996   Subterranean Rotation-Inducing Device and Method All maintenance done - will expire on 6/6/2015 Coil Tubing Technology, Inc.
Canada 2,837,938 9/12/2013 20.83 9/30/2015 3/29/2011 Downhole Oscillator Need to request examination but am waiting to see what happens in U.S. application as we can have this application mirror a U.S. allowed application which cuts down on prosecution fees. Next annuity due 3/30/2015 Coil Tubing Technology, Inc.
US 61(932,629 1/28/2014 21.17 1/31/2016   Downhole Tool (Ampli-Max) Need to prepare and file full-blown non-provisional patent application Jerry L. Swinford

 

 
 

 

All intellectual property rights associated with or related to the above, including but not limited to:

 

(i) Technical documentation reflecting engineering, maintenance, servicing and production data, design data, plans, specifications, drawings, technology, know how, trade secrets, confidential business information, research and development, servicing and maintenance processes, customer and supplier lists, pricing and cost information and business and marketing plans and proposals, relating to the above or to the maintenance of the above and all documentary evidence thereof, including without limitation the technical information incorporated in such documentation; and

 

(ii) To the extent that intellectual property is entered in pertinent patent, copyright and trademark registers or offices, to the full extent permitted by law, all related files in Seller’s direct and indirect possession and all documents, certificates and declarations necessary to enable Purchaser to register such intellectual property in its name.

 

All rights, liabilities, requirements, and obligations of Seller under any agreements, documents, understandings or contracts, associated with the above.

 

The goodwill of Seller relating to the above, all information in the possession of Seller relating to the operations of the Assets, the exclusive right of the Purchaser to represent itself as carrying on the business of the Assets as well as all corporate business opportunities of Seller relating to the above.

 

 
 

 

 

EXHIBIT D

 

SECURED PROMISSORY NOTE

   
US $3,750,000 March 25, 2015

 

NOW THEREFORE FOR VALUE RECEIVED, the undersigned, Coil Tubing Technology, Inc., a Nevada corporation (“Coil Tubing”), hereby promises to pay to the order of Jerry Swinford, an individual (“Swinford”), at the address of Swinford at 22305 Gosling Road, Spring, Texas 77389, or such other place as may be designated by Swinford to Coil Tubing in writing, the principal sum of Three Million Seven Hundred and Fifty Thousand Dollars ($3,750,000), in lawful money of the United States of America, which shall be legal tender, bearing interest and payable as provided herein. This Secured Promissory Note (this “Note” or “Promissory Note”) has an effective date of December 1, 2014 (the “Effective Date”). This Note is entered into to evidence amounts owed to Swinford pursuant to the terms of that certain Intellectual Property Purchase Agreement entered into between Swinford and Coil Tubing on or around the date hereof (the “Purchase Agreement”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Purchase Agreement.

 

1. The unpaid balance of this Note shall bear interest at the rate of three percent (3%) per annum from the Effective Date until paid in full. Until January 1, 2017 (the “Amortizing Payment Start Date”), payments of accrued interest only on this Note through such applicable payment date shall be due on June 30, 2015 and December 31, 2015 (the “Interest Only Payments”).

 

2. Beginning on the Amortizing Payment Start Date and continuing until the Maturity Date, Coil Tubing agrees to pay Swinford (a) the lesser of (i) $15,810.15; or (ii) the total amount then due under this Note, per month (each a “Monthly Payment”); payable in advance on or before the 1st of each month (each the “Monthly Payment Date”) towards the outstanding principal and accrued interest on this Note, with the first such Monthly Payment due on the Amortizing Payment Start Date. The “Maturity Date” of this Note shall be January 1, 2018. Any and all unpaid principal or interest on this Note shall be repaid on the Maturity Date. All past-due principal (which failure to pay such amounts shall be defined herein as an “Event of Default”) shall bear interest at the rate of twelve percent (12%) per annum (the “Default Rate”) until paid in full. All computations of interest shall be made on the basis of a 360-day year for actual days elapsed.

 

3. This Note may be prepaid in whole or in part, at any time and from time to time, without premium or penalty. This Note shall be subject to a mandatory prepayment in the event a Change in Control Transaction has occurred as described in and as provided in Section 2.4(a) of the Purchase Agreement.

 

4. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which national banks are not open for business, such payment shall be made on the next succeeding business day.

 

5. This Note shall be binding upon and inure to the benefit of Coil Tubing and Coil Tubing’s respective successors and assigns. Each holder of this Note, by accepting the same, agrees to and shall be bound by all of the provisions of this Note. Swinford may assign this Note or any of his rights, interests or obligations to this Note without the prior written approval of Coil Tubing.

 

6. This Note and the representations, warranties and obligations set forth herein are guaranteed by Coil Tubing Technology Holdings, Inc., a Nevada corporation, Coil Tubing’s wholly-owned subsidiary (“Holdings”), Holdings’ wholly-owned subsidiaries Total Downhole Solutions, Inc., a Texas corporation, Coil Tubing Technology, Inc., a Texas corporation and Coil Tubing Technology Canada Inc., an Alberta Canada corporation, and Excel Inspection, LLC, a Texas limited liability company which is a majority-owned subsidiary of Coil Tubing (collectively with Holdings, the “CTT Subsidiaries”) pursuant to a Guaranty by Holdings in favor of Swinford (the “Guaranty”). Additionally, the payment of this Note is secured by Security Interests as provided for in Section 2.3 of the Purchase Agreement and in Section 13, below.

 

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7. No provision of this Note shall alter or impair the obligation of Coil Tubing to pay the principal of and interest on this Note at the times, places and rates, and in the coin or currency, herein prescribed.

 

8. Coil Tubing will do or cause to be done all things reasonably necessary to preserve and keep in full force and affect its corporate existence, rights and franchises and comply with all laws applicable to Coil Tubing, except where the failure to comply could not reasonably be expected to have a material adverse effect on Coil Tubing.

 

9. Notwithstanding anything to the contrary in this Note or any other agreement entered into in connection herewith, whether now existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all interest and any other charges constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under this Note or otherwise in connection with this loan transaction, shall under no circumstances exceed the Maximum Rate (defined below).

 

10. Coil Tubing represents and warrants to Swinford as follows:

 

(a) The execution and delivery by Coil Tubing of this Note (i) are within Coil Tubing’s corporate power and authority, and (ii) have been duly authorized by all necessary corporate action.

 

(b) This Note is a legally binding obligation of Coil Tubing, enforceable against Coil Tubing in accordance with the terms hereof, except to the extent that (i) such enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights, and (ii) the availability of the remedy of specific performance or injunctive or other equitable relief is subject to the discretion of the court before which any proceeding therefore may be brought.

 

11. If an Event of Default (as defined herein or below) occurs (unless all Events of Default have been cured or waived by Swinford), Swinford may, by written notice to Coil Tubing, declare the principal amount then outstanding of, and the accrued interest and all other amounts payable on, this Note to be immediately due and payable, and/or may take any action provided for below to enforce the Security Interests (provided for in Section 2.3 of the Purchase Agreement and below under Section 13). The following events and/or any other Events of Default defined elsewhere in this Note are “Events of Default” under this Note:

 

(a) Coil Tubing shall fail to pay, when and as due, the principal or interest (if any) payable (i) hereunder (other than a Monthly Payment which is provided for below), within fifteen (15) days from the due date of such payment; or

 

(b) Coil Tubing shall fail to pay, when and as due, any Monthly Payment due hereunder within five (5) days of the due date of such; or

 

(c) Coil Tubing shall have breached in any material respect any covenant in this (i) Note; or (ii) the Purchase Agreement (including the exhibits thereto), or any CTT Subsidiary shall have breached in any material respect any covenant of the Guaranty, and, with respect to breaches capable of being cured, such breach shall not have been cured within thirty (30) days following the occurrence of such breach; or

 

(d) Coil Tubing shall: (i) become insolvent or take any action which constitutes its admission of inability to pay its debts as they mature; (ii) make an assignment for the benefit of creditors, file a petition in bankruptcy, petition or apply to any tribunal for the appointment of a custodian, receiver or a trustee for it or a substantial portion of its assets; (iii) commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation or statute of any jurisdiction, whether now or hereafter in effect; (iv) have filed against it any such petition or application in which an order for relief is entered or which remains undismissed for a period of ninety (90) days or more; (v) indicate its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial portion of its assets; or (vi) suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of ninety (90) days or more; or

 

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(e) Coil Tubing shall take any action authorizing, or in furtherance of, any of the foregoing.

 

12. In case any one or more Events of Default shall occur and be continuing, Swinford may proceed to protect and enforce his rights by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or for an injunction against a violation of any of the terms hereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. In case of a default in the payment of any principal of or premium, if any, or interest on this Note, Coil Tubing will pay to Swinford such further amount as shall be sufficient to cover the reasonable cost and expenses of collection, including, without limitation, reasonable attorneys’ fees, expenses and disbursements. No course of dealing and no delay on the part of Swinford in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice Swinford’s rights, powers or remedies. No right, power or remedy conferred by this Note upon Swinford shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise.

 

13. Security Interest in the Assets.

 

(a) Grant of a Security Interest. As security for (a) the full and punctual payment (in lawful money of the United States and in immediately available funds), as and when due, of all principal, interest, attorneys’ fees, costs, expenses and other amounts which are or may become payable by Coil Tubing under this Note (the “Debt”) and (b) the full and punctual performance of all other obligations of Coil Tubing under this Note (collectively the “Coil Tubing Obligations”), Coil Tubing hereby grants to Swinford a continuing and first-priority security interest (the “Security Interest”) in the following (collectively, the “Collateral”): all right, title and interest of Coil Tubing in and to the Assets; all cash and other consideration paid or payable with respect to the Assets; all of Coil Tubing’s books and records pertaining to the foregoing; and all proceeds from sales, transfers or other dispositions of the foregoing.

 

(b) No Transfer of the Collateral. Prior to the payment and performance in full of all of Coil Tubing Obligations, Coil Tubing shall not sell, pledge or otherwise transfer (whether voluntarily, involuntarily, by operation of law, or by gift or for consideration) any of the Collateral or any of its interest therein without the prior written consent of Swinford. Any such sale, pledge or other transfer shall be null and void and shall confer no rights on the purported transferee.

 

(c) Preservation and Protection of the Security Interest. Coil Tubing shall preserve and protect Swinford’s first-priority security interest in the Collateral and shall cause the Security Interest to be perfected and to continue to be perfected until the Coil Tubing Obligations are paid and performed in full. Coil Tubing shall execute and deliver to Swinford (within ten days after receipt of Swinford’s request) such other security agreements, endorsements, pledges, assignments and other documents (including, without limitation, financing statements and continuation statements and amendments thereto) as Swinford may request from time to time to effectuate the grant to Swinford of the Security Interest and the perfection of the Security Interest, and Swinford is authorized to file and/or record such documents with appropriate regulatory authorities. Coil Tubing shall promptly notify Swinford in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by Coil Tubing that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of Swinford hereunder.

 

(d) Title to the Collateral. Coil Tubing shall at all times maintain good and marketable title to the Collateral free and clear of all liens, encumbrances and other security interests. Coil Tubing shall pay in full any tax that is imposed on any of the Collateral prior to its delinquency and, within ten days after any other lien or encumbrance is imposed on any of the Collateral, Coil Tubing shall pay and discharge such lien or other encumbrance in full.

 

(e) Power of Attorney. Coil Tubing hereby appoints Swinford as its attorney-in-fact (with full power of substitution) to execute, deliver and file, effective upon the occurrence of an Event of Default (as defined in the Note), on Coil Tubing’s behalf and at Coil Tubing’s expense, (1) any financing statements, continuation statements or other documents required to perfect or continue the Security Interest and (2) any other documents and instruments that Swinford determines are necessary or appropriate in order to enable him to exercise his rights and remedies that are provided hereunder and by applicable law upon the occurrence of an Event of Default. This power, being coupled with an interest, shall be irrevocable until the Coil Tubing Obligations are paid and performed in full.

 

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(f) Termination of the Security Interest. The Security Interest shall terminate only if and when the Coil Tubing Obligations have been paid and performed in full.

 

(g) Additional Remedies Upon Default. Swinford’s rights and remedies upon an Event of Default hereunder shall include, without limitation, the power (1) to transfer into Swinford’s name or into the name of its nominee any or all of the Collateral and thereafter to receive and retain all cash and other dividends, distributions and payments made on account of the Collateral, and otherwise act with respect thereto as though he were the absolute owner thereof, (2) to sell all or any portion of the Collateral at a public or private sale at such place and time and at such prices and other terms as Swinford may determine, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as Swinford may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to Coil Tubing or right of redemption of Coil Tubing, which are hereby expressly waived, and (3) to file an action against Coil Tubing in his personal capacity for repayment of the Debt. Coil Tubing recognizes that Swinford may be compelled to resort to one or more private sales of any or all of the Collateral. Coil Tubing acknowledges and agrees that any such private sale may result in prices and other terms less favorable to Swinford than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall not, for such reason alone, be deemed to have been made in a commercially unreasonable manner. At any sale, Swinford may, to the extent permissible under applicable law, purchase the whole or any part of the Collateral, and Swinford shall be entitled to use and apply any or all of the Debt as a credit on account of the purchase price of any Collateral. Swinford and any other purchaser of the Collateral at any such sale shall hold the purchased Collateral free from any claim or right on the part of Coil Tubing, and Coil Tubing hereby waives any right of redemption, stay or appraisal that he might otherwise have under applicable law.

 

(h) The proceeds of any such sale, lease or other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys’ fees and expenses incurred by Swinford in enforcing his rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Coil Tubing Obligations, and to the payment of any other amounts required by applicable law, after which Swinford shall pay to Coil Tubing any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which Swinford is legally entitled, Coil Tubing will be liable for the deficiency, together with interest thereon, at the Default Rate and the reasonable fees of any attorneys employed by Swinford or a Collateral Agent on behalf of Swinford, to collect such deficiency. To the extent permitted by applicable law, Coil Tubing waives all claims, damages and demands against Swinford arising out of the repossession, removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of Swinford or a Collateral Agent.

 

(i) Coil Tubing agrees to pay all out-of-pocket fees, costs and expenses incurred in connection with any filing which may be required hereunder, including without limitation, any financing statements, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by Swinford. Coil Tubing shall also pay all other claims and charges which in the reasonable opinion of Swinford might prejudice, imperil or otherwise affect the Collateral or the Security Interest therein. Coil Tubing will also, upon demand, pay to Swinford the amount of any and all reasonable expenses, including the reasonable fees and expenses of his counsel and of any experts and agents, which Swinford may incur in connection with (i) the enforcement of this Note, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of Swinford under this Note. Until so paid, any fees payable hereunder shall be added to the principal amount of the Note and shall bear interest at the Default Rate.

 

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(j) All rights of Swinford and all Coil Tubing Obligations of Coil Tubing hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Note, or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Coil Tubing Obligations, or any other amendment or waiver of or any consent to any departure from the Note, or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Coil Tubing Obligations; (d) any action by Swinford or a Collateral Agent on behalf of Swinford to obtain, adjust, settle and cancel in their sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to Coil Tubing, or a discharge of all or any part of the Security Interest granted hereby. Until the Coil Tubing Obligations shall have been paid and performed in full, the rights of Swinford shall continue even if the Coil Tubing Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. Coil Tubing expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by Swinford hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than Swinford, then, in any such event, the Coil Tubing Obligations hereunder shall survive cancellation of this Note, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. Coil Tubing waives all right to require Swinford or a Collateral Agent on behalf of Swinford to proceed against any other person or to apply any Collateral which Swinford or Collateral Agent on behalf of Swinford may hold at any time, or to pursue any other remedy. Coil Tubing waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby.

 

14. If from any circumstance any holder of this Note shall ever receive interest or any other charges constituting interest, or adjudicated as constituting interest, the amount, if any, which would exceed the Maximum Rate shall be applied to the reduction of the principal amount owing on this Note, and not to the payment of interest; or if such excessive interest exceeds the unpaid balance of principal hereof, the amount of such excessive interest that exceeds the unpaid balance of principal hereof shall be refunded to Coil Tubing. In determining whether or not the interest paid or payable exceeds the Maximum Rate, to the extent permitted by applicable law (i) any nonprincipal payment shall be characterized as an expense, fee or premium rather than as interest; and (ii) all interest at any time contracted for, charged, received or preserved in connection herewith shall be amortized, prorated, allocated and spread in equal parts during the period of the full stated term of this Note. The term “Maximum Rate” shall mean the maximum rate of interest allowed by applicable federal or state law.

 

15. Except as provided herein, Coil Tubing and any sureties, guarantors and endorsers of this Note jointly and severally waive demand, presentment, notice of nonpayment or dishonor, notice of intent to accelerate, notice of acceleration, diligence in collecting, grace, notice and protest, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, without prejudice to the holder. The holder shall similarly have the right to deal in anyway, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to grant any other indulgences or forbearance whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect or enforce this Note or any installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable attorney’s fees.

 

16. This Note may be executed in several counterparts, each of which is an original. It shall not be necessary in making proof of this Note or any counterpart hereof to produce or account for any of the other counterparts. A copy of this Note signed by one party and faxed or scanned and emailed to another party (as a PDF or similar image file) shall be deemed to have been executed and delivered by the signing party as though an original. A photocopy or PDF of this Note shall be effective as an original for all purposes.

 

17. It is the intention of the parties hereto that the terms and provisions of this Note are to be construed in accordance with and governed by the laws of the State of Texas, except as such laws may be preempted by any federal law controlling the rate of interest which may be charged on account of this Note. The parties hereby consent and agree that, in any actions predicated upon this Note, venue is properly laid in Texas and that the Circuit Court in and for Houston, Texas, shall have full subject matter and personal jurisdiction over the parties to determine all issues arising out of or in connection with the execution and enforcement of this Note.

 

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18. The term “Coil Tubing” as used herein in every instance shall include Coil Tubing’s successors, legal representatives and assigns, including all subsequent grantees, either voluntarily by act of Coil Tubing or involuntarily by operation of law and shall denote the singular and/or plural and the masculine and/or feminine and natural and/or artificial persons, whenever and wherever the contexts so requires or properly applies. The term “Swinford” as used herein in every instance shall include Swinford’s successors, legal representatives and assigns, as well as all subsequent assignees, endorsees and payees of this Note, either voluntarily by act of the parties or involuntarily by operation of law. Captions and paragraph headings in this Note are for convenience only and shall not affect its interpretation. Words in the singular include the plural and words in the plural include the singular, and words importing the masculine gender include the feminine and neuter genders.

 

19. Anything else in this Note to the contrary notwithstanding, in any action arising out of this Agreement, the prevailing party shall be entitled to collect from the non-prevailing party all of its attorneys’ fees. For the purposes of this Note, the party who receives or is awarded a substantial portion of the damages or claims sought in any proceeding shall be deemed the “prevailing” party and attorneys’ fees shall mean the reasonable fees charged by an attorney or a law firm for legal services and the services of any legal assistants, and costs of litigation, including, but not limited to, fees and costs at trial and appellate levels.

 

20. In the event Coil Tubing issues, sells, exchanges or transfers 25% or more of Coil Tubing’s then outstanding shares of common stock or voting securities in any Change of Control (as defined in the Purchase Agreement) transaction (each a “Change in Control Transaction”), Coil Tubing agrees to use any and all of such funds received in connection with such Change in Control Transaction to pay down amounts owed to Swinford under this Note, unless otherwise approved by Swinford in writing.

 

21. In the event any one or more of the provisions contained in this Note shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

 

22. No modification, amendment, addition to, or termination of this Note, nor waiver of any of its provisions, shall be valid or enforceable unless in writing and signed by all the parties hereto.

 

23. The Note constitutes the entire agreement of the parties regarding the matters contemplated herein, or related thereto, and supersedes all prior and contemporaneous agreements, and understandings of the parties in connection therewith.

 

 

 

 

 

 

[Remainder of page left intentionally blank. Signature page follows.]

 

 

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IN WITNESS WHEREOF, the parties have duly executed this Secured Promissory Note as of the day and year first above written, with an Effective Date as provided above.

 

  “Coil Tubing”
   
  Coil Tubing Technology, Inc.
  (A Nevada corporation)
   
   
  By: /s/ Jason L. Swinford
   
  Its: President
   
  Printed Name: Jason L. Swinford

 

 

“Swinford”


/s/ Jerry L. Swinford

Jerry L. Swinford

 

 

 

 

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EXHIBIT E

 

GUARANTY

 

This Guaranty (the “Guaranty” or the “Agreement”) is made as of March 25, 2015 by Coil Tubing Technology Holdings, Inc., a Nevada corporation (“Holdings”), Total Downhole Solutions, Inc., a Texas corporation, Coil Tubing Technology, Inc., a Texas corporation, Coil Tubing Technology Canada Inc., an Alberta Canada corporation, and Excel Inspection, LLC, a Texas limited liability company (collectively, with Holdings, the “Guarantor”) in favor of Jerry L. Swinford, an individual (“Swinford”). When the context in which words are used in this Agreement indicates that such is the intent, singular words shall include the plural, and vice versa, and masculine words shall include the feminine and neuter genders, and vice versa. Captions are inserted for convenience only, are not a part of this Agreement, and shall not be used in the interpretation of this Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and the Notes (each as defined below), unless the context requires otherwise.

 

Recitals

 

WHEREAS, Coil Tubing Technology, Inc., a Nevada corporation (“Coil Tubing”) has previously entered into that certain Intellectual Property Purchase Agreement with Swinford, dated as of March 25, 2015, pursuant to which Coil Tubing has agreed to purchase certain intellectual property of Swinford (the “Purchase Agreement”);

 

WHEREAS, Guarantor is the direct or indirect wholly-owned subsidiary of Coil Tubing and will receive a direct benefit from the Purchase Agreement and the terms and conditions thereof;

 

WHEREAS, Coil Tubing has entered into that certain Secured Promissory Note in the amount of $3,750,000 dated March 6, 2015 in favor of Swinford (the “Note”), evidencing amounts owed under the Purchase Agreement; and

 

WHEREAS, Swinford was unwilling to execute the Purchase Agreement and to enter into the transactions described in the Purchase Agreement without receipt from Guarantor of a guaranty of all of the obligations of Coil Tubing under the Notes.

 

NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, receipt of which hereby is acknowledged, Guarantor hereby agrees as follows:

 

1. Guaranty. Guarantor hereby jointly and severally, unconditionally and irrevocably guarantees to Swinford and his successors and assigns (a) the full and punctual payment (in lawful money of the United States and in immediately available funds), as and when due, of all principal, interest, attorneys’ fees, costs, expenses and other amounts which are or may become payable by Coil Tubing under the Note (the “Coil Tubing Debt”) and (b) the full and punctual performance of all other obligations of Coil Tubing under the Note and Purchase Agreement (and exhibits thereto). The obligations of Coil Tubing under the Note, including the payment obligations regarding the Coil Tubing Debt, are referred to in this Guaranty as the “Coil Tubing Obligations”, and the covenants and obligations of Guarantor that are described in the preceding sentence and elsewhere in this Guaranty are referred to in this Guaranty as “Guarantor’s Obligations”.

 

2. Certain Rights of Swinford. Guarantor authorizes Swinford, without giving notice to Guarantor or obtaining Guarantor’s consent in its individual capacity and without affecting the liability of Guarantor, but subject to obtaining Coil Tubing’s written agreement to the extent its written agreement is required, from time to time to: (a) renew, extend or increase the Coil Tubing Debt or any portion thereof; (b) declare all Coil Tubing Debt due and payable upon the occurrence of a default under the Note; (c) make changes in the dates on which the Coil Tubing Debt is payable; (d) otherwise modify the terms of the Coil Tubing Debt; (e) amend the Note in any respect; (f) take and hold additional security for the Coil Tubing Debt and exchange, enforce, waive and release any such security; (g) apply such security and direct the order or manner of sale thereof as Swinford in his discretion may determine; and (h) add any one or more guarantors of the Coil Tubing Debt.

 

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3. Guarantor’s Waivers. Guarantor waives: (a) any defense based upon any legal disability or other defense of Coil Tubing or any other guarantor or person or based upon Coil Tubing’s cessation for any reason of liability under any of the Note; (b) any defense based upon any lack of authority of Coil Tubing’s officers or other agents acting or purporting to act on behalf of Coil Tubing or any defect in the formation of Coil Tubing; (c) any defense of Guarantor based upon Swinford’s election of any remedy against Guarantor or Coil Tubing or both, including, without limitation, any right to require Swinford to proceed against Coil Tubing or another person or to proceed against any other security for the Coil Tubing Obligations; (d) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other respects more burdensome than that of a principal; (e) any right of subrogation, any right to enforce any remedy which Swinford may have against Coil Tubing and any right to participate in, or benefit from, any security for the Coil Tubing Obligations now or hereafter held by Swinford; (f) presentment, demand, protest and notice of any kind; (g) the benefit of any statute of limitations affecting the liability of Guarantor hereunder or the enforcement hereof; (h) any right to require Swinford to pursue any other remedy in Swinford’s power; and (i) any right to revoke this Guaranty. Guarantor waives any other circumstance or event, in existence now or in the future, that might otherwise constitute a legal or equitable defense to the enforcement of this Guaranty.

 

4. Guarantor’s Representations and Warranties. Guarantor represents, warrants and agrees that: (a) Swinford would not have entered into the Purchase Agreement or the Note but for this Guaranty; (b) there are no conditions precedent to the effectiveness of this Guaranty; and (c) this Guaranty shall continue in full force and effect and shall be binding on Guarantor regardless of whether Swinford obtains other collateral or any guaranties from others or takes any other action. Guarantor consents to Coil Tubing’s execution, delivery and performance of the Note.

 

5. Subordination. Guarantor subordinates all present and future indebtedness owing by Coil Tubing to Guarantor to the Coil Tubing Debt and other obligations under the Note at any time owing by Coil Tubing to Swinford. Guarantor assigns to Swinford all such indebtedness owed by Coil Tubing to Guarantor as security for this Guaranty. Guarantor further agrees not to assign all or any part of such indebtedness prior to the full payment and performance of the Coil Tubing Obligations.

 

6. Nature of Guarantor’s Liability Under This Guaranty. This is a guaranty of payment and performance and not merely of collection. Guarantor’s obligations under this Guaranty are independent of Coil Tubing’s obligations to Swinford under the Note. Swinford may bring a separate action to enforce the provisions hereof against Guarantor without taking action against Coil Tubing or any collateral or joining Coil Tubing as a party to such action. The obligations of Guarantor under this Guaranty constitute the full recourse obligations of Guarantor and are enforceable against him and her to the full extent of their assets.

 

7. Event of Default; Swinford’s Remedies.

 

(a) Event of Default. An “Event of Default” for purposes of this Guaranty means (1) Coil Tubing’s or Guarantor’s failure to pay when due any Coil Tubing Debt, (2) Coil Tubing’s or Guarantor’s failure to perform any other Coil Tubing Obligations when due or in accordance with the terms of such obligations, (3) Guarantor’s failure to perform any of Guarantor’s Obligations when due or in accordance with their terms, or (4) the failure to be true of any representation or warranty of Guarantor that is contained in this Guaranty or any of the documents evidencing the Guarantor’s Obligations, if Guarantor does not remedy in full any such failure described in this sentence within ten days after receipt of written notice from Swinford.

 

(b) Remedies on an Event of Default. Upon the occurrence of an Event of Default, Swinford shall have the immediate right to file an action at law or equity against Guarantor and/or to take control of all or any part of any collateral, with or without judicial process, and without demand of performance, advertisement or notice to Guarantor, which are expressly waived by Guarantor; provided, however, that if any notice is required by law in connection with the exercise by Swinford of his rights and remedies, Guarantor agrees that ten days' prior written notice is a reasonable time and manner for notice. Furthermore, Swinford may exercise all of the other rights and remedies that are provided to him under this Guaranty.

 

Page 2 of 6
 

 

(c) No Implied Waivers; Cumulative Remedies. No delay or failure of Swinford in exercising any right or remedy under this Guaranty shall operate as a waiver thereof, nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right or remedy preclude any further exercise thereof or of any other right or remedy. The rights and remedies of Swinford under this Guaranty are cumulative and not exclusive of any rights or remedies which he might otherwise have under applicable law. Any waiver, permit, consent or approval of any kind or character on the part of Swinford of any Event of Default or any such waiver of any provision of this Guaranty must be in writing and shall be effective only to the extent specifically set forth in writing. Guarantor acknowledges and agrees that the exercise by Swinford of his rights under this Section 7 will not operate to release Guarantor from its personal obligation to pay the Coil Tubing Debt until full payment of any deficiency on the Coil Tubing Debt has been made in cash. Furthermore, Guarantor acknowledges and agrees that Swinford is not obligated to exercise any of the rights or remedies provided by this Section 7.

 

8. Bankruptcy. This Guaranty shall continue in full force and effect in the event of any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar proceeding involving Coil Tubing or Guarantor, and this Guaranty shall continue in full force and effect notwithstanding any subsequent change in the ownership or assets of Coil Tubing. In any bankruptcy of Coil Tubing or other proceeding involving Coil Tubing in which the filing of claims is required by law, Guarantor shall file all claims which Guarantor may have against Coil Tubing relating to any indebtedness of Coil Tubing to Guarantor and shall assign to Swinford all rights of Guarantor thereunder. If Guarantor does not file any such claim, Swinford, as attorney-in-fact for Guarantor, is hereby authorized to do so in the name of Guarantor or, in Swinford’s discretion, to assign the claim to a nominee and to cause proof of claim to be filed in the name of Swinford’s nominee. The foregoing power of attorney is coupled with an interest and cannot be revoked. Swinford or his nominee shall have the right, in his reasonable discretion, to accept or reject any plan proposed in such proceeding and to take any other action which a party filing a claim is entitled to do. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claim shall pay to Swinford the amount payable on such claim and, to the full extent necessary for that purpose, Guarantor hereby assigns to Swinford all of Guarantor’s rights to any such payments or distributions; provided, however, Guarantor’s obligations hereunder shall not be satisfied except to the extent that Swinford receives cash by reason of any such payment or distribution. If all or any portion of the Coil Tubing Debt and other obligations guaranteed hereunder is paid or performed, the obligations of Guarantor hereunder shall continue and shall remain in full force and effect in the event that all or any part of such payment or performance is avoided or recovered directly or indirectly from Swinford as a preference, fraudulent transfer or otherwise under the Bankruptcy Code or other similar laws.

 

9. Successors and Assigns; Subsequent Subsidiaries. This Guaranty shall be binding upon, and shall inure to the benefit of, the respective successors and assigns of Guarantor and Swinford, provided that the foregoing provision shall not be construed as permitting Guarantor to assign its obligations hereunder. Promptly after the formation or acquisition by Holdings, or if applicable, any other wholly-owned subsidiary of Coil Tubing Technology, Inc., a Nevada corporation, of any Subsidiary not already a party hereto, such Subsidiary shall provide a guaranty to Swinford in the form of this Guaranty, or agree to become a party and guarantor hereunder, unless such requirement is waived by Swinford in writing. For the purposes of this Section 9, “Subsidiary” means with respect to the applicable entity, (i) any corporation at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such applicable entity or by one or more of its subsidiaries, or by such applicable entity and one or more of its subsidiaries, (ii) any general partnership, joint venture, limited liability company, statutory trust, or other entity, at least a majority of the outstanding partnership, membership, or other similar equity interests of which shall at the time be owned by such applicable entity, or by one or more of its subsidiaries, or by such applicable entity and one or more of its subsidiaries, and (iii) any limited partnership of which such applicable entity or any of its subsidiaries is a general partner. For the purposes of this definition, “voting stock” means shares, interests, participations, or other equivalents in the equity interest (however designated) in such applicable entity having ordinary voting power for the election of a majority of the directors (or the equivalent) of such applicable entity, other than shares, interests, participations, or other equivalents having such power only by reason of the occurrence of a contingency.

 

10. Attorneys’ Fees. If any attorney is engaged by Swinford to enforce or defend any provision of this Guaranty, with or without the filing of any legal action or proceeding, Guarantor shall pay to Swinford, within ten days after demand therefor, all reasonable attorneys’ fees and costs incurred by Swinford in connection therewith (including, without limitation, in any appellate or post-judgment proceedings), together with interest thereon from the date of such demand until paid at the rate of ten percent per annum (or, if lower, at the maximum rate allowed by applicable law).

 

Page 3 of 6
 

 

11. Rules of Construction. The term “person” as used herein shall include any individual, corporation, trust or other legal entity of any kind whatsoever. When the context and construction so require, all words used in the words in the singular include the plural and words in the plural include the singular, and words importing the masculine gender include the feminine and neuter genders. All headings appearing in this Guaranty are for convenience only and shall be disregarded in construing this Guaranty. This Guaranty is the result of arms-length negotiations between Guarantor and Swinford and their respective attorneys. Accordingly, neither Guarantor nor Swinford shall be deemed to be the author of this Guaranty, and this Guaranty shall not be construed against either party.

 

12. Notices. All notices required or permitted by this Guaranty to be delivered to Guarantor or Swinford shall be delivered in writing, by personal delivery, by overnight courier, by facsimile transmission or by registered or certified mail, return receipt requested, postage prepaid, to the address for such party set forth on the signature page of this Guaranty. Any such notice shall be deemed given as follows: (a) if personally delivered, when served; (b) if sent by overnight courier, on the first business day after delivery to the courier; (c) if sent by facsimile, on the date of transmission if delivered on a business day (or, if not delivered on a business day, on the next business day after transmission); or (d) if sent by registered or certified mail, on the third day after deposit in the mail.

 

13. General Provisions. If any provision of this Guaranty shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that portion shall be deemed severed from this Guaranty and the remaining parts shall remain in full force as though the invalid, illegal or unenforceable portion had never been part of this Guaranty. This Guaranty constitutes the only agreement between Guarantor and Swinford with respect to the subject matter hereof and supersedes all previous agreements with respect thereto. This Guaranty may be amended or terminated only by an agreement in writing executed by Guarantor and Swinford. This Guaranty may be executed in two counterparts, which together shall constitute but one and the same instrument. This Guaranty may be executed by facsimile transmission or by e-mail transmission in PDF format.

 

14. Governing Law. This Guaranty shall be governed by, and construed in accordance with, the internal laws of the State of Texas without giving effect to such state’s conflict-of-law principles.

 

15. Waiver of Jury Trial. Guarantor and Swinford each hereby irrevocably waives all rights that it may have under applicable law to a trial by jury of any issue or claim arising under this Guaranty in any action to enforce or interpret this Guaranty.

 

 

 

 

 

 

 

[Remainder of page left intentionally blank. Signature page follows.]

 

Page 4 of 6
 

 

 

IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as of the date appearing on the first page of this Guaranty.

 

 

Coil Tubing Technology Holdings, Inc.

(A Nevada corporation)

 

By: /s/ Jerry L. Swinford

Its: President

Printed Name: Jerry L. Swinford

 

 

Total Downhole Solutions, Inc.

(a Texas corporation)

 

By: /s/ Jerry L. Swinford

Its: President

Printed Name: Jerry L. Swinford

 

 

Coil Tubing Technology, Inc.

(a Texas corporation)

 

By: /s/ Jason L. Swinford

Its: Chief Executive Officer

Printed Name: Jason L. Swinford

 

Address for all entities above:

 

Attn: Jason Swinford

22305 Gosling Road

Spring, Texas 77389

Phone: (281) 651-0200

Fax: (281) 288-0400

 

 

Coil Tubing Technology Canada Inc.

(an Alberta Canada corporation)

 

By: /s/ Jason L. Swinford

Its: Chief Executive Officer

Printed Name: Jason L. Swinford

 

Address:

 

Attn: Jason Swinford

22305 Gosling Road

Spring, Texas 77389

Phone: (281) 651-0200

Fax: (281) 288-0400

 

 

Excel Inspection, LLC

(a Texas limited liability company)

 

By: /s/ Jason L. Swinford

Its: Managing Partner

Printed Name: Jason L. Swinford

 

Page 5 of 6
 

 

 

Address:

 

Attn: Jason Swinford

22305 Gosling Road

Spring, Texas 77389

Phone: (281) 651-0200

Fax: (281) 288-0400

AGREED TO AND ACCEPTED:

 

/s/ Jerry L. Swinford

Jerry L. Swinford

 

Address:

 

22305 Gosling Road

Spring, Texas 77389

Phone: (281) 651-0200

Fax: (281) 288-0400

  

 

 

 

 

 

 

 

 

 

 

 

 

Page 6 of 6
 

 

 

EXHIBIT F

 

INTELLECTUAL PROPERTY ASSIGNMENT

 

This Intellectual Property Assignment (the “Assignment” or “Agreement”) is entered on March 25, 2015 to be effective as of December 1, 2014, by and between Jerry L. Swinford, an individual residing in the State of Texas (“Assignor”) and Coil Tubing Technology, Inc., a Nevada corporation (“Assignee”). Assignor and Assignee may be referred to herein individually as a “Party” and jointly as the “Parties.”

 

WHEREAS, Assignor is the named inventor and owner of all rights, title, and interest in and to the intellectual property listed in Exhibit A, attached hereto and incorporated herein as if fully reproduced (the “Transferred Assets”); and

 

WHEREAS, Assignor desires to assign and transfer to Assignee, and Assignee desires to obtain from Assignor an assignment and transfer of, the Transferred Assets pursuant to this Assignment.

 

NOW THEREFORE, in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged as received, and in consideration of the foregoing and the covenants and promises contained herein, the Parties agree as follows:

 

1. Assignment of Transferred Assets. Assignor hereby unconditionally and irrevocably sells, assigns, transfers, conveys, and delivers to Assignee, its successors and assigns, all his right, title, and interest in, to, and under the Transferred Assets, said Transferred Assets set forth herein in Exhibit A, and any reissues, reexaminations, renewals, continuations, continuations-in-part, divisions, substitute applications thereof, and the like, and any extensions thereof, and all patents worldwide that may be granted thereon, together with the right to file such applications and the right to claim for the same the priority rights derived from such patent application under the laws of the United States and its territorial possessions, the International Convention for the Protection of Industrial Property, or any other international agreement or the domestic laws of the country in which any such application is filed, as may be applicable, to be held and enjoyed by Assignee for its own use and enjoyment, and for the use and enjoyment of its successors and assigns, to the end of the term or terms for which such patents may be granted or reissued, as fully and entirely as the same would have been held and enjoyed by Assignor if this assignment and sale had not been made.

 

2. Cooperation with Assignee. Assignor agrees to cooperate with Assignee to provide the necessary executed assignments and other documents as required to perfect the assignment set forth in Section 1. Assignor further covenants that Assignee will, upon its request, be provided promptly with all pertinent facts and documents relating to said inventions and said Letters Patent and legal equivalents as may be known and accessible to Assignor and will testify as to the same in any interference, litigation, or proceeding related thereto and will promptly execute and deliver to Assignee or its legal representatives any and all papers, instruments or affidavits required to apply for, obtain, maintain, issue and enforce said application, said inventions and said Letters Patent and said equivalents thereof which may be necessary or desirable to carry out the purposes thereof.

 

3. Issuance of Future Patents. Assignor hereby authorizes and requests the Commissioner of Patents and Trademarks of the United States, and any officer of any country or countries foreign to the United States, whose duty it is to issue patents or other evidence or forms of intellectual property protection to issue respective Letters of Patent to Assignee, and the entire right, title, and interest in and to the same, for its sole use and benefit; and for the use and benefit of its successors and assigns, to the full end of the term(s) for which said Patent(s) may be granted, as fully and entirely as the same would have been held by me had this assignment not been made.

 

4. No Prior Encumbrance. Assignor hereby covenants that no assignment, sale, agreement, or encumbrance has been or will be made or entered into which would conflict with the terms of this Assignment.

 

Page 1 of 3
 

 

5. Right to Sue for Past Infringement. Assignor hereby expressly grants to Assignee all of Assignor’s rights to bring any necessary action, including, but not limited to lawsuits, against any past, present, or future third party infringers, potential or actual, of any Transferred Asset as if the Assignor himself were bringing such action. Assignee shall have the right to any and all recoveries from any such actions and Assignor hereby waives any recovery obtained by Assignee.

 

6. Indemnification. ASSIGNEE HEREBY AGREES TO INDEMNIFY, DEFEND, AND HOLD HARMLESS THE ASSIGNOR FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LOSSES, EXPENSES (INCLUDING, BUT NOT LIMITED TO, ATTORNEYS’ FEES AND COURT COSTS), AND CAUSES OF ACTION OF EVERY KIND AND CHARACTER, WITHOUT LIMITS AND WITHOUT REGARD TO THE CAUSE OR CAUSES THEREOF OR NEGLIGENCE OF ANY PARTY, INCLUDING, BUT NOT LIMITED TO, THE SOLE, ACTIVE, PASSIVE, JOINT, OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY (OF WHATEVER CHARACTER) OF ASSIGNOR, ARISING OUT OF OR IN CONNECTION WITH, DIRECTLY OR INDIRECTLY, THIS ASSIGNMENT AND THE TRANSFERRED ASSETS. ASSIGNEE’S INDEMNITY UNDER THIS PARAGRAPH SHALL BE WITHOUT REGARD TO AND WITHOUT ANY RIGHT TO CONTRIBUTION FROM ANY INSURANCE MAINTAINED BY ASSIGNOR.

 

7. Prior Agreements; Waiver. No modification of this Assignment shall be of any force or effect unless in writing and signed by an authorized signatory of both Parties. This Assignment constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes those provisions of all prior and contemporaneous agreements, representations and understandings of the parties pertaining to the same subject matter. No waiver of any of the provisions of this Assignment shall be deemed to, or shall constitute a waiver of, any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

 

8. Captions and Headings. Captions and headings used herein are inserted only for convenience of reference only and shall not operate to modify, interpret, alter, limit or define any provision hereof.

 

 

 

 

 

 

 

 

 

 

[Remainder of page left intentionally blank. Signature page follows.]

 

 

 

 

Page 2 of 3
 


IN WITNESS WHEREOF, Assignor hereby assigns the Transferred Assets to the Assignee and the Assignee hereby accepts said assignment and has hereunto set hand and seal on the following dates.

 

ASSIGNOR: ASSIGNEE:
   
  COIL TUBING TECHNOLOGY, INC.
   
By: /s/ Jerry L. Swinford By: /s/ Jason L. Swinford
Jerry L. Swinford, Inventor Jason L. Swinford, CEO
   
Date: March 25, 2015 Date: March 25, 2015

 

 

NOTARIZATIONS

 

STATE OF TEXAS §
COUNTY OF HARRIS §

 

Before me this 25th day of March 2015, personally appeared Jerry L. Swinford, to me known to be the person who is described in and who executed the foregoing assignment instrument and acknowledge to me that he executed the same of his own free will for the purpose therein expressed.

 

  /s/ Signed by Notary
  Notary Public in and for the State of Texas

 

 

STATE OF TEXAS §
COUNTY OF HARRIS §

 

This instrument was acknowledged before me on the 25th day of March 2015, by Jason L. Swinford, Chief Executive Officer of Coil Tubing Technology, Inc., a Nevada Corporation, who acknowledged to me that he has the authority to sign this document on behalf of said corporation.

 

 

  /s/ Signed by Notary
  Notary Public in and for the State of Texas

 

Page 3 of 3
 

 

 

EXHIBIT A

TRANSFERRED ASSETS

 

COUNTRY

PATENT OR

APPLICATION NO.

 FILING DATE REMAINING TERM

REGISTRATION

DATE

PRIORITY DATE,

IF ANY

 TOOL NOTES LISTED OWNER
US 5,584,342 6/6/1995 2.04 12/17/1996   Subterranean Rotation- Inducing Device and Method All maintenance done - will expire on 6/6/2015 Coil Tubing Technology, Inc.
US 7,686.102 3/29/2007 15.33 3/30/2010 3/31/2006 Jet Motor for Providing Rotation in a Downhole Tool Next maintenance window opens 3/30/2017. Coil Tubing Technology, Inc.
US 8,151.908 12/4/2009- Continuation 17.36 4/10/2012 3/31/2006 Jet Motor for Providing Rotation in a Downhole Tool Next maintenance window opens 4/10/2015. Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
Canada 2,646.326 9/23/2008 (national entry date) 18.18 2/5/2013 3/31/2006 Jet Motor and Method for Providing Rotation in a Downhole Tool Next annuity due by 3/30/2015 Coil Tubing Technology, Inc.
Canada 2,797,565 3/29/2007 -Divisional app. 12.32 3/29/2007 3/31/2006 Jet Motor and Method for Providing Rotation in a Downhole Tool Notice of Allowance has issued Next annuity due by 3/29/2015 Coil Tubing Technology, Inc.
Singapore 146,369 9/26/2008 15.45 5/14/2010 3/31/2006 Jet Motor and Method for Providing Rotation in a Downhole Tool Next annuity due by 3/29/2015 Coil Tubing Technology, Inc.
US 7,946,348 8/31/2007 16.48 5/24/2011   Rotation Tool First maintenance window opens 5/24/2014 Coil Tubing Technology, Inc.
Canada 2,734,285 2/15/2011 (national entry date) 18.51 6/5/2013 8/31/2007 Rotation Tool Next annuity due by 7/16/2014 Coil Tubing Technology, Inc.
Indonesia W00201001371 4/28/2010 17.41 4/30/2012 8/31/2007 Rotation Tool Is still being examined Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
US 12/480.680 6/8/2009 16.58 6/30/2011 6/6/2008 Jet Hammer Awaiting appeal decision - Coil Tubing Technology. Inc.
US 8,151.910 5/7/2009 17.36 4/10/2012 5/7/2008 Drilling Jar First maintenance window opens 4/10/2015 Coil Tubing Technology, Inc.
US 5,584.342 6/6/1995 2.04 12/17/1996   Subterranean Rotation- Inducing Device and Method All maintenance done - will expire on 6/6/2015 Coil Tubing Technology. Inc.

 

 
 

 

Canada 2,723,420 11/2/2010 (national entry date) 19.16 1/28/2014 5/7/2008 Drilling Jar Next annuity due by 5/7/2014 Coil Tubing Technology. Inc.
Indonesia ID P0029982 11/26/2010 (national entry date) 17.13 1/16/2012 5/7/2008 Drilling Jar Next annuity due by 1/16/2015 Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
US 13/046.662 3/11/2011 18.33 3/31/2013 3/11/2010 Method and Apparatus for Washing Downhole Tubulars and Equipment Undergoing examination Coil Tubing Technology, Inc.
Norway 20,120,910 8/15/2012 19.75 8/31/2014 3/11/2010 Method and Apparatus for Washing Downhole Tubulars and Equipment Based on PCT/US11/28241 Undergoing examination Next annuity due 3/31/2015 Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
UK/Scotland 1216072.7 9/10/2012 19.83 9/30/2014 3/11/2010 Method and Apparatus for Washing Downhole Tubulars and Equipment Based on PCT/US11/28241 Undergoing examination Next annuity due 3/31/2015 Jerry L. Swinford -will file assignment to Coil Tubing Technology. Inc.
US 13'434.812 3/29/2012 19.33 3/31/2014 3/29/2011 Downhole Oscillator Waiting for examination Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
US 5,584,342 6/6/1995 2.04 12/17/1996   Subterranean Rotation-Inducing Device and Method All maintenance done - will expire on 6/6/2015 Coil Tubing Technology, Inc.
Canada 2,837,938 9/12/2013 20.83 9/30/2015 3/29/2011 Downhole Oscillator Need to request examination but am waiting to see what happens in U.S. application as we can have this application mirror a U.S. allowed application which cuts down on prosecution fees. Next annuity due 3/30/2015 Coil Tubing Technology, Inc.
US 61(932,629 1/28/2014 21.17 1/31/2016   Downhole Tool (Ampli-Max) Need to prepare and file full-blown non-provisional patent application Jerry L. Swinford

 

 

 

 



Exhibit 10.37

 

SECURED PROMISSORY NOTE

   
US $3,750,000 March 25, 2015

 

NOW THEREFORE FOR VALUE RECEIVED, the undersigned, Coil Tubing Technology, Inc., a Nevada corporation (“Coil Tubing”), hereby promises to pay to the order of Jerry Swinford, an individual (“Swinford”), at the address of Swinford at 22305 Gosling Road, Spring, Texas 77389, or such other place as may be designated by Swinford to Coil Tubing in writing, the principal sum of Three Million Seven Hundred and Fifty Thousand Dollars ($3,750,000), in lawful money of the United States of America, which shall be legal tender, bearing interest and payable as provided herein. This Secured Promissory Note (this “Note” or “Promissory Note”) has an effective date of December 1, 2014 (the “Effective Date”). This Note is entered into to evidence amounts owed to Swinford pursuant to the terms of that certain Intellectual Property Purchase Agreement entered into between Swinford and Coil Tubing on or around the date hereof (the “Purchase Agreement”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Purchase Agreement.

 

1. The unpaid balance of this Note shall bear interest at the rate of three percent (3%) per annum from the Effective Date until paid in full. Until January 1, 2017 (the “Amortizing Payment Start Date”), payments of accrued interest only on this Note through such applicable payment date shall be due on June 30, 2015 and December 31, 2015 (the “Interest Only Payments”).

 

2. Beginning on the Amortizing Payment Start Date and continuing until the Maturity Date, Coil Tubing agrees to pay Swinford (a) the lesser of (i) $15,810.15; or (ii) the total amount then due under this Note, per month (each a “Monthly Payment”); payable in advance on or before the 1st of each month (each the “Monthly Payment Date”) towards the outstanding principal and accrued interest on this Note, with the first such Monthly Payment due on the Amortizing Payment Start Date. The “Maturity Date” of this Note shall be January 1, 2018. Any and all unpaid principal or interest on this Note shall be repaid on the Maturity Date. All past-due principal (which failure to pay such amounts shall be defined herein as an “Event of Default”) shall bear interest at the rate of twelve percent (12%) per annum (the “Default Rate”) until paid in full. All computations of interest shall be made on the basis of a 360-day year for actual days elapsed.

 

3. This Note may be prepaid in whole or in part, at any time and from time to time, without premium or penalty. This Note shall be subject to a mandatory prepayment in the event a Change in Control Transaction has occurred as described in and as provided in Section 2.4(a) of the Purchase Agreement.

 

4. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which national banks are not open for business, such payment shall be made on the next succeeding business day.

 

5. This Note shall be binding upon and inure to the benefit of Coil Tubing and Coil Tubing’s respective successors and assigns. Each holder of this Note, by accepting the same, agrees to and shall be bound by all of the provisions of this Note. Swinford may assign this Note or any of his rights, interests or obligations to this Note without the prior written approval of Coil Tubing.

 

6. This Note and the representations, warranties and obligations set forth herein are guaranteed by Coil Tubing Technology Holdings, Inc., a Nevada corporation, Coil Tubing’s wholly-owned subsidiary (“Holdings”), Holdings’ wholly-owned subsidiaries Total Downhole Solutions, Inc., a Texas corporation, Coil Tubing Technology, Inc., a Texas corporation and Coil Tubing Technology Canada Inc., an Alberta Canada corporation, and Excel Inspection, LLC, a Texas limited liability company which is a majority-owned subsidiary of Coil Tubing (collectively with Holdings, the “CTT Subsidiaries”) pursuant to a Guaranty by Holdings in favor of Swinford (the “Guaranty”). Additionally, the payment of this Note is secured by Security Interests as provided for in Section 2.3 of the Purchase Agreement and in Section 13, below.

 

Page 1 of 7
 

 

7. No provision of this Note shall alter or impair the obligation of Coil Tubing to pay the principal of and interest on this Note at the times, places and rates, and in the coin or currency, herein prescribed.

 

8. Coil Tubing will do or cause to be done all things reasonably necessary to preserve and keep in full force and affect its corporate existence, rights and franchises and comply with all laws applicable to Coil Tubing, except where the failure to comply could not reasonably be expected to have a material adverse effect on Coil Tubing.

 

9. Notwithstanding anything to the contrary in this Note or any other agreement entered into in connection herewith, whether now existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all interest and any other charges constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under this Note or otherwise in connection with this loan transaction, shall under no circumstances exceed the Maximum Rate (defined below).

 

10. Coil Tubing represents and warrants to Swinford as follows:

 

(a) The execution and delivery by Coil Tubing of this Note (i) are within Coil Tubing’s corporate power and authority, and (ii) have been duly authorized by all necessary corporate action.

 

(b) This Note is a legally binding obligation of Coil Tubing, enforceable against Coil Tubing in accordance with the terms hereof, except to the extent that (i) such enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights, and (ii) the availability of the remedy of specific performance or injunctive or other equitable relief is subject to the discretion of the court before which any proceeding therefore may be brought.

 

11. If an Event of Default (as defined herein or below) occurs (unless all Events of Default have been cured or waived by Swinford), Swinford may, by written notice to Coil Tubing, declare the principal amount then outstanding of, and the accrued interest and all other amounts payable on, this Note to be immediately due and payable, and/or may take any action provided for below to enforce the Security Interests (provided for in Section 2.3 of the Purchase Agreement and below under Section 13). The following events and/or any other Events of Default defined elsewhere in this Note are “Events of Default” under this Note:

 

(a) Coil Tubing shall fail to pay, when and as due, the principal or interest (if any) payable (i) hereunder (other than a Monthly Payment which is provided for below), within fifteen (15) days from the due date of such payment; or

 

(b) Coil Tubing shall fail to pay, when and as due, any Monthly Payment due hereunder within five (5) days of the due date of such; or

 

(c) Coil Tubing shall have breached in any material respect any covenant in this (i) Note; or (ii) the Purchase Agreement (including the exhibits thereto), or any CTT Subsidiary shall have breached in any material respect any covenant of the Guaranty, and, with respect to breaches capable of being cured, such breach shall not have been cured within thirty (30) days following the occurrence of such breach; or

 

(d) Coil Tubing shall: (i) become insolvent or take any action which constitutes its admission of inability to pay its debts as they mature; (ii) make an assignment for the benefit of creditors, file a petition in bankruptcy, petition or apply to any tribunal for the appointment of a custodian, receiver or a trustee for it or a substantial portion of its assets; (iii) commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation or statute of any jurisdiction, whether now or hereafter in effect; (iv) have filed against it any such petition or application in which an order for relief is entered or which remains undismissed for a period of ninety (90) days or more; (v) indicate its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial portion of its assets; or (vi) suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of ninety (90) days or more; or

 

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(e) Coil Tubing shall take any action authorizing, or in furtherance of, any of the foregoing.

 

12. In case any one or more Events of Default shall occur and be continuing, Swinford may proceed to protect and enforce his rights by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or for an injunction against a violation of any of the terms hereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. In case of a default in the payment of any principal of or premium, if any, or interest on this Note, Coil Tubing will pay to Swinford such further amount as shall be sufficient to cover the reasonable cost and expenses of collection, including, without limitation, reasonable attorneys’ fees, expenses and disbursements. No course of dealing and no delay on the part of Swinford in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice Swinford’s rights, powers or remedies. No right, power or remedy conferred by this Note upon Swinford shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise.

 

13. Security Interest in the Assets.

 

(a) Grant of a Security Interest. As security for (a) the full and punctual payment (in lawful money of the United States and in immediately available funds), as and when due, of all principal, interest, attorneys’ fees, costs, expenses and other amounts which are or may become payable by Coil Tubing under this Note (the “Debt”) and (b) the full and punctual performance of all other obligations of Coil Tubing under this Note (collectively the “Coil Tubing Obligations”), Coil Tubing hereby grants to Swinford a continuing and first-priority security interest (the “Security Interest”) in the following (collectively, the “Collateral”): all right, title and interest of Coil Tubing in and to the Assets; all cash and other consideration paid or payable with respect to the Assets; all of Coil Tubing’s books and records pertaining to the foregoing; and all proceeds from sales, transfers or other dispositions of the foregoing.

 

(b) No Transfer of the Collateral. Prior to the payment and performance in full of all of Coil Tubing Obligations, Coil Tubing shall not sell, pledge or otherwise transfer (whether voluntarily, involuntarily, by operation of law, or by gift or for consideration) any of the Collateral or any of its interest therein without the prior written consent of Swinford. Any such sale, pledge or other transfer shall be null and void and shall confer no rights on the purported transferee.

 

(c) Preservation and Protection of the Security Interest. Coil Tubing shall preserve and protect Swinford’s first-priority security interest in the Collateral and shall cause the Security Interest to be perfected and to continue to be perfected until the Coil Tubing Obligations are paid and performed in full. Coil Tubing shall execute and deliver to Swinford (within ten days after receipt of Swinford’s request) such other security agreements, endorsements, pledges, assignments and other documents (including, without limitation, financing statements and continuation statements and amendments thereto) as Swinford may request from time to time to effectuate the grant to Swinford of the Security Interest and the perfection of the Security Interest, and Swinford is authorized to file and/or record such documents with appropriate regulatory authorities. Coil Tubing shall promptly notify Swinford in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by Coil Tubing that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of Swinford hereunder.

 

(d) Title to the Collateral. Coil Tubing shall at all times maintain good and marketable title to the Collateral free and clear of all liens, encumbrances and other security interests. Coil Tubing shall pay in full any tax that is imposed on any of the Collateral prior to its delinquency and, within ten days after any other lien or encumbrance is imposed on any of the Collateral, Coil Tubing shall pay and discharge such lien or other encumbrance in full.

 

(e) Power of Attorney. Coil Tubing hereby appoints Swinford as its attorney-in-fact (with full power of substitution) to execute, deliver and file, effective upon the occurrence of an Event of Default (as defined in the Note), on Coil Tubing’s behalf and at Coil Tubing’s expense, (1) any financing statements, continuation statements or other documents required to perfect or continue the Security Interest and (2) any other documents and instruments that Swinford determines are necessary or appropriate in order to enable him to exercise his rights and remedies that are provided hereunder and by applicable law upon the occurrence of an Event of Default. This power, being coupled with an interest, shall be irrevocable until the Coil Tubing Obligations are paid and performed in full.

 

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(f) Termination of the Security Interest. The Security Interest shall terminate only if and when the Coil Tubing Obligations have been paid and performed in full.

 

(g) Additional Remedies Upon Default. Swinford’s rights and remedies upon an Event of Default hereunder shall include, without limitation, the power (1) to transfer into Swinford’s name or into the name of its nominee any or all of the Collateral and thereafter to receive and retain all cash and other dividends, distributions and payments made on account of the Collateral, and otherwise act with respect thereto as though he were the absolute owner thereof, (2) to sell all or any portion of the Collateral at a public or private sale at such place and time and at such prices and other terms as Swinford may determine, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as Swinford may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to Coil Tubing or right of redemption of Coil Tubing, which are hereby expressly waived, and (3) to file an action against Coil Tubing in his personal capacity for repayment of the Debt. Coil Tubing recognizes that Swinford may be compelled to resort to one or more private sales of any or all of the Collateral. Coil Tubing acknowledges and agrees that any such private sale may result in prices and other terms less favorable to Swinford than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall not, for such reason alone, be deemed to have been made in a commercially unreasonable manner. At any sale, Swinford may, to the extent permissible under applicable law, purchase the whole or any part of the Collateral, and Swinford shall be entitled to use and apply any or all of the Debt as a credit on account of the purchase price of any Collateral. Swinford and any other purchaser of the Collateral at any such sale shall hold the purchased Collateral free from any claim or right on the part of Coil Tubing, and Coil Tubing hereby waives any right of redemption, stay or appraisal that he might otherwise have under applicable law.

 

(h) The proceeds of any such sale, lease or other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys’ fees and expenses incurred by Swinford in enforcing his rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Coil Tubing Obligations, and to the payment of any other amounts required by applicable law, after which Swinford shall pay to Coil Tubing any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which Swinford is legally entitled, Coil Tubing will be liable for the deficiency, together with interest thereon, at the Default Rate and the reasonable fees of any attorneys employed by Swinford or a Collateral Agent on behalf of Swinford, to collect such deficiency. To the extent permitted by applicable law, Coil Tubing waives all claims, damages and demands against Swinford arising out of the repossession, removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of Swinford or a Collateral Agent.

 

(i) Coil Tubing agrees to pay all out-of-pocket fees, costs and expenses incurred in connection with any filing which may be required hereunder, including without limitation, any financing statements, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by Swinford. Coil Tubing shall also pay all other claims and charges which in the reasonable opinion of Swinford might prejudice, imperil or otherwise affect the Collateral or the Security Interest therein. Coil Tubing will also, upon demand, pay to Swinford the amount of any and all reasonable expenses, including the reasonable fees and expenses of his counsel and of any experts and agents, which Swinford may incur in connection with (i) the enforcement of this Note, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of Swinford under this Note. Until so paid, any fees payable hereunder shall be added to the principal amount of the Note and shall bear interest at the Default Rate.

 

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(j) All rights of Swinford and all Coil Tubing Obligations of Coil Tubing hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Note, or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Coil Tubing Obligations, or any other amendment or waiver of or any consent to any departure from the Note, or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Coil Tubing Obligations; (d) any action by Swinford or a Collateral Agent on behalf of Swinford to obtain, adjust, settle and cancel in their sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to Coil Tubing, or a discharge of all or any part of the Security Interest granted hereby. Until the Coil Tubing Obligations shall have been paid and performed in full, the rights of Swinford shall continue even if the Coil Tubing Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. Coil Tubing expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by Swinford hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than Swinford, then, in any such event, the Coil Tubing Obligations hereunder shall survive cancellation of this Note, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. Coil Tubing waives all right to require Swinford or a Collateral Agent on behalf of Swinford to proceed against any other person or to apply any Collateral which Swinford or Collateral Agent on behalf of Swinford may hold at any time, or to pursue any other remedy. Coil Tubing waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby.

 

14. If from any circumstance any holder of this Note shall ever receive interest or any other charges constituting interest, or adjudicated as constituting interest, the amount, if any, which would exceed the Maximum Rate shall be applied to the reduction of the principal amount owing on this Note, and not to the payment of interest; or if such excessive interest exceeds the unpaid balance of principal hereof, the amount of such excessive interest that exceeds the unpaid balance of principal hereof shall be refunded to Coil Tubing. In determining whether or not the interest paid or payable exceeds the Maximum Rate, to the extent permitted by applicable law (i) any nonprincipal payment shall be characterized as an expense, fee or premium rather than as interest; and (ii) all interest at any time contracted for, charged, received or preserved in connection herewith shall be amortized, prorated, allocated and spread in equal parts during the period of the full stated term of this Note. The term “Maximum Rate” shall mean the maximum rate of interest allowed by applicable federal or state law.

 

15. Except as provided herein, Coil Tubing and any sureties, guarantors and endorsers of this Note jointly and severally waive demand, presentment, notice of nonpayment or dishonor, notice of intent to accelerate, notice of acceleration, diligence in collecting, grace, notice and protest, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, without prejudice to the holder. The holder shall similarly have the right to deal in anyway, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to grant any other indulgences or forbearance whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect or enforce this Note or any installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable attorney’s fees.

 

16. This Note may be executed in several counterparts, each of which is an original. It shall not be necessary in making proof of this Note or any counterpart hereof to produce or account for any of the other counterparts. A copy of this Note signed by one party and faxed or scanned and emailed to another party (as a PDF or similar image file) shall be deemed to have been executed and delivered by the signing party as though an original. A photocopy or PDF of this Note shall be effective as an original for all purposes.

 

17. It is the intention of the parties hereto that the terms and provisions of this Note are to be construed in accordance with and governed by the laws of the State of Texas, except as such laws may be preempted by any federal law controlling the rate of interest which may be charged on account of this Note. The parties hereby consent and agree that, in any actions predicated upon this Note, venue is properly laid in Texas and that the Circuit Court in and for Houston, Texas, shall have full subject matter and personal jurisdiction over the parties to determine all issues arising out of or in connection with the execution and enforcement of this Note.

 

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18. The term “Coil Tubing” as used herein in every instance shall include Coil Tubing’s successors, legal representatives and assigns, including all subsequent grantees, either voluntarily by act of Coil Tubing or involuntarily by operation of law and shall denote the singular and/or plural and the masculine and/or feminine and natural and/or artificial persons, whenever and wherever the contexts so requires or properly applies. The term “Swinford” as used herein in every instance shall include Swinford’s successors, legal representatives and assigns, as well as all subsequent assignees, endorsees and payees of this Note, either voluntarily by act of the parties or involuntarily by operation of law. Captions and paragraph headings in this Note are for convenience only and shall not affect its interpretation. Words in the singular include the plural and words in the plural include the singular, and words importing the masculine gender include the feminine and neuter genders.

 

19. Anything else in this Note to the contrary notwithstanding, in any action arising out of this Agreement, the prevailing party shall be entitled to collect from the non-prevailing party all of its attorneys’ fees. For the purposes of this Note, the party who receives or is awarded a substantial portion of the damages or claims sought in any proceeding shall be deemed the “prevailing” party and attorneys’ fees shall mean the reasonable fees charged by an attorney or a law firm for legal services and the services of any legal assistants, and costs of litigation, including, but not limited to, fees and costs at trial and appellate levels.

 

20. In the event Coil Tubing issues, sells, exchanges or transfers 25% or more of Coil Tubing’s then outstanding shares of common stock or voting securities in any Change of Control (as defined in the Purchase Agreement) transaction (each a “Change in Control Transaction”), Coil Tubing agrees to use any and all of such funds received in connection with such Change in Control Transaction to pay down amounts owed to Swinford under this Note, unless otherwise approved by Swinford in writing.

 

21. In the event any one or more of the provisions contained in this Note shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

 

22. No modification, amendment, addition to, or termination of this Note, nor waiver of any of its provisions, shall be valid or enforceable unless in writing and signed by all the parties hereto.

 

23. The Note constitutes the entire agreement of the parties regarding the matters contemplated herein, or related thereto, and supersedes all prior and contemporaneous agreements, and understandings of the parties in connection therewith.

 

 

 

 

 

 

[Remainder of page left intentionally blank. Signature page follows.]

 

 

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IN WITNESS WHEREOF, the parties have duly executed this Secured Promissory Note as of the day and year first above written, with an Effective Date as provided above.

 

  “Coil Tubing”
   
  Coil Tubing Technology, Inc.
  (A Nevada corporation)
   
   
  By: /s/ Jason L. Swinford
   
  Its: President
   
  Printed Name: Jason L. Swinford

 

 

“Swinford”


/s/ Jerry L. Swinford

Jerry L. Swinford

 

 

 

 

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Exhibit 10.38

 

GUARANTY

 

This Guaranty (the “Guaranty” or the “Agreement”) is made as of March 25, 2015 by Coil Tubing Technology Holdings, Inc., a Nevada corporation (“Holdings”), Total Downhole Solutions, Inc., a Texas corporation, Coil Tubing Technology, Inc., a Texas corporation, Coil Tubing Technology Canada Inc., an Alberta Canada corporation, and Excel Inspection, LLC, a Texas limited liability company (collectively, with Holdings, the “Guarantor”) in favor of Jerry L. Swinford, an individual (“Swinford”). When the context in which words are used in this Agreement indicates that such is the intent, singular words shall include the plural, and vice versa, and masculine words shall include the feminine and neuter genders, and vice versa. Captions are inserted for convenience only, are not a part of this Agreement, and shall not be used in the interpretation of this Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and the Notes (each as defined below), unless the context requires otherwise.

 

Recitals

 

WHEREAS, Coil Tubing Technology, Inc., a Nevada corporation (“Coil Tubing”) has previously entered into that certain Intellectual Property Purchase Agreement with Swinford, dated as of March 25, 2015, pursuant to which Coil Tubing has agreed to purchase certain intellectual property of Swinford (the “Purchase Agreement”);

 

WHEREAS, Guarantor is the direct or indirect wholly-owned subsidiary of Coil Tubing and will receive a direct benefit from the Purchase Agreement and the terms and conditions thereof;

 

WHEREAS, Coil Tubing has entered into that certain Secured Promissory Note in the amount of $3,750,000 dated March 6, 2015 in favor of Swinford (the “Note”), evidencing amounts owed under the Purchase Agreement; and

 

WHEREAS, Swinford was unwilling to execute the Purchase Agreement and to enter into the transactions described in the Purchase Agreement without receipt from Guarantor of a guaranty of all of the obligations of Coil Tubing under the Notes.

 

NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, receipt of which hereby is acknowledged, Guarantor hereby agrees as follows:

 

1. Guaranty. Guarantor hereby jointly and severally, unconditionally and irrevocably guarantees to Swinford and his successors and assigns (a) the full and punctual payment (in lawful money of the United States and in immediately available funds), as and when due, of all principal, interest, attorneys’ fees, costs, expenses and other amounts which are or may become payable by Coil Tubing under the Note (the “Coil Tubing Debt”) and (b) the full and punctual performance of all other obligations of Coil Tubing under the Note and Purchase Agreement (and exhibits thereto). The obligations of Coil Tubing under the Note, including the payment obligations regarding the Coil Tubing Debt, are referred to in this Guaranty as the “Coil Tubing Obligations”, and the covenants and obligations of Guarantor that are described in the preceding sentence and elsewhere in this Guaranty are referred to in this Guaranty as “Guarantor’s Obligations”.

 

2. Certain Rights of Swinford. Guarantor authorizes Swinford, without giving notice to Guarantor or obtaining Guarantor’s consent in its individual capacity and without affecting the liability of Guarantor, but subject to obtaining Coil Tubing’s written agreement to the extent its written agreement is required, from time to time to: (a) renew, extend or increase the Coil Tubing Debt or any portion thereof; (b) declare all Coil Tubing Debt due and payable upon the occurrence of a default under the Note; (c) make changes in the dates on which the Coil Tubing Debt is payable; (d) otherwise modify the terms of the Coil Tubing Debt; (e) amend the Note in any respect; (f) take and hold additional security for the Coil Tubing Debt and exchange, enforce, waive and release any such security; (g) apply such security and direct the order or manner of sale thereof as Swinford in his discretion may determine; and (h) add any one or more guarantors of the Coil Tubing Debt.

 

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3. Guarantor’s Waivers. Guarantor waives: (a) any defense based upon any legal disability or other defense of Coil Tubing or any other guarantor or person or based upon Coil Tubing’s cessation for any reason of liability under any of the Note; (b) any defense based upon any lack of authority of Coil Tubing’s officers or other agents acting or purporting to act on behalf of Coil Tubing or any defect in the formation of Coil Tubing; (c) any defense of Guarantor based upon Swinford’s election of any remedy against Guarantor or Coil Tubing or both, including, without limitation, any right to require Swinford to proceed against Coil Tubing or another person or to proceed against any other security for the Coil Tubing Obligations; (d) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other respects more burdensome than that of a principal; (e) any right of subrogation, any right to enforce any remedy which Swinford may have against Coil Tubing and any right to participate in, or benefit from, any security for the Coil Tubing Obligations now or hereafter held by Swinford; (f) presentment, demand, protest and notice of any kind; (g) the benefit of any statute of limitations affecting the liability of Guarantor hereunder or the enforcement hereof; (h) any right to require Swinford to pursue any other remedy in Swinford’s power; and (i) any right to revoke this Guaranty. Guarantor waives any other circumstance or event, in existence now or in the future, that might otherwise constitute a legal or equitable defense to the enforcement of this Guaranty.

 

4. Guarantor’s Representations and Warranties. Guarantor represents, warrants and agrees that: (a) Swinford would not have entered into the Purchase Agreement or the Note but for this Guaranty; (b) there are no conditions precedent to the effectiveness of this Guaranty; and (c) this Guaranty shall continue in full force and effect and shall be binding on Guarantor regardless of whether Swinford obtains other collateral or any guaranties from others or takes any other action. Guarantor consents to Coil Tubing’s execution, delivery and performance of the Note.

 

5. Subordination. Guarantor subordinates all present and future indebtedness owing by Coil Tubing to Guarantor to the Coil Tubing Debt and other obligations under the Note at any time owing by Coil Tubing to Swinford. Guarantor assigns to Swinford all such indebtedness owed by Coil Tubing to Guarantor as security for this Guaranty. Guarantor further agrees not to assign all or any part of such indebtedness prior to the full payment and performance of the Coil Tubing Obligations.

 

6. Nature of Guarantor’s Liability Under This Guaranty. This is a guaranty of payment and performance and not merely of collection. Guarantor’s obligations under this Guaranty are independent of Coil Tubing’s obligations to Swinford under the Note. Swinford may bring a separate action to enforce the provisions hereof against Guarantor without taking action against Coil Tubing or any collateral or joining Coil Tubing as a party to such action. The obligations of Guarantor under this Guaranty constitute the full recourse obligations of Guarantor and are enforceable against him and her to the full extent of their assets.

 

7. Event of Default; Swinford’s Remedies.

 

(a) Event of Default. An “Event of Default” for purposes of this Guaranty means (1) Coil Tubing’s or Guarantor’s failure to pay when due any Coil Tubing Debt, (2) Coil Tubing’s or Guarantor’s failure to perform any other Coil Tubing Obligations when due or in accordance with the terms of such obligations, (3) Guarantor’s failure to perform any of Guarantor’s Obligations when due or in accordance with their terms, or (4) the failure to be true of any representation or warranty of Guarantor that is contained in this Guaranty or any of the documents evidencing the Guarantor’s Obligations, if Guarantor does not remedy in full any such failure described in this sentence within ten days after receipt of written notice from Swinford.

 

(b) Remedies on an Event of Default. Upon the occurrence of an Event of Default, Swinford shall have the immediate right to file an action at law or equity against Guarantor and/or to take control of all or any part of any collateral, with or without judicial process, and without demand of performance, advertisement or notice to Guarantor, which are expressly waived by Guarantor; provided, however, that if any notice is required by law in connection with the exercise by Swinford of his rights and remedies, Guarantor agrees that ten days' prior written notice is a reasonable time and manner for notice. Furthermore, Swinford may exercise all of the other rights and remedies that are provided to him under this Guaranty.

 

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(c) No Implied Waivers; Cumulative Remedies. No delay or failure of Swinford in exercising any right or remedy under this Guaranty shall operate as a waiver thereof, nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right or remedy preclude any further exercise thereof or of any other right or remedy. The rights and remedies of Swinford under this Guaranty are cumulative and not exclusive of any rights or remedies which he might otherwise have under applicable law. Any waiver, permit, consent or approval of any kind or character on the part of Swinford of any Event of Default or any such waiver of any provision of this Guaranty must be in writing and shall be effective only to the extent specifically set forth in writing. Guarantor acknowledges and agrees that the exercise by Swinford of his rights under this Section 7 will not operate to release Guarantor from its personal obligation to pay the Coil Tubing Debt until full payment of any deficiency on the Coil Tubing Debt has been made in cash. Furthermore, Guarantor acknowledges and agrees that Swinford is not obligated to exercise any of the rights or remedies provided by this Section 7.

 

8. Bankruptcy. This Guaranty shall continue in full force and effect in the event of any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar proceeding involving Coil Tubing or Guarantor, and this Guaranty shall continue in full force and effect notwithstanding any subsequent change in the ownership or assets of Coil Tubing. In any bankruptcy of Coil Tubing or other proceeding involving Coil Tubing in which the filing of claims is required by law, Guarantor shall file all claims which Guarantor may have against Coil Tubing relating to any indebtedness of Coil Tubing to Guarantor and shall assign to Swinford all rights of Guarantor thereunder. If Guarantor does not file any such claim, Swinford, as attorney-in-fact for Guarantor, is hereby authorized to do so in the name of Guarantor or, in Swinford’s discretion, to assign the claim to a nominee and to cause proof of claim to be filed in the name of Swinford’s nominee. The foregoing power of attorney is coupled with an interest and cannot be revoked. Swinford or his nominee shall have the right, in his reasonable discretion, to accept or reject any plan proposed in such proceeding and to take any other action which a party filing a claim is entitled to do. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claim shall pay to Swinford the amount payable on such claim and, to the full extent necessary for that purpose, Guarantor hereby assigns to Swinford all of Guarantor’s rights to any such payments or distributions; provided, however, Guarantor’s obligations hereunder shall not be satisfied except to the extent that Swinford receives cash by reason of any such payment or distribution. If all or any portion of the Coil Tubing Debt and other obligations guaranteed hereunder is paid or performed, the obligations of Guarantor hereunder shall continue and shall remain in full force and effect in the event that all or any part of such payment or performance is avoided or recovered directly or indirectly from Swinford as a preference, fraudulent transfer or otherwise under the Bankruptcy Code or other similar laws.

 

9. Successors and Assigns; Subsequent Subsidiaries. This Guaranty shall be binding upon, and shall inure to the benefit of, the respective successors and assigns of Guarantor and Swinford, provided that the foregoing provision shall not be construed as permitting Guarantor to assign its obligations hereunder. Promptly after the formation or acquisition by Holdings, or if applicable, any other wholly-owned subsidiary of Coil Tubing Technology, Inc., a Nevada corporation, of any Subsidiary not already a party hereto, such Subsidiary shall provide a guaranty to Swinford in the form of this Guaranty, or agree to become a party and guarantor hereunder, unless such requirement is waived by Swinford in writing. For the purposes of this Section 9, “Subsidiary” means with respect to the applicable entity, (i) any corporation at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such applicable entity or by one or more of its subsidiaries, or by such applicable entity and one or more of its subsidiaries, (ii) any general partnership, joint venture, limited liability company, statutory trust, or other entity, at least a majority of the outstanding partnership, membership, or other similar equity interests of which shall at the time be owned by such applicable entity, or by one or more of its subsidiaries, or by such applicable entity and one or more of its subsidiaries, and (iii) any limited partnership of which such applicable entity or any of its subsidiaries is a general partner. For the purposes of this definition, “voting stock” means shares, interests, participations, or other equivalents in the equity interest (however designated) in such applicable entity having ordinary voting power for the election of a majority of the directors (or the equivalent) of such applicable entity, other than shares, interests, participations, or other equivalents having such power only by reason of the occurrence of a contingency.

 

10. Attorneys’ Fees. If any attorney is engaged by Swinford to enforce or defend any provision of this Guaranty, with or without the filing of any legal action or proceeding, Guarantor shall pay to Swinford, within ten days after demand therefor, all reasonable attorneys’ fees and costs incurred by Swinford in connection therewith (including, without limitation, in any appellate or post-judgment proceedings), together with interest thereon from the date of such demand until paid at the rate of ten percent per annum (or, if lower, at the maximum rate allowed by applicable law).

 

Page 3 of 6
 

 

11. Rules of Construction. The term “person” as used herein shall include any individual, corporation, trust or other legal entity of any kind whatsoever. When the context and construction so require, all words used in the words in the singular include the plural and words in the plural include the singular, and words importing the masculine gender include the feminine and neuter genders. All headings appearing in this Guaranty are for convenience only and shall be disregarded in construing this Guaranty. This Guaranty is the result of arms-length negotiations between Guarantor and Swinford and their respective attorneys. Accordingly, neither Guarantor nor Swinford shall be deemed to be the author of this Guaranty, and this Guaranty shall not be construed against either party.

 

12. Notices. All notices required or permitted by this Guaranty to be delivered to Guarantor or Swinford shall be delivered in writing, by personal delivery, by overnight courier, by facsimile transmission or by registered or certified mail, return receipt requested, postage prepaid, to the address for such party set forth on the signature page of this Guaranty. Any such notice shall be deemed given as follows: (a) if personally delivered, when served; (b) if sent by overnight courier, on the first business day after delivery to the courier; (c) if sent by facsimile, on the date of transmission if delivered on a business day (or, if not delivered on a business day, on the next business day after transmission); or (d) if sent by registered or certified mail, on the third day after deposit in the mail.

 

13. General Provisions. If any provision of this Guaranty shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that portion shall be deemed severed from this Guaranty and the remaining parts shall remain in full force as though the invalid, illegal or unenforceable portion had never been part of this Guaranty. This Guaranty constitutes the only agreement between Guarantor and Swinford with respect to the subject matter hereof and supersedes all previous agreements with respect thereto. This Guaranty may be amended or terminated only by an agreement in writing executed by Guarantor and Swinford. This Guaranty may be executed in two counterparts, which together shall constitute but one and the same instrument. This Guaranty may be executed by facsimile transmission or by e-mail transmission in PDF format.

 

14. Governing Law. This Guaranty shall be governed by, and construed in accordance with, the internal laws of the State of Texas without giving effect to such state’s conflict-of-law principles.

 

15. Waiver of Jury Trial. Guarantor and Swinford each hereby irrevocably waives all rights that it may have under applicable law to a trial by jury of any issue or claim arising under this Guaranty in any action to enforce or interpret this Guaranty.

 

 

 

 

 

 

 

[Remainder of page left intentionally blank. Signature page follows.]

 

Page 4 of 6
 

 

 

IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as of the date appearing on the first page of this Guaranty.

 

 

Coil Tubing Technology Holdings, Inc.

(A Nevada corporation)

 

By: /s/ Jerry L. Swinford

Its: President

Printed Name: Jerry L. Swinford

 

 

Total Downhole Solutions, Inc.

(a Texas corporation)

 

By: /s/ Jerry L. Swinford

Its: President

Printed Name: Jerry L. Swinford

 

 

Coil Tubing Technology, Inc.

(a Texas corporation)

 

By: /s/ Jason L. Swinford

Its: Chief Executive Officer

Printed Name: Jason L. Swinford

 

Address for all entities above:

 

Attn: Jason Swinford

22305 Gosling Road

Spring, Texas 77389

Phone: (281) 651-0200

Fax: (281) 288-0400

 

 

Coil Tubing Technology Canada Inc.

(an Alberta Canada corporation)

 

By: /s/ Jason L. Swinford

Its: Chief Executive Officer

Printed Name: Jason L. Swinford

 

Address:

 

Attn: Jason Swinford

22305 Gosling Road

Spring, Texas 77389

Phone: (281) 651-0200

Fax: (281) 288-0400

 

 

Excel Inspection, LLC

(a Texas limited liability company)

 

By: /s/ Jason L. Swinford

Its: Managing Partner

Printed Name: Jason L. Swinford

 

Page 5 of 6
 

 

 

Address:

 

Attn: Jason Swinford

22305 Gosling Road

Spring, Texas 77389

Phone: (281) 651-0200

Fax: (281) 288-0400

AGREED TO AND ACCEPTED:

 

/s/ Jerry L. Swinford

Jerry L. Swinford

 

Address:

 

22305 Gosling Road

Spring, Texas 77389

Phone: (281) 651-0200

Fax: (281) 288-0400

  

 

 

 

 

 

 

 

 

 

 

 

 

Page 6 of 6



Exhibit 10.39

 

 

INTELLECTUAL PROPERTY ASSIGNMENT

 

This Intellectual Property Assignment (the “Assignment” or “Agreement”) is entered on March 25, 2015 to be effective as of December 1, 2014, by and between Jerry L. Swinford, an individual residing in the State of Texas (“Assignor”) and Coil Tubing Technology, Inc., a Nevada corporation (“Assignee”). Assignor and Assignee may be referred to herein individually as a “Party” and jointly as the “Parties.”

 

WHEREAS, Assignor is the named inventor and owner of all rights, title, and interest in and to the intellectual property listed in Exhibit A, attached hereto and incorporated herein as if fully reproduced (the “Transferred Assets”); and

 

WHEREAS, Assignor desires to assign and transfer to Assignee, and Assignee desires to obtain from Assignor an assignment and transfer of, the Transferred Assets pursuant to this Assignment.

 

NOW THEREFORE, in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged as received, and in consideration of the foregoing and the covenants and promises contained herein, the Parties agree as follows:

 

1. Assignment of Transferred Assets. Assignor hereby unconditionally and irrevocably sells, assigns, transfers, conveys, and delivers to Assignee, its successors and assigns, all his right, title, and interest in, to, and under the Transferred Assets, said Transferred Assets set forth herein in Exhibit A, and any reissues, reexaminations, renewals, continuations, continuations-in-part, divisions, substitute applications thereof, and the like, and any extensions thereof, and all patents worldwide that may be granted thereon, together with the right to file such applications and the right to claim for the same the priority rights derived from such patent application under the laws of the United States and its territorial possessions, the International Convention for the Protection of Industrial Property, or any other international agreement or the domestic laws of the country in which any such application is filed, as may be applicable, to be held and enjoyed by Assignee for its own use and enjoyment, and for the use and enjoyment of its successors and assigns, to the end of the term or terms for which such patents may be granted or reissued, as fully and entirely as the same would have been held and enjoyed by Assignor if this assignment and sale had not been made.

 

2. Cooperation with Assignee. Assignor agrees to cooperate with Assignee to provide the necessary executed assignments and other documents as required to perfect the assignment set forth in Section 1. Assignor further covenants that Assignee will, upon its request, be provided promptly with all pertinent facts and documents relating to said inventions and said Letters Patent and legal equivalents as may be known and accessible to Assignor and will testify as to the same in any interference, litigation, or proceeding related thereto and will promptly execute and deliver to Assignee or its legal representatives any and all papers, instruments or affidavits required to apply for, obtain, maintain, issue and enforce said application, said inventions and said Letters Patent and said equivalents thereof which may be necessary or desirable to carry out the purposes thereof.

 

3. Issuance of Future Patents. Assignor hereby authorizes and requests the Commissioner of Patents and Trademarks of the United States, and any officer of any country or countries foreign to the United States, whose duty it is to issue patents or other evidence or forms of intellectual property protection to issue respective Letters of Patent to Assignee, and the entire right, title, and interest in and to the same, for its sole use and benefit; and for the use and benefit of its successors and assigns, to the full end of the term(s) for which said Patent(s) may be granted, as fully and entirely as the same would have been held by me had this assignment not been made.

 

4. No Prior Encumbrance. Assignor hereby covenants that no assignment, sale, agreement, or encumbrance has been or will be made or entered into which would conflict with the terms of this Assignment.

 

Page 1 of 3
 

 

5. Right to Sue for Past Infringement. Assignor hereby expressly grants to Assignee all of Assignor’s rights to bring any necessary action, including, but not limited to lawsuits, against any past, present, or future third party infringers, potential or actual, of any Transferred Asset as if the Assignor himself were bringing such action. Assignee shall have the right to any and all recoveries from any such actions and Assignor hereby waives any recovery obtained by Assignee.

 

6. Indemnification. ASSIGNEE HEREBY AGREES TO INDEMNIFY, DEFEND, AND HOLD HARMLESS THE ASSIGNOR FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LOSSES, EXPENSES (INCLUDING, BUT NOT LIMITED TO, ATTORNEYS’ FEES AND COURT COSTS), AND CAUSES OF ACTION OF EVERY KIND AND CHARACTER, WITHOUT LIMITS AND WITHOUT REGARD TO THE CAUSE OR CAUSES THEREOF OR NEGLIGENCE OF ANY PARTY, INCLUDING, BUT NOT LIMITED TO, THE SOLE, ACTIVE, PASSIVE, JOINT, OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY (OF WHATEVER CHARACTER) OF ASSIGNOR, ARISING OUT OF OR IN CONNECTION WITH, DIRECTLY OR INDIRECTLY, THIS ASSIGNMENT AND THE TRANSFERRED ASSETS. ASSIGNEE’S INDEMNITY UNDER THIS PARAGRAPH SHALL BE WITHOUT REGARD TO AND WITHOUT ANY RIGHT TO CONTRIBUTION FROM ANY INSURANCE MAINTAINED BY ASSIGNOR.

 

7. Prior Agreements; Waiver. No modification of this Assignment shall be of any force or effect unless in writing and signed by an authorized signatory of both Parties. This Assignment constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes those provisions of all prior and contemporaneous agreements, representations and understandings of the parties pertaining to the same subject matter. No waiver of any of the provisions of this Assignment shall be deemed to, or shall constitute a waiver of, any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

 

8. Captions and Headings. Captions and headings used herein are inserted only for convenience of reference only and shall not operate to modify, interpret, alter, limit or define any provision hereof.

 

 

 

 

 

 

 

 

 

 

[Remainder of page left intentionally blank. Signature page follows.]

 

 

 

 

Page 2 of 3
 


IN WITNESS WHEREOF, Assignor hereby assigns the Transferred Assets to the Assignee and the Assignee hereby accepts said assignment and has hereunto set hand and seal on the following dates.

 

ASSIGNOR: ASSIGNEE:
   
  COIL TUBING TECHNOLOGY, INC.
   
By: /s/ Jerry L. Swinford By: /s/ Jason L. Swinford
Jerry L. Swinford, Inventor Jason L. Swinford, CEO
   
Date: March 25, 2015 Date: March 25, 2015

 

 

NOTARIZATIONS

 

STATE OF TEXAS §
COUNTY OF HARRIS §

 

Before me this 25th day of March 2015, personally appeared Jerry L. Swinford, to me known to be the person who is described in and who executed the foregoing assignment instrument and acknowledge to me that he executed the same of his own free will for the purpose therein expressed.

 

  /s/ Signed by Notary
  Notary Public in and for the State of Texas

 

 

STATE OF TEXAS §
COUNTY OF HARRIS §

 

This instrument was acknowledged before me on the 25th day of March 2015, by Jason L. Swinford, Chief Executive Officer of Coil Tubing Technology, Inc., a Nevada Corporation, who acknowledged to me that he has the authority to sign this document on behalf of said corporation.

 

 

  /s/ Signed by Notary
  Notary Public in and for the State of Texas

 

Page 3 of 3
 

 

 

EXHIBIT A

TRANSFERRED ASSETS

 

COUNTRY

PATENT OR

APPLICATION NO.

 FILING DATE REMAINING TERM

REGISTRATION

DATE

PRIORITY DATE,

IF ANY

 TOOL NOTES LISTED OWNER
US 5,584,342 6/6/1995 2.04 12/17/1996   Subterranean Rotation- Inducing Device and Method All maintenance done - will expire on 6/6/2015 Coil Tubing Technology, Inc.
US 7,686.102 3/29/2007 15.33 3/30/2010 3/31/2006 Jet Motor for Providing Rotation in a Downhole Tool Next maintenance window opens 3/30/2017. Coil Tubing Technology, Inc.
US 8,151.908 12/4/2009- Continuation 17.36 4/10/2012 3/31/2006 Jet Motor for Providing Rotation in a Downhole Tool Next maintenance window opens 4/10/2015. Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
Canada 2,646.326 9/23/2008 (national entry date) 18.18 2/5/2013 3/31/2006 Jet Motor and Method for Providing Rotation in a Downhole Tool Next annuity due by 3/30/2015 Coil Tubing Technology, Inc.
Canada 2,797,565 3/29/2007 -Divisional app. 12.32 3/29/2007 3/31/2006 Jet Motor and Method for Providing Rotation in a Downhole Tool Notice of Allowance has issued Next annuity due by 3/29/2015 Coil Tubing Technology, Inc.
Singapore 146,369 9/26/2008 15.45 5/14/2010 3/31/2006 Jet Motor and Method for Providing Rotation in a Downhole Tool Next annuity due by 3/29/2015 Coil Tubing Technology, Inc.
US 7,946,348 8/31/2007 16.48 5/24/2011   Rotation Tool First maintenance window opens 5/24/2014 Coil Tubing Technology, Inc.
Canada 2,734,285 2/15/2011 (national entry date) 18.51 6/5/2013 8/31/2007 Rotation Tool Next annuity due by 7/16/2014 Coil Tubing Technology, Inc.
Indonesia W00201001371 4/28/2010 17.41 4/30/2012 8/31/2007 Rotation Tool Is still being examined Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
US 12/480.680 6/8/2009 16.58 6/30/2011 6/6/2008 Jet Hammer Awaiting appeal decision - Coil Tubing Technology. Inc.
US 8,151.910 5/7/2009 17.36 4/10/2012 5/7/2008 Drilling Jar First maintenance window opens 4/10/2015 Coil Tubing Technology, Inc.
US 5,584.342 6/6/1995 2.04 12/17/1996   Subterranean Rotation- Inducing Device and Method All maintenance done - will expire on 6/6/2015 Coil Tubing Technology. Inc.

 

 
 

 

Canada 2,723,420 11/2/2010 (national entry date) 19.16 1/28/2014 5/7/2008 Drilling Jar Next annuity due by 5/7/2014 Coil Tubing Technology. Inc.
Indonesia ID P0029982 11/26/2010 (national entry date) 17.13 1/16/2012 5/7/2008 Drilling Jar Next annuity due by 1/16/2015 Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
US 13/046.662 3/11/2011 18.33 3/31/2013 3/11/2010 Method and Apparatus for Washing Downhole Tubulars and Equipment Undergoing examination Coil Tubing Technology, Inc.
Norway 20,120,910 8/15/2012 19.75 8/31/2014 3/11/2010 Method and Apparatus for Washing Downhole Tubulars and Equipment Based on PCT/US11/28241 Undergoing examination Next annuity due 3/31/2015 Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
UK/Scotland 1216072.7 9/10/2012 19.83 9/30/2014 3/11/2010 Method and Apparatus for Washing Downhole Tubulars and Equipment Based on PCT/US11/28241 Undergoing examination Next annuity due 3/31/2015 Jerry L. Swinford -will file assignment to Coil Tubing Technology. Inc.
US 13'434.812 3/29/2012 19.33 3/31/2014 3/29/2011 Downhole Oscillator Waiting for examination Jerry L. Swinford -will file assignment to Coil Tubing Technology, Inc.
US 5,584,342 6/6/1995 2.04 12/17/1996   Subterranean Rotation-Inducing Device and Method All maintenance done - will expire on 6/6/2015 Coil Tubing Technology, Inc.
Canada 2,837,938 9/12/2013 20.83 9/30/2015 3/29/2011 Downhole Oscillator Need to request examination but am waiting to see what happens in U.S. application as we can have this application mirror a U.S. allowed application which cuts down on prosecution fees. Next annuity due 3/30/2015 Coil Tubing Technology, Inc.
US 61(932,629 1/28/2014 21.17 1/31/2016   Downhole Tool (Ampli-Max) Need to prepare and file full-blown non-provisional patent application Jerry L. Swinford

 

 

 

 



Exhibit 21.1

 

Subsidiaries

 

Coil Tubing Technology Holdings, Inc., a Nevada Corporation (wholly-owned)(“Holdings”)

 

·Total Downhole Solutions, Inc., a Texas corporation (wholly-owned by Holdings)
·Coil Tubing Technology, Inc., a Texas corporation (wholly-owned by Holdings)
·Coil Tubing Technology Canada Inc., an Alberta, Canada corporation (wholly-owned by Holdings)

 

Excel Inspection, LLC, a Texas limited liability company (51% owned)



EXHIBIT 31.1

Certification by the Chief Executive Officer Pursuant

to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Jason L. Swinford, certify that:

 

1. I have reviewed this report on Form 10-K of Coil Tubing Technology, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an Quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: March 30, 2015  /s/ Jason L. Swinford
  Jason Swinford
  Chief Executive Officer (Principal Executive Officer)

 



EXHIBIT 31.2

 

Certification by the Chief Financial Officer Pursuant

to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Richard R. Royall, certify that:

 

1. I have reviewed this report on Form 10-K of Coil Tubing Technology, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an Quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: March 30, 2015 /s/ Richard R. Royall
    Richard R. Royall
    Chief Financial Officer (Principal Financial/Accounting Officer)

 



EXHIBIT 32.1

 

Certification by the Chief Executive Officer Pursuant to 18 U. S. C. Section 1350,

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Pursuant to 18 U. S. C. Section 1350, I, Jason L. Swinford, hereby certify that, to the best of my knowledge, the Annual Report on Form 10-K of Coil Tubing Technology, Inc. for the fiscal year ended December 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Coil Tubing Technology, Inc.

 

 

 

   
       
Date: March 30, 2015 /s/ Jason L. Swinford
    Jason Swinford
   

Chief Executive Officer

(Principal Executive Officer)

       

 

 

This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

 



EXHIBIT 32.2

 

Certification by the Chief Financial Officer Pursuant to 18 U. S. C. Section 1350,

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Pursuant to 18 U. S. C. Section 1350, I, Richard R. Royall, hereby certify that, to the best of my knowledge, the Annual Report on Form 10-K of Coil Tubing Technology, Inc. for the fiscal year ended December 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Coil Tubing Technology, Inc. 

 

   
       
Date: March 30, 2015 /s/ Richard R. Royall
    Richard R. Royall
   

Chief Financial Officer

(Principal Accounting/Financial Officer)

       

 

This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

 

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