This Quarterly Report on Form 10-Q (this
“Form 10-Q”) is prepared by Coil Tubing Technology, Inc. Unless otherwise indicated or the context otherwise requires,
in this Form 10-Q all references to “Coil Tubing Technology, Inc.” the “Company,” “we,” “our”
and “us” refer to Coil Tubing Technology, Inc. and its subsidiaries on a consolidated basis.
The following discussion and analysis of
our results of operations and financial condition should be read in conjunction with our audited consolidated financial statements
as of December 31, 2013 and 2012, and for the years then ended, included in our Annual Report on Form 10-K for the year ended
December 31, 2013, filed with the Securities and Exchange Commission on March 31, 2014 (the “Form 10-K”) and with
the unaudited condensed consolidated financial statements and related notes thereto presented in this Form 10-Q.
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 primary markets for our coil tubing
products are oil and gas companies engaged in horizontal drilling activities located in the United States and Canada. We rent our
products to these oil and gas companies either directly or indirectly through oil service companies. Our revenues are generated
by drilling and well services activities which are subject to drilling company budgets and the competitive bundling for our services
by oil service companies. During fiscal 2013 and continuing throughout the first three months of 2014, oil and gas service companies,
which are our clients, reduced their drilling and work-over operations in Canada, Pennsylvania and Louisiana which continues to
have an overall negative impact on our revenues. Our revenues for the three months ended March 31, 2014 were approximately $1,267,000
compared to $1,804,000 during the three months ended March 31, 2013, a decrease of $537,000. We expect our revenues in North America
and Canada to continue to be impacted by and to follow the trends in natural gas drilling activities for the remainder of 2014.
As discussed below, we are in the process of advancing our technology and global participation in Mexico, South America and Asia
to take advantage of the growing coil tubing demands.
Based on the current trends in world-wide
drilling activities, we have implemented the following strategies:
We believe increasing the availability
of our proprietary product lines to our customers is critical to our profitability. Therefore, we will focus on initiatives to
drive quarter over quarter sales growth for our existing and new products emphasizing:
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.
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.
Comparison of Results of Operations
Three Months Ended March 31, 2014,
Compared To Three Months Ended March 31, 2013
The following tables set forth summarized
consolidated financial information for the three months ended March 31, 2014 and 2013:
|
|
|
Three Months March 31,
|
|
(in thousands)
|
|
|
2014
|
|
|
|
2013
|
|
|
|
$ Change
|
|
|
|
% Change
|
|
Total revenues
|
|
$
|
1,267
|
|
|
$
|
1,804
|
|
|
$
|
(537
|
)
|
|
|
(30
|
%)
|
Cost of revenues
|
|
|
(750
|
)
|
|
|
(854
|
)
|
|
|
104
|
|
|
|
(12
|
%)
|
Gross profit
|
|
|
517
|
|
|
|
950
|
|
|
|
(433
|
)
|
|
|
(46
|
%)
|
Gross profit as a percentage of total revenues
|
|
|
41
|
%
|
|
|
53
|
%
|
|
|
(12
|
%)
|
|
|
(23
|
%)
|
Operating expenses
|
|
|
978
|
|
|
|
1,019
|
|
|
|
(41
|
)
|
|
|
(4
|
%)
|
Loss from operations
|
|
|
(461
|
)
|
|
|
(69
|
)
|
|
|
(392
|
)
|
|
|
(568
|
%)
|
Other income (expense)
|
|
|
(12
|
)
|
|
|
3
|
|
|
|
(15
|
)
|
|
|
(500
|
%)
|
Net loss
|
|
$
|
(473
|
)
|
|
$
|
(66
|
)
|
|
$
|
(407
|
)
|
|
|
(617
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
(in thousands)
|
|
|
2014
|
|
|
|
2013
|
|
|
|
$ Change
|
|
|
|
% Change
|
|
Rentals
|
|
$
|
1,249
|
|
|
$
|
1,760
|
|
|
$
|
(511
|
)
|
|
|
(29
|
%)
|
Products
|
|
|
18
|
|
|
|
44
|
|
|
|
(26
|
)
|
|
|
(59
|
%)
|
Total revenue
|
|
$
|
1,267
|
|
|
$
|
1,804
|
|
|
$
|
(537
|
)
|
|
|
(30
|
%)
|
For the three months ended March 31, 2014,
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, 2014, the Company's consolidated operations generated revenues of approximately $1,267,000
compared to revenues of $1,804,000 for the quarter ended March 31, 2013. The $537,000 decrease in net sales is primarily attributable
to a decline in rental orders for coil tubing products and competitive pricing by larger service companies. We expect to increase
our revenues to reflect the current trends in the drilling industry based on sales information provided by our largest customers.
For the three months ended March 31, 2014, the Company had a gross profit as a percentage of sales of 41%, compared to 53% for
the three months ended March 31, 2013. The $433,000 decrease in gross profit for the three months ended March 31, 2014, compared
to the prior period, is primarily attributed to the slowdown in orders for our rental products by our largest customers.
Revenue Information
The following table sets forth summarized
consolidated sales information for the three months ended March 31, 2014 and 2013:
We had total revenues of approximately
$1,267,000 for the three months ended March 31, 2014, compared to total revenues of $1,804,000 for the three months ended March
31, 2013, a decrease in total revenues of $537,000 or 30% from the prior period. Total revenues included $1,249,000
of rental revenue for the three months ended March 31, 2014, compared to $1,760,000 for the three months ended March 31, 2013,
a decrease in rental revenue of $511,000 or 29% 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 2014.
Cost of Revenue
The following table sets forth summarized
cost of revenue information for the three months ended March 31, 2014 and 2013:
|
|
|
Three Months March 31,
|
|
(in thousands)
|
|
|
2014
|
|
|
|
2013
|
|
|
|
$ Change
|
|
|
|
% Change
|
|
Depreciation of rental tools
|
|
$
|
284
|
|
|
$
|
268
|
|
|
$
|
16
|
|
|
|
6
|
%
|
Facilities and support expenses
|
|
|
41
|
|
|
|
61
|
|
|
|
(20
|
)
|
|
|
(33
|
%)
|
Compensation and benefits
|
|
|
213
|
|
|
|
234
|
|
|
|
(21
|
)
|
|
|
(9
|
%)
|
Material, supplies and support service
|
|
|
212
|
|
|
|
291
|
|
|
|
(79
|
)
|
|
|
(27
|
%)
|
Total cost of revenue
|
|
$
|
750
|
|
|
$
|
854
|
|
|
$
|
(104
|
)
|
|
|
(12
|
%)
|
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 $750,000 for the three months ended March 31, 2014, compared to a cost
of $854,000 for the three months ended March 31, 2013, a decrease of $104,000 or 12% from the prior period. The main reasons for
the decrease was a $79,000 or 27% decrease in material, supplies and support service which was directly related to the decrease
in revenue for the three months ended March 31, 2014 compared to the prior year’s period.
Depreciation of Rental Tools
Depreciation expense (as a portion of cost
of revenues) increased by $16,000 or 6%, to $284,000 for the three months ended March 31, 2014, compared to $268,000 for the three
months ended March 31, 2013, which increase was mainly due to an increase in the depreciable asset base in 2014 versus 2013.
Gross Profit
We had gross profit of $517,000 for the
three months ended March 31, 2014, compared to gross profit of $950,000 for the three months ended March 31, 2013, a decrease in
gross profit of $433,000 or 46% from the prior period. Our gross profit was 41% of revenue for the three months ended March 31,
2014, compared to 53% for the three months ended March 31, 2013.
General Operating Expenses
The following table sets forth summarized
operating expense information for the three months ended March 31, 2014 and 2013:
|
|
|
Three Months March 31,
|
|
(in thousands)
|
|
|
2014
|
|
|
|
2013
|
|
|
|
$ Change
|
|
|
|
% Change
|
|
Depreciation and amortization
|
|
$
|
84
|
|
|
$
|
67
|
|
|
$
|
17
|
|
|
|
25
|
%
|
Compensation and benefits
|
|
|
210
|
|
|
|
268
|
|
|
|
(58
|
)
|
|
|
(22
|
%)
|
General and administrative - Professional services
|
|
|
222
|
|
|
|
157
|
|
|
|
65
|
|
|
|
41
|
%
|
General and administrative expenses - Other
|
|
|
79
|
|
|
|
72
|
|
|
|
7
|
|
|
|
10
|
%
|
Total general operating expenses
|
|
$
|
595
|
|
|
$
|
564
|
|
|
$
|
31
|
|
|
|
5
|
%
|
We had total general operating expenses
of $595,000 for the three months ended March 31, 2014, compared to total operating expenses of $564,000 for the three months ended
March 31, 2013, an increase in operating expenses of $31,000 or 5% from the prior period. The increase in general operating expenses
was primarily related to an increase in professional service fees related to the 2013 year-end audit and legal fees related to
our ongoing lawsuit (see also Part II - Item 1).
Selling and Marketing
The following table sets forth summarized
selling and marketing expense information for the three months ended March 31, 2014 and 2013:
|
|
|
Three Months March 31,
|
|
(in thousands)
|
|
|
2014
|
|
|
|
2013
|
|
|
|
$ Change
|
|
|
|
% Change
|
|
Auto
|
|
$
|
96
|
|
|
$
|
79
|
|
|
$
|
17
|
|
|
|
22
|
%
|
Commissions
|
|
|
101
|
|
|
|
191
|
|
|
|
(90
|
)
|
|
|
(47
|
%)
|
Compensation and benefits
|
|
|
129
|
|
|
|
110
|
|
|
|
19
|
|
|
|
17
|
%
|
Other selling and marketing
|
|
|
58
|
|
|
|
93
|
|
|
|
(35
|
)
|
|
|
(38
|
%)
|
Total selling and marketing expenses
|
|
$
|
384
|
|
|
$
|
473
|
|
|
$
|
(89
|
)
|
|
|
(19
|
%)
|
We had total selling and marketing expenses
of $384,000 for the
three months ended March 31, 2014
, compared to $473,000 for the
three
months ended March 31, 2013
, a decrease of $89,000 or 19% from the prior period, which decrease was primarily due to decreased
commissions, selling and marketing expenses (due mainly to our decreased revenues) offset by an increase in auto expense and compensation
and benefits.
Depreciation and Amortization
Depreciation and amortization expense increased
by $17,000 or 25%, to $84,000 for the
three months ended March 31, 2014
, compared to $67,000
for the
three months ended March 31, 2013
. The increase was primarily due to the addition
of shop equipment and automobiles.
Loss from Operations
We had a loss from operations of $461,000
for the three months ended March 31, 2014, compared a loss of $69,000 for the three months ended March 31, 2013, an increase of
$392,000 or 568% from the prior period.
Other Income (expense)
We had other expense of $12,000 for the
three months ended March 31, 2014, which included interest expense of $13,000 offset by $1,000 of other income, versus other income
of $3,000 for the three months ended March 31, 2013, which represented $6,000 of other income offset by $3,000 of interest expense.
Net Loss
We had a net loss of $473,000 for the
three
months ended March 31, 2014
, compared to net loss of $66,000 for the
three months ended March
31, 2013
, an increase in net loss of $407,000 or 617% from the prior period. The increase in net loss was attributable
to a decrease in total revenue and an increase in certain operating expenses, for the
three months ended
March 31, 2014
, compared to the
three months ended March 31, 2013
.
Liquidity and Capital Resources
We had $1,844,000 of working capital as
of
March 31, 2014
. We believe we are sufficiently capitalized to continue our growth and are
in a position to develop financing alternatives that will enable us to take advantage of growth opportunities in the future.
As of
March
31, 2014
, we had total assets of $8,313,000, which included total current assets of $2,910,000, consisting of $1,121,000
of cash, $1,707,000 of accounts receivable, net, and $82,000 of other current assets; and long term assets including $2,924,000
of rental tools, net; $1,546,000 of property and equipment, net; and $933,000 of intangible assets, net.
We had total liabilities of $1,937,000
as of March 31, 2014, which included total current liabilities of $1,066,000, consisting of accounts payable of $591,000; accrued
liabilities of $228,000; current portion of related party notes payable of $156,000, relating to amounts owed to Jerry Swinford
in connection with the IP Agreement, described in note 4 to the financials included herein, and current portion of notes payable
of $91,000, relating to the amount due on loans associated with equipment financing and building loan; and long term liabilities
consisting of $52,000 of related party notes payable, net of current portion, relating to amounts owed to Jerry Swinford in connection
with the IP Agreement, described in note 4 to the financials included herein, and $819,000 of notes payable, net of current portion
relating to equipment financing and our building loan.
We had net cash provided by operating activities
of $
521
,000 for the three
months ended
March 31, 2014, which
consisted of non-cash items including $368,000 of depreciation and amortization, $51,000 of stock-option expense, $119,000 of increase
in accrued liabilities, $259,000 of increase in accounts payable, $168,000 of decrease in accounts receivable, and $30,000 of decrease
in other current assets offset by $473,000 of net loss.
We had $282,000 of net cash used in investing
activities for the three
months ended
March 31, 2014, which included the purchase of $207,000
of rental tools and $127,000 of property and equipment; offset by $42,000 in proceeds from the sale of lost tools and $10,000 from
the disposal of equipment. Our principal recurring investing activity was the funding of capital expenditures to ensure that
we have the appropriate levels and types of equipment in place to generate revenue from operations.
We had $
20
,000
of net cash used in financing activities for the three
months ended
March 31, 2014, which included
$51,000 of proceeds from notes payable related to vehicles, offset by $39,000 of payments on related party notes payable, relating
to amounts paid to Jerry Swinford in connection with the IP Agreement, described in note 4 to the financials included herein and
$32,000 of payments on notes payable.
Effective October 25, 2013, we purchased
a 6,000 square foot office/warehouse building and associated land located at 22305 Gosling Road, Spring, Texas 77389. The purchase
price was $884,508. The Company obtained $649,000 of the purchase price by way of a loan from Bank of Houston, evidenced by a promissory
note, which loan bears interest at 5% per annum for three years and the prime rate plus 1% thereafter (not to be less than 5%),
and has a maturity date of October 25, 2018. Upon an event of default, the loan bears interest at the lesser of the rate of 5%
above the then applicable interest rate of the note, and the greatest amount provided by law. Amortization payments based on a
20 year amortization schedule (initially $4,309 per month) are due on the loan until maturity (recalculated based on the then interest
rate after the first three years of the loan). The amount due under the loan is secured by a Deed of Trust, Security Agreement
and Financing Statement on the property purchased.
The Company’s outstanding notes payable
and the material terms thereof are described in note 4 to the financials included herein.
The Company has historically been funded
through loans provided by, and through the sale of common stock and warrants to, the Company’s largest shareholder and former
director, Herbert C. Pohlmann, provided that Mr. Pohlmann is not required to provide us any additional funding and/or to purchase
any securities from us in the future.
Our immediate plans are to continue our
growth by meeting expected demand for our rental tool products in our current geographic markets and further expanding into international
markets similar to what we accomplished in Canada during 2012 and 2013. We plan to supplement our cash flow with typical bank debt
or similar financing which will enable us to meet larger demand on bigger projects, enter new markets and improve our network for
servicing our customers.
Moving forward, we anticipate increased
spending on research and development activities, which we believe will be required to provide technological advancement to our
coiled tubing technologies and workover product lines. We are currently working on a new generation of coil tubing tools to aid
in and facilitate horizontal drilling. We expect the market for new applications of coiled tubing to continue to expand our operations
throughout the remainder of fiscal 2014, especially in the horizontal drilling and workover applications.
In addition to debt financing and our organic
growth as discussed above, we may raise funds for further expansion of our tool fleet, development of new tools or to make strategic
acquisitions through the sale or exchange of equity securities. Our common stock is now quoted on the OTCQB market, provided that
we may choose to list our common stock on the NYSE MKT or NASDAQ Capital Market in the future. As a result of becoming a fully-reporting
public company, we believe investors may be more willing to purchase our common stock in private offerings allowing us to raise
funding to use for the items described above. The sale of additional equity or debt securities, if accomplished, may result in
dilution to our shareholders.
Off Balance Sheet Arrangements:
None.