UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2015
		or
o		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 

 

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 o

 

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 o

 

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	o		Accelerated filer	o
	Non-accelerated filer	o		Smaller reporting company	x

 

The number of shares outstanding of the registrant's $0.001 par value common stock on May 14, 2015 is 15,632,425 shares.

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

COIL TUBING TECHNOLOGY, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of March 31, 2015 and December 31, 2014

($ in thousands except share data)

(Unaudited)

 

		March 31,				December 31,
		2015				2014
Assets
Current Assets:
Cash		$	979			$	1,280
Accounts receivable, net			1,581				2,102
Other current assets			71				194
Total Current Assets			2,631				3,576
Rental tools, net			2,127				2,325
Property and equipment, net			2,667				1,575
Intangible assets, net			4,520				4,602
Total Assets		$	11,945			$	12,078
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable		$	411			$	450
Accrued liabilities			123				89
Related party accrued liabilities			37				39
Related party notes payable - current			52				91
Notes payable - current			130				99
Total Current Liabilities			753				768
Long-Term Liabilities:
Related party notes payable, net of current portion			3,750				3,750
Notes payable, net of current portion			1,579				873
Total Liabilities			6,082				5,391
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $.001 par value, 5,000,000 shares authorized Series A Preferred Stock, $.001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding			–				–
Series B Convertible Preferred Stock, $.001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding			–				–
Common Stock, $.001 par value, 200,000,000 shares authorized; 15,632,425 and 15,651,827 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively			16				16
Additional paid-in capital			10,065				10,047
Accumulated deficit			(4,208	)			(3,376	)
Total Coil Tubing Technology, Inc. Stockholders' Equity			5,873				6,687
Non-controlling interest			(10	)			–
Total Stockholders’ Equity			5,863				6,687
Total Liabilities and Stockholders' Equity		$	11,945			$	12,078

 

See accompanying notes to consolidated financial statements.

 

 

COIL TUBING TECHNOLOGY, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2015 and 2014

($ in thousands except share data)

(Unaudited)

 

		March 31,
		2015				2014
Revenue:
Rental revenue		$	1,093			$	1,249
Product revenue			59				18
Inspection revenue			9				–
Total revenue			1,161				1,267
Cost of revenue:
Compensation and benefits			235				213
Material, supplies and support service			174				212
Facilities and support expenses			45				41
Depreciation of rental tools			301				284
Total cost of revenue			755				750
Gross profit			406				517
Operating Expenses:
Compensation and benefits			209				210
Selling and marketing			361				384
General and administrative			443				301
Depreciation and amortization			154				84
Gain (loss) on sale of fixed assets			–				(1	)
Total operating expenses			1,167				978
Loss from operations			(761	)			(461	)
Other income (expense):
Other income (expense)			(39	)			1
Interest expense			(42	)			(13	)
Total other income (expense)			(81	)			(12	)
Consolidated net loss		$	(842	)		$	(473	)
Net income attributable to non-controlling interest			10				–
Net loss attributable to Coil Tubing Technology, Inc.		$	(832	)		$	(473	)
Net loss per common share:
Basic and diluted loss		$	(0.05	)		$	(0.03	)
Weighted average common shares outstanding:
Basic and diluted			15,632,425				15,651,827

 

See accompanying notes to consolidated financial statements.

 

 

COIL TUBING TECHNOLOGY, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2015 and 2014

($ per thousands)

(Unaudited)

 

		March 31,
		2015				2014
Cash Flows From Operating Activities:
Net loss		$	(842	)		$	(473	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock option expense			30				51
Depreciation and amortization			455				368
(Gain) loss on sale of fixed assets			–				(1	)
Bad debt expense			95				–
Changes in:
Accounts receivable			425				168
Other current assets			122				30
Accounts payable			(39	)			259
Accrued liabilities – related party			(2	)			–
Accrued liabilities			34				119
Net cash provided by operating activities			278				521
Cash Flows From Investing Activities:
Purchase of rental tools			(135	)			(207	)
Proceeds from sale of lost tools			39				42
Purchase of building, machinery and equipment			(1,170	)			(127	)
Proceeds from sale of fixed assets			–				10
Net cash used in investing activities			(1,266	)			(282	)
Cash Flows From Financing Activities:
Proceeds from notes payable			765				51
Payments on notes payable			(28	)			(32	)
Payments on related party notes payable			(39	)			(39	)
Retirement of common stock			(11	)			–
Net cash provided by (used in) financing activities			687				(20	)
Net increase (decrease) in cash			(301	)			219
Cash at beginning of period			1,280				902
Cash at end of period		$	979			$	1,121
Supplemental disclosure of cash flow information:
Cash paid for:
Interest		$	42			$	13
Income taxes		$	6			$	–

 

See accompanying notes to consolidated financial statements.

 

 

COIL TUBING TECHNOLOGY, INC. & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

Nature of the Company

 

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 four categories of coil tubing applications: (1) tubing fishing, (2) tubing work over, (3) coil tubing drilling, and (4) the inspection of tubulars and coil tubing. 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, inspections 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 Accounting

 

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Coil Tubing Technology Holdings, Inc., a Nevada corporation (“Holdings”) 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 accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's annual report for the year ended December 31, 2014 filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal year ended December 31, 2014 as reported in Form 10-K have been omitted.

  

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 five years and are presented in the accompanying financial statements, net of accumulated depreciation of $4,611,604 and $4,316,834 as of March 31, 2015 and December 31, 2014, respectively. For the three months ended March 31, 2015 and 2014, depreciation expense of $301,000, and $284,000, respectively, was included in the cost of revenue.

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

As of March 31, 2015 and December 31, 2014, accounts receivable, net consists of the following (in thousands):

 

		2015				2014
Accounts receivable		$	1,781			$	2,207
Allowance for doubtful accounts			(200	)			(105	)
Accounts receivable, net		$	1,581			$	2,102

 

NOTE 4 – NOTES PAYABLE

 

Notes payable as of March 31, 2015 and December 31, 2014 are as follows (in thousands):

		2015				2014
Notes payable – vehicle loans		$	328			$	346
Notes payable – building loans			1,381				626
Related party notes payable - Jerry Swinford			3,802				3,841
Total debt			5,511				4,813
Less current portion:
Note payable – vehicle loans			(80	)			(79	)
Notes payable – building loans			(50	)			(20	)
Related party notes payable – Jerry Swinford			(52	)			(91	)
Long-term debt		$	5,329			$	4,623

 

 

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.

 

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 from 5.34% to 8.79% per annum and are secured by the vehicles, and have maturity dates of 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 an Intellectual Property Purchase Agreement (the “2010 IP Purchase Agreement”) with Jerry Swinford, the Company’s then Chief Executive Officer and current Executive Vice President. 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 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 Holdings also agreed, pursuant to a Guaranty Agreement, to guaranty the repayment of the Swinford Notes.

 

In connection with the 2010 IP Purchase 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 Herbert C. 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 2015 Swinford Note 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 2015 Swinford 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 2015 Swinford Note. Holdings, its subsidiaries and Excel Inspection, LLC also agreed, pursuant to a Guaranty, to guaranty the repayment of the 2015 Swinford Note.

 

Future maturities of the notes payable are as follows:

 

2016		$	182,493
2017			206,864
2018			216,432
2019			3,713,395
2020 and later			1,191,744
		$	5,510,928

 

 

NOTE 5 – STOCK OPTIONS

 

There were no options granted during the three months ended March 31, 2015.

 

The Company recognized total option expense of $30,000 and $51,000 for the three months ended March 31, 2015 and 2014, respectively.  The remaining amount of unamortized option expense at March 31, 2015 was $90,000. The intrinsic value of outstanding and exercisable options at March 31, 2015 was $-0-.

 

NOTE 6 – MAJOR CUSTOMERS

 

The Company had gross sales of $1,161,000 and $1,267,000 for the three months ended March 31, 2015 and 2014, respectively. The Company had one customer representing approximately 8% of gross sales and two customers representing approximately 19% and 12%, respectively, of total accounts receivable for the three months ended March 31, 2015. The Company had one customer representing approximately 13% of gross sales and one customer representing approximately 25% of total accounts receivable for the three months ended March 31, 2014.

 

NOTE 7 – CONTINGENCIES

 

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. During the quarter ended March 31, 2015, the Company settled a lawsuit with a shareholder for $63,000. The settlement included reimbursement of legal fees and the purchase and retirement of the shareholder’s common stock for $11,448.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) is prepared by Coil Tubing Technology, Inc. Unless otherwise indicated or the context otherwise requires, in this Form 10-Q all references to “Coil Tubing Technology, Inc.” the “Company,” “we,” “our” and “us” refer to Coil Tubing Technology, Inc. and its subsidiaries on a consolidated basis.

 

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our audited consolidated financial statements as of December 31, 2014 and 2013, and for the years then ended, included in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on March 30, 2015 (the “Form 10-K”) and with the unaudited condensed consolidated financial statements and related notes thereto presented in this Form 10-Q.

 

Disclosure Regarding Forward-Looking Statements

 

Our disclosure and analysis in this Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements.

 

These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control.

 

Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-Q are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed under “Item 1A. Risk Factors” in our Form 10-K and this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, or MD&A. All forward-looking statements speak only as of the date of this Form 10-Q. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

 

Our Markets and Business Strategy

 

Our primary markets for our coil tubing products are oil and gas companies engaged in horizontal drilling activities located in the United States, Mexico and Canada. We rent our coil tubing products to these oil and gas companies either directly or indirectly through oil service companies. During the first quarter ended March 31, 2015, the Company entered into a joint venture with Excel Inspection Services, LLC to provide inspection services for tubulars and coil tubing to the oil and gas industry. Our revenues for the three months ended March 31, 2015 were approximately $1,161,000 compared to $1,267,000 during the three months ended March 31, 2014, a decrease of $106,000.

 

The oil and gas industry is continuing to experience a downturn in drilling and workover activity due to lower oil and gas prices. Our revenues have followed this oil and gas trend as our business is dependent on demand for drilling and workover activities. In order to increase our revenues, we have commenced a business strategy of expanding our international tool sales and inspection service of tubular products. Our domestic service company budgets for new drilling have been significantly reduced with the current focus on the completion of the existing inventory of uncompleted wells as well as maintaining the older production wells. Our tools are designed for completion and workover jobs and represent a lower cost solution to increase the production of older wells and completions. In addition to our primary business focus, we have entered into the business of inspecting oilfield tubulars. We believe this new activity will help in the diversification of our service products and will be sold directly to the tubular companies. We expect the inspection service to increase our revenues throughout the remainder of the year.

 

Revenue Recognition. The Company's revenue is generated primarily from the rental and sales of its tools used for oilfield services primarily in Texas, Louisiana and Pennsylvania in the U.S. and in Alberta, Canada. Rental income is recognized over the rental periods, which are generally from one to thirty days. The estimated amounts of sales discounts, returns and allowances are accounted for as reductions of sales when the sale occurs and the realization of collectability is reasonably assured. These estimates are based on historical amounts and adjusted periodically based on changes in facts and circumstances when the changes become known to the Company. The Company also recognizes rental revenue for the full sales price of any tools which are lost and/or damaged in use (and billed to the customer) and recognizes the net carrying cost of such tool (“manufacturers’ cost” less depreciation) as cost of product and rental revenue.

 

  

Sales of coil tubing related products are primarily derived from instances where a customer has a specific need for a particular coil tubing related product and desires to have the Company obtain and/or manufacture the particular product. These sales may include replacement parts, as well as proprietary tools which are manufactured to the customer’s specification, but which are not part of the Company’s tool line. The Company generally recognizes product revenue at the time the product is shipped. Concurrent with the recognition of revenue, the Company provides for the estimated cost of product returns. Sales incentives are generally classified as a reduction of revenue and are recognized at the later of when revenue is recognized or when the incentive is offered. Shipping and handling costs are included in cost of goods sold.

   

Rental Tool Assets.  Approximately 94% of the Company’s revenues are generated from the rental of its coil tubing products. Rental tools are recorded on the Company’s books as rental equipment at “manufacturers’ cost.” Depreciation is calculated using the straight line method over the useful lives of the assets of five years. Lost or destroyed tools are not a significant source of rental tools revenue for the Company. The Company bills customers for the sales price of any tools which are lost and/or damaged in use and the cost and related accumulated depreciation are removed from the accounts and any resulting revenue or expense is recognized. Lost tools are recognized as product rental revenue and cost of products and rental revenue, respectively.

 

Intangible Assets.  The Company’s intangible assets, which are recorded at cost, consist primarily of the unamortized cost basis of issued and pending patents.  These assets are being amortized on a straight line basis over the estimated useful lives of 15 years. The Company continually evaluates the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or impairment in value. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our Intangible assets, we may incur charges for impairment in the future.

 

Stock-Based Compensation.  The Company accounts for stock-based employee compensation arrangements using the fair value method that requires that the fair value of employees awards issued, modified, repurchased or cancelled after implementation, under share-based payment arrangements, be measured as of the date the award is issued, modified, repurchased or cancelled. The resulting cost is then recognized in the statement of earnings over the service period.

 

The Company periodically issues common stock for services rendered and may issue common stock for acquisitions in the future. Common stock issued is valued at fair market value. Management and the board of directors consider market price quotations, recent stock offering prices and other factors in determining fair market value for purposes of valuing the common stock. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the various weighted average assumptions, including dividend yield, expected volatility, average risk-free interest rate and expected lives.

 

Income Taxes.  The Company uses the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.

 

Comparison of Results of Operations

 

Three Months Ended March 31, 2015, Compared To Three Months Ended March 31, 2014

 

The following tables set forth summarized consolidated financial information for the three months ended March 31, 2015 and 2014:

 

		Three Months March 31,
(in thousands)		2015				2014				$ Change				% Change
Total revenues		$	1,161			$	1,267			$	(106	)			(8%	)
Cost of revenues			(755	)			(750	)			5				1%
Gross profit			406				517				(111	)			(22%	)
Gross profit as a percentage of total revenues			35%				41%								(6%	)
Operating expenses			1,167				978				189				19%
Loss from operations			(761	)			(461	)			300				65%
Other income (expense)			(81	)			(12	)			69				575%
Consolidated net loss		$	(842	)		$	(473	)		$	369				78%

 

 

For the three months ended March 31, 2015, the Company's business operations reflected a decrease in sales for Coil Tubing Technology, Inc. and subsidiaries (“CTT”). For the three months ended March 31, 2015, the Company's consolidated operations generated revenues of approximately $1,161,000 compared to revenues of $1,267,000 for the quarter ended March 31, 2014. The $106,000 decrease in total revenue is primarily attributable to a decline in rental orders for coil tubing products and competitive pricing by larger service companies. We expect to increase our revenues to reflect the current trends in the drilling industry based on sales information provided by our largest customers moving forward. For the three months ended March 31, 2015, the Company had a gross profit as a percentage of sales of 35%, compared to 41% for the three months ended March 31, 2014. The $111,000 decrease in gross profit for the three months ended March 31, 2015, compared to the prior period, is primarily attributed to the slowdown in orders for our rental products by our largest customers.

 

Revenue Information

 

The following table sets forth summarized consolidated sales information for the three months ended March 31, 2015 and 2014:

 

		Three Months Ended March 31,
(in thousands)		2015				2014				$ Change				% Change
Rentals		$	1,093			$	1,249			$	(156	)			(13%	)
Products			59				18				41				228%
Inspections			9				–				9				100%
Total revenue		$	1,161			$	1,267			$	(106	)			(8%	)

 

We had total revenues of approximately $1,161,000 for the three months ended March 31, 2015, compared to total revenues of $1,267,000 for the three months ended March 31, 2014, a decrease in total revenues of $106,000 or 8% from the prior period.  Total revenues included $1,093,000 of rental revenue for the three months ended March 31, 2015, compared to $1,249,000 for the three months ended March 31, 2014, a decrease in rental revenue of $156,000 or 13% from the prior period. The decrease in rental revenue was mainly due to a decrease in customer demand and an increase in competitive pricing by other large service companies.  We believe that through joint pricing efforts with our partner service companies we will be able to expand our services to new customers in the United States, Mexico and Canada and, accordingly, we will be able to maintain and increase our revenues throughout the remainder of 2015.

 

Cost of Revenue

 

The following table sets forth summarized cost of revenue information for the three months ended March 31, 2015 and 2014:

 

		Three Months March 31,
(in thousands)		2015				2014				$ Change				% Change
Depreciation of rental tools		$	301			$	284			$	17				6%
Facilities and support expenses			45				41				4				10%
Compensation and benefits			235				213				22				10%
Material, supplies and support service			174				212				(38	)			(18%	)
Total cost of revenue		$	755			$	750			$	5				1%

 

 

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 $755,000 for the three months ended March 31, 2015, compared to a cost of $750,000 for the three months ended March 31, 2014, an increase of $5,000 or 1% from the prior period. The main reason for the $5,000 increase in total cost of revenue for the three months ended March 31, 2015, compared to 2014, was principally related to added staff for the inspection business and an increase in depreciation on new rental tools added during the period, offset by lower material costs.

 

Gross Profit

 

We had gross profit of $406,000 for the three months ended March 31, 2015, compared to gross profit of $517,000 for the three months ended March 31, 2014, a decrease in gross profit of $111,000 or 22% from the prior period. Our gross profit was 35% of revenue for the three months ended March 31, 2015, compared to 41% for the three months ended March 31, 2014. The decrease in gross profit was mainly due to a decrease in customer demand and an increase in competitive pricing by other large service companies. 

 

 

General Operating Expenses

 

The following table sets forth summarized operating expense information for the three months ended March 31, 2015 and 2014:

 

		Three Months March 31,
(in thousands)		2015				2014				$ Change				% Change
Depreciation and amortization		$	154			$	84			$	70				83%
Compensation and benefits			209				210				(1	)			(1%	)
General and administrative - Professional services			71				222				(151	)			(68%	)
General and administrative expenses - Other			372				79				293				371%
Total general operating expenses		$	806			$	595			$	211				36%

 

We had total general operating expenses of $806,000 for the three months ended March 31, 2015, compared to total operating expenses of $595,000 for the three months ended March 31, 2014, an increase in total general operating expenses of $211,000 or 36% from the prior period. The increase in total general operating expenses was primarily related to an increase in bad debt expense offset by a decrease in legal fees related to the settlement of our prior lawsuit, described in greater detail below under “Part II” – “Item 1. Legal Proceedings”.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by $70,000 or 83%, to $154,000 for the three months ended March 31, 2015, compared to $84,000 for the three months ended March 31, 2014.  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.

 

Selling and Marketing

 

The following table sets forth summarized selling and marketing expense information for the three months ended March 31, 2015 and 2014:

 

		Three Months March 31,
(in thousands)		2015				2014				$ Change				% Change
Auto		$	61			$	96			$	(35	)			(37%	)
Commissions			127				101				26				26%
Compensation and benefits			115				129				(14	)			(11%	)
Other selling and marketing			58				58				–				–
Total selling and marketing expenses		$	361			$	384			$	(23	)			(6%	)

 

We had total selling and marketing expenses of $361,000 for the three months ended March 31, 2015, compared to $384,000 for the three months ended March 31, 2014, a decrease of $23,000 or 6% from the prior period, which decrease was primarily due to decreased auto expense resulting from lower fuel costs, decrease in compensation and benefits related to a reduction in field sales staff, offset by an increase in commissions from product sales.

 

Loss from Operations

 

We had a loss from operations of $761,000 for the three months ended March 31, 2015, compared to a loss from operations of $461,000 for the three months ended March 31, 2014, an increase of $300,000 or 65% from the prior period.

 

Other Income (expense)

 

We had other expense of $81,000 and $12,000 for the three months ended March 31, 2015 and 2014, respectively. The increase of $69,000 relates principally to interest expense on additional mortgage and new loans and foreign currency conversion on our Canadian subsidiary incurred during the three months ended March 31, 2015.

 

Net Loss

 

We had a net loss of $842,000 for the three months ended March 31, 2015, compared to net loss of $473,000 for the three months ended March 31, 2014, an increase in net loss of $369,000 or 78% from the prior period.  The increase in net loss was attributable to a decrease in total revenue and an increase in certain operating expenses (as described above), for the three months ended March 31, 2015, compared to the three months ended March 31, 2014.

 

 

Liquidity and Capital Resources

 

We had $1,878,000 of working capital as of March 31, 2015. 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 March 31, 2015, we had total assets of $11,945,000, which included total current assets of $2,631,000, consisting of $979,000 of cash, $1,581,000 of accounts receivable, net, and $71,000 of other current assets; and long term assets including $2,127,000 of rental tools, net; $2,667,000 of property and equipment, net; and $4,520,000 of intangible assets, net, representing the value of certain patents and other intellectual property associated with our products.

 

We had total liabilities of approximately $6,082,000 as of March 31, 2015, which included total current liabilities of approximately $753,000, consisting of accounts payable of approximately $411,000; accrued liabilities of approximately $123,000; current portion of related party accrued liabilities of $37,000; current portion of related party notes payable of approximately $52,000, relating to amounts owed to Jerry Swinford in connection with the 2010 IP Purchase Agreement, described in note 4 to our consolidated financials included herein in “Part I” – “Item 1. Financial Statements”, above; and current portion of notes payable of approximately $130,000, 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 in note 4 to our consolidated financials included herein in “Part I” – “Item 1. Financial Statements”, above, and approximately $1,579,000 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 $278,000 for the three months ended March 31, 2015, which consisted of approximately $842,000 of net loss, approximately $425,000 of decrease in accounts receivable, approximately $122,000 of decrease in other current assets, approximately $39,000 of decrease in accounts payable, approximately $2,000 of decrease in accrued liabilities – related party and $34,000 of increase in accrued liabilities, offset by non-cash items including approximately $455,000 of depreciation and amortization and approximately $30,000 of stock option expense.

 

We had approximately $1,266,000 of net cash used in investing activities for the three months ended March 31, 2015, which included the purchase of approximately $135,000 of rental tools and approximately $1,170,000 of building, property and equipment, offset by approximately $39,000 in proceeds from the sale of lost tools. The $1,170,000 of building, property and equipment was in the purchase of a new building to house our repair shop activities as described below. 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. 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 $687,000 of net cash provided by financing activities for the three months ended March 31, 2015, which included approximately $39,000 of payments on related party notes payable, relating to amounts paid to Jerry Swinford in connection with the IP Purchase Agreement, described in note 4 to our consolidated financials included herein in “Part I” – “Item 1. Financial Statements”, above, approximately $28,000 of payments on notes payable, approximately $11,000 for the retirement of common stock in connection with the settlement of a lawsuit described in greater detail below under “Part II” – “Item 1. Legal Proceedings”, and approximately $765,000 of proceeds from notes payable related to the new building and vehicles as described in greater detail below.

 

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.

 

The Company’s outstanding notes payable and the material terms thereof are described in greater detail in note 4 to our consolidated financials included herein in “Part I” – “Item 1. Financial Statements”, above.

 

 

The Company has historically been funded through loans provided by, and through the sale of common stock and warrants to, the Company’s largest shareholder and former director, Herbert C. Pohlmann, provided that Mr. Pohlmann is not required to provide us any additional funding and/or to purchase any securities from us in the future.

 

Our immediate plans are to continue 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, similar to what we accomplished in Canada during 2014 and 2013. We plan to supplement our cash flow with typical bank debt or similar financing which we believe will enable us to meet larger demand on bigger projects, enter new markets and improve our network for servicing our customers.

 

Moving forward, we anticipate increased spending on research and development activities, which we believe will be required to provide technological advancement to our coiled tubing technologies and workover product lines. We are currently working on a new generation of coil tubing tools to aid in and facilitate horizontal drilling. We expect the market for new applications of coiled tubing to continue to expand throughout fiscal 2015 and 2016, especially in the horizontal drilling and workover applications.

 

In addition to debt financing and our organic growth as discussed above, we may raise funds for further expansion of our tool fleet, development of new tools or to make strategic acquisitions through the sale or exchange of equity securities. Our common stock is quoted on the OTCQB market, provided that we may choose to list our common stock on the NYSE MKT or NASDAQ Capital Market in the future. As a result of becoming a fully-reporting public company, we believe investors may be more willing to purchase our common stock in private offerings allowing us to raise funding to use for the items described above. The sale of additional equity or debt securities, if accomplished, may result in dilution to our shareholders.

 

Off Balance Sheet Arrangements:

 

None.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As a smaller reporting company, as defined in rule 12b-2 of the Exchange Act, we are not required to provide the information mandated by this item.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on our evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1. 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 proceeding described below. We may become involved in other material legal proceedings in the future.

 

On July 25, 2013, Eric Cohen (a then 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. The case was dismissed on March 31, 2015, and each party dismissed their claims against the other with prejudice.

 

Item 1A. Risk Factors.

 

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Commission on March 30, 2015, and investors are encouraged to review such risk factors, prior to making an investment in the Company.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

 

 

SIGNATURES

 

Pursuant to the requirements 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.

 

 

By: /s/ Jason Swinford

       Jason Swinford

       Chief Executive Officer (Principal Executive Officer) and Director

       Dated: May 14, 2015

 

 

By: /s/ Richard R. Royall

       Richard R. Royall

       Chief Financial Officer (Principal Financial/Accounting Officer)

       Dated: May 14, 2015

 

 

EXHIBIT INDEX

 

10.1(1)		Promissory Note with Arnold & Norma Rodriguez Family Limited Partnership (February 27, 2015)
10.2(1)		Intellectual Property Purchase Agreement Between Jerry Swinford and the Company (March 25, 2015)***
10.3(1)		Secured Promissory Note ($3.75 Million) – Coil Tubing Technology, Inc. and Jerry Swinford - March 25, 2015***
10.4(1)		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***
10.5(1)		Intellectual Property Assignment Agreement between Jerry Swinford and the Company - March 25, 2015***
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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
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
101.INS#		XBRL Instance Document
101.SCH#		XBRL Taxonomy Extension Schema Document
101.CAL#		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF#		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB#		XBRL Taxonomy Extension Label Linkbase Document
101.PRE#		XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

 

** Furnished herewith.

 

*** Indicates management contract or compensatory plan or arrangement.

 

(1) Filed as exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on March 30, 2015 and incorporated herein by reference.

 

# 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.