NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012
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, Precision Machining Resources, Inc. (“
PMR
”)
and Coil Tubing Technology, Inc. (“
CTT Texas
”) Texas corporations and Coil Tubing Technology Canada Inc., an
Alberta, Canada corporation (“
CTT Canada
”). The Company’s consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (“
GAAP
”).
The Company’s consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. 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
95% of the Company’s revenues are generated from rental equipment. 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 2.5% in 2012). 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
Intangibles assets, we may incur charges for impairment in the future.
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. Diluted earnings per share for 2012 reflect the potential dilution of securities
that could share in the earnings of an entity, such as stock options and warrants. The calculation of diluted earnings per
share for the years ended December 31, 2012 and 2011 includes stock options and warrants to purchase 2,879,565 and 457,143
shares, respectively. The calculation of diluted earnings per share for the years ended December 31, 2012 and 2011 excludes
stock options to purchase 3,334 and 603,334 shares respectively, due to their anti-dilutive effect.
All previously reported
earnings per share amounts in the accompanying financial statements are being retroactively presented to reflect the
stock distribution and the reverse stock split in 2011 as described in Note 6, in accordance with ASC 260-10-55-12.
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 expenses, notes payable, and debt. The Company
carries cash, accounts receivable, accounts payable and accrued expenses at historical costs; their respective estimated fair values
approximate carrying values due to their current nature. The Company also periodically carries convertible debt. The
fair values of the convertible debt instruments 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 $13,404 and $0 as of December 31, 2012 and 2011, respectively. Bad debt expense
was $30,540 and $1,150 for the years ended December 31, 2012 and 2011, 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 seven 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.
Recently Issued Accounting
Pronouncements.
We have adopted recently issued accounting pronouncements and have determined that they have no material
effect on our financial position, results of operations, or cash flow. 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
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 $2,100,808 and $1,112,430
as of December 31, 2012 and 2011, respectively. For the years ended December 31, 2012 and 2011, depreciation expense
of $988,378 and $544,013, respectively, was included in the cost of revenue.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment
consisted of the following:
|
|
|
|
December 31,
|
|
Description
|
|
Life
|
|
2012
|
|
|
2011
|
|
Office equipment
|
|
5 years
|
|
$
|
29,359
|
|
|
$
|
11,751
|
|
Shop equipment
|
|
5 years
|
|
|
187,806
|
|
|
|
171,591
|
|
Vehicles
|
|
4 years
|
|
|
505,827
|
|
|
|
381,838
|
|
Leasehold improvements
|
|
10 years
|
|
|
116,893
|
|
|
|
95,699
|
|
|
|
|
|
|
839,885
|
|
|
|
660,879
|
|
Less: accumulated depreciation
|
|
|
|
|
(306,171
|
)
|
|
|
(160,183
|
)
|
|
|
|
|
$
|
533,714
|
|
|
$
|
500,696
|
|
For the years ended December
31, 2012 and 2011, depreciation expense was $162,813 and $90,751, respectively. During the years ended December
31, 2012 and 2011, the Company sold equipment, traded in vehicles and disposal of obsolete equipment resulting in a loss
of $5,884 and $11,908, respectively.
NOTE 4 - INTANGIBLE ASSETS
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 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).
Intangible assets consisted of the following:
|
|
|
|
December 31,
|
|
Description
|
|
Life
|
|
2012
|
|
|
2011
|
|
Issued patents
|
|
15 years
|
|
$
|
550,000
|
|
|
$
|
550,000
|
|
Pending patents
|
|
15 years
|
|
|
650,000
|
|
|
|
650,000
|
|
Total intangible assets
|
|
|
|
|
1,200,000
|
|
|
|
1,200,000
|
|
Less: accumulated amortization
|
|
|
|
|
(166,667
|
)
|
|
|
(86,667
|
)
|
Intangible assets, net
|
|
|
|
$
|
1,033,333
|
|
|
$
|
1,113,333
|
|
Amortization expense was
$80,000 during each of the years ended December 31, 2012 and 2011, respectively and is reflected as a component of operating expenses
in the accompanying consolidated financial statements.
NOTE 5 – NOTES PAYABLE
As of December 31, 2012
and 2011, the following promissory notes were outstanding:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Notes payable – vehicle loans
|
|
$
|
204,759
|
|
|
$
|
277,411
|
|
Related party note payable - Jerry Swinford
|
|
|
401,851
|
|
|
|
557,407
|
|
Total debt
|
|
|
606,610
|
|
|
|
834,818
|
|
Less current portion – current portion – notes payable
|
|
|
(47,365
|
)
|
|
|
(73,818
|
)
|
Less current portion – related party note payable
|
|
|
(155,556
|
)
|
|
|
(155,556
|
)
|
Long-term debt
|
|
$
|
403,689
|
|
|
$
|
605,444
|
|
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 4.99% to 7.84% and are secured
by the vehicle.
Related Party Notes Payable
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 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 Holding, 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.
Future maturities under the above mentioned
notes payable at December 31, 2012 were as follows:
Year Ending
December 31,
|
|
Amount
|
|
2013
|
|
|
202,921
|
|
2014
|
|
|
203,708
|
|
2015
|
|
|
126,948
|
|
2016
|
|
|
34,331
|
|
2017
|
|
|
30,873
|
|
Thereafter
|
|
|
7,829
|
|
Total
|
|
$
|
606,610
|
|
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.
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, 2012 and 2011, 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 total number of designated
shares of the Company’s Series B Preferred Stock is one million (1,000,000). As of December 31, 2012 and 2011, the Company
had 1,000,000 shares of its Series B Preferred Stock, $0.001 par value issued and outstanding, respectively. The Series B Preferred
Stock has 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.
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, 2012
and 2011, the Company had 15,651,827 shares and 15,599,327 shares of its $0.001 par value common stock issued and outstanding,
respectively.
In January 2012, the Company
sold 52,500 Units to a third party in consideration for $52,500 or $1.00 per unit.
During 2011 the Company
issued 14,613,810 shares of common stock as follows:
|
·
|
In January 2011, the Company sold 666,667
shares of the Company’s common stock to Mr. Herbert C. Pohlmann for consideration of $1,000,000 or $1.50 per share.
|
|
·
|
In February 2011, the Company sold 333,333
shares of the Company’s common stock to Mr. Herbert C. Pohlmann for consideration of $500,000 or $1.50 per share.
|
|
·
|
In May 2011, the Company sold 166,667
shares of the Company’s common stock to Mr. Herbert C. Pohlmann for consideration of $250,000 or $1.50 per share.
|
|
·
|
In May 2011, the Company sold 233,333
shares of the Company’s common stock to Mr. Herbert C. Pohlmann for consideration of $350,000 or $1.50 per share.
|
|
·
|
In May 2011, the Company issued 2,512,665
shares of the Company’s common stock to Mr. Herbert C. Pohlmann in connection with the conversion of the Convertible Promissory
Notes (and accrued interest thereon).
|
|
·
|
In May 2011, the Company issued 761,408
shares of common stock to shareholders of Grifco and the Company as described in Note 10, below.
|
|
·
|
In May 2011, the Company issued 7,673,070
shares of the Company’s common stock to Mr. Herbert C. Pohlmann in connection with an Anti-Dilution and Make Whole Agreement,
which was subsequently amended in June 2011 (as amended, the “Make Whole Agreement”). In connection with the Make Whole
Agreement, we agreed to adjust the purchase price of certain of Mr. Herbert C. Pohlmann’s common stock purchases and to provide
Mr. Herbert C. Pohlmann anti-dilutive rights in connection with the 761,408 shares of common stock issuable to shareholders of
Grifco and the Company as described in Note 10, below, and to adjust the conversion price of his Convertible Promissory Notes. The
Company accounted for this transaction in accordance with ASC 470-50-15 and ASC 470-50-40
|
|
·
|
In July 2011, the Company sold 333,333
shares of the Company’s common stock to a third party for consideration of $500,000 or $1.50 per share.
|
|
·
|
In October 2011, the Company sold 166,667
shares of the Company’s common stock to a third party for consideration of $200,000 or $1.20 per share.
|
|
·
|
In October 2011, the Company sold 166,667
shares of the Company’s common stock to Mr. Pohlmann for consideration of $200,000 or $1.20 per share.
|
|
·
|
In December 2011, the Company sold
an aggregate of 1,600,000 units to Mr. Pohlmann, each consisting of (a) one share of common stock and (b) one common stock purchase
warrant to purchase one share of common stock with a five year term and an exercise price of $1.00 per share (collectively the
“Units”) for an aggregate of $1,600,000 or $1.00 per Unit. A total of $200,000 of the amount due in connection
with the purchase of the Units was due prior to December 31, 2011 (amount was received as of 12/31/11); a total of $200,000 was
due prior to January 25, 2012 (amount has been received as of the filing date of this report); a total of $100,000 was due prior
to February 28, 2012 (amount has been received as of the filing date of this report); a total of $1,000,000 was due prior to April
30, 2012(amount has been received as of the filing date of this report); and a total of $100,000 was due prior to May 31, 2012(amount
has been received as of the filing date of this report), with any and all unpaid amounts treated for all purposes as an outstanding
promissory note due to the Company from Mr. Pohlmann, which notes shall not accrue interest until due.
|
As of December 31, 2012,
Mr. Herbert C. Pohlmann held 14,401,095 shares (14,204,897 directly and 196,198 through a trust) (or approximately 92%) 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”).
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 during 2012 under the 2012 plan
|
|
|
(600,000
|
)
|
Securities available to be granted/issued at December 31, 2012
|
|
|
233,333
|
|
Options issued and outstanding under the plans as of December 31, 2012
|
|
|
600,000
|
|
The Company recognized
total option expense of $215,706 and $31,996 for the years ended December 31, 2012 and 2011, respectively. The
remaining amount of unamortized options expense at December 31, 2012 and 2011 was $784,294 and $0, respectively. The intrinsic
value of outstanding as well as exercisable options at December 31, 2012 and 2011 was $1,560,000 and $80,000, respectively.
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.
Activity in options during the year ended December
31, 2012 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, 2011
|
|
|
603,334
|
|
|
$
|
1.04
|
|
|
|
7.92
|
|
Granted
|
|
|
600,000
|
|
|
$
|
1.00
|
|
|
|
9.08
|
|
Balance at December 31, 2012
|
|
|
1,203,334
|
|
|
$
|
1.04
|
|
|
|
8.50
|
|
Exercisable at December 31, 2012
|
|
|
303,334
|
|
|
$
|
1.07
|
|
|
|
|
|
Summary of options outstanding
and exercisable as of December 31, 2012 is as follows:
Exercise Price
|
|
|
Weighted Average Remaining Life (years)
|
|
|
Number of Options Outstanding
|
|
|
Number of Options Exercisable
|
|
$
|
7.50
|
|
|
|
7.9
|
|
|
|
3,334
|
|
|
|
3,334
|
|
$
|
1.00
|
|
|
|
8.5
|
|
|
|
1,200,000
|
|
|
|
300,000
|
|
$
|
1.00 to $7.50
|
|
|
|
8.5
|
|
|
|
1,203,334
|
|
|
|
303,334
|
|
Summary of options outstanding and exercisable as of December
31, 2011 is as follows:
Exercise Price
|
|
|
Weighted Average Remaining Life (years)
|
|
|
Number of Options Outstanding
|
|
|
Number of Options Exercisable
|
$
|
7.50
|
|
|
|
4.9
|
|
|
|
3,334
|
|
|
|
1,667
|
$
|
1.00
|
|
|
|
5.0
|
|
|
|
200,000
|
|
|
|
–
|
|
*
|
|
|
|
6.0
|
|
|
|
200,000
|
|
|
|
–
|
|
*
|
|
|
|
7.0
|
|
|
|
200,000
|
|
|
|
–
|
$
|
1.00 to $7.50
|
|
|
|
6.0
|
|
|
|
603,334
|
|
|
|
1,667
|
* Exercise price will be determined on
December 31, 2012 and 2013, and will equal the mean between the highest and lowest quoted selling prices of the Company’s
common stock on the OTC Pink market.
Investor Warrants
In December 2011, the Company
completed a private placement of 1,600,000 Units to Mr. Herbert C. Pohlmann as described in Note 6 above. 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 as described in Note 6 above. 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; 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.
Activity in warrants during the year ended
December 31, 2012 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, 2011
|
|
|
1,600,000
|
|
|
$
|
1.00
|
|
|
|
3.96
|
|
Granted
|
|
|
325,000
|
|
|
$
|
1.00
|
|
|
|
1.74
|
|
Balance at December 31, 2012
|
|
|
1,925,000
|
|
|
$
|
1.00
|
|
|
|
3.59
|
|
Exercisable at December 31, 2012
|
|
|
1,925,000
|
|
|
$
|
1.00
|
|
|
|
|
|
Summary of warrants outstanding
and exercisable as of December 31, 2012 is as follows:
Exercise Price
|
|
|
Weighted Average Remaining Life (years)
|
|
|
Number of Warrants Outstanding
|
|
|
Number of Warrants Exercisable
|
|
$
|
1.00
|
|
|
|
3.59
|
|
|
|
1,925,000
|
|
|
|
1,925,000
|
|
$
|
1.00
|
|
|
|
3.59
|
|
|
|
1,925,000
|
|
|
|
1,925,000
|
|
Summary of warrants outstanding and exercisable as of December 31,
2011 is as follows:
Exercise Price
|
|
|
Weighted Average Remaining Life (years)
|
|
|
Number of Warrants Outstanding
|
|
|
Number of Warrants Exercisable
|
$
|
1.00
|
|
|
|
4.96
|
|
|
|
1,600,000
|
|
|
|
1,600,000
|
$
|
1.00
|
|
|
|
4.96
|
|
|
|
1,600,000
|
|
|
|
1,600,000
|
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 (in thousands):
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Provision (benefit) at statutory rate
|
|
$
|
256,000
|
|
|
$
|
248,000
|
|
Net operating loss utilization
|
|
|
(347,000
|
)
|
|
|
–
|
|
Change in valuation allowance
|
|
|
91,000
|
|
|
|
(248,000
|
)
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011, are presented
below:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,532,000
|
|
|
$
|
1,879,000
|
|
Deferred tax assets
|
|
|
1,532,000
|
|
|
|
1,879,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(1,126,000
|
)
|
|
|
(1,217,000
|
)
|
Deferred tax liabilities
|
|
|
(1,126,000
|
)
|
|
|
(1,217,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
406,000
|
|
|
|
662,000
|
|
Valuation allowance
|
|
|
(406,000
|
)
|
|
|
(662,000
|
)
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The Company has determined that a valuation
allowance of $406,000 at December 31, 2012, 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 2012 was approximately $91,000. As of December 31, 2012, the Company has a net operating loss
carry-forward of $4,507,000, 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 $7,764,984 and $5,541,131 for the years ended December 31, 2012 and 2011, respectively. The Company had two customers
representing approximately 16% and 18% of gross sales and 32% and 20% of total accounts receivable
for the year ended December 31, 2012. The Company had one customer that represented approximately 10% of gross sales and 22%
of total accounts receivable for the year ended December 31, 2011.
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.
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.
NOTE 10 – LITIGATION
In March 2010, the Company
filed a Motion for Fairness Hearing to Issue Securities Pursuant to Section 3(a)(10) of the Securities Act of 1933, as Amended
(the “
Motion
”) in order to issue shares of common stock to certain prior shareholders of the Company, Grifco
International, Inc., a Nevada corporation (“
Grifco
”), and Mr. Pohlmann in order to settle an ongoing lawsuit.
The court subsequently held a fairness hearing and approved the issuance of 761,408 shares of the Company’s common stock,
plus additional shares issuable due to rounding (the “
Shares
”) without restrictive legend pursuant to an exemption
from registration provided by Section 3(a)(10) of the Securities Act of 1933, as amended (the “
Act
”). The issuance
of the common stock was accrued as of December 31, 2010 and recorded as a stock dividend, in accordance with ASC 260-10-55-12.
As a result of the court
order, we reclassified approximately $760 from the Company’s accumulated deficit account to its common stock account. The
$760 represents the fair value of the shares issued pursuant to the court order. All previously reported earnings per share
amounts in the accompanying financial statements are being retroactively presented to reflect the issuance of the 761,408
shares.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Leases
The
Company sub-leases approximately 10,000 square feet in Spring, Texas that serves as its corporate offices and repair shop. The
lease is on a month-to-month basis at a monthly cost of $6,700. The Company leased space for its sales offices in Dallas, Texas
at a cost of $666 per month, which lease expired in February 2013 and was not renewed. The Company has a twelve month residential
sub-lease agreement in effect from December 1, 2012 to December 1, 2013, pursuant to which the Company agreed to rent a residence
located in Blairsville, Pennsylvania. The lease has a monthly rental cost of $850 per month. The Company
plans to use the leased residence as a district office for sales in Ohio, Pennsylvania, and West Virginia and repair of equipment
for that area. The Company also leases approximately 1,560 square feet of warehouse and office space in Red Deer, Alberta, Canada
which lease expires in November 2013 for a total monthly rental expense of approximately $1,877 Canadian dollars (approximately
$1,914 U.S. dollars) per month during the term of the lease. The Company also leases space serving as a sales office, warehouse
and machine shop in Haynesville, Louisiana, which lease expires in August 2014 at a rate of $500 per month. The Company entered
into a six month residential lease agreement (from June 1, 2012 to November 30, 2012) in Red Deer, Alberta, pursuant to which the
Company leased a residence which it used as a corporate office space. The lease had a monthly rental cost of $1,070 Canadian dollars
(approximately $1,091 U.S. dollars) per month and expired on November 30, 2012,
which
lease was not renewed.
Future minimum lease
payments are as follows:
Years Ending December 31,
|
|
Amount
|
|
2013
|
|
$
|
37,736
|
|
2014
|
|
|
4,000
|
|
Total
|
|
$
|
41,736
|
|
For the years ended December 31, 2012 and
2011, rental expense of approximately $134,000 and $71,000, respectively, was incurred.
NOTE 12 - RELATED PARTY TRANSACTIONS
Executive Bonuses
In September, 2012, the Board of Directors,
along with the Company’s majority shareholder agreed to pay the Company’s executive management discretionary bonuses
totaling $311,500. As of December 31, 2012, the Company had paid the bonuses in full.
In December 2011, the Board of Directors, along
with the Company’s majority shareholder, agreed to pay the Company’s executive management discretionary bonuses totaling
$252,000. The bonuses, which had been accrued in 2011, were paid on July 15, 2012.
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.
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.
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 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.
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.
NOTE 13 – SUBSEQUENT EVENTS
Effective January 7, 2013, the Company
engaged Agility Financial Partners (“Agility”) to provide financial reporting and corporate governance consulting
services. On January 7, 2013, Agility provided John N. Bingham to the Company and he was appointed as the Acting Chief Financial
Officer. Agility received $5,000 per month under the terms of its engagement with the Company. On February 28, 2013, the Board
of Directors of the Company terminated the services of Agility and John N. Bingham, former acting Chief Financial Officer.
Effective February 1, 2013, Herbert C. Pohlmann
resigned as a Director of the Company in order to reduce his work load and focus on his health, but will continue to serve as
a member of the Company’s Advisory Board moving forward.
Effective March 4, 2013, the Board of Directors appointed Richard
R. Royall as Chief Financial Officer of 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.
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.