UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________
FORM 10-K
(Mark One)
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For The Fiscal Year Ended December 31, 2009
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File No. 333-143215
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ENERGY & TECHNOLOGY, CORP.
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(Exact name of registrant as specified in Charter)
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DELAWARE
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333-143215
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26-0198662
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(State or other jurisdiction of
incorporation or organization)
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(Commission File No.)
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(IRS Employee Identification No.)
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3639 Ambassador Caffery Blvd
Petroleum Towers, Suite 530
P.O. Box 52523
Lafayette, LA 70505
(Address of Principal Executive Offices)
(337) 984-2000
(Issuer Telephone number)
(337) 988 1777
(Issuer Fax number)
www.engt.com
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Securities registered under Section 12(b) of the Exchange Act:
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None.
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Securities registered under Section 12(g) of the Exchange Act:
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Common stock, par value $0.001 per share.
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(Title of class)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter 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 if disclosure of delinquent filers pursuant to Item 405 of S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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x
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State issuer’s revenues for its most recent fiscal year: $6,863,367
The aggregate market value of Common Stock held by non-affiliates of the Registrant on April 14, 2010 was $5,865,125 based on a $1.00 closing price for the Common Stock on June 30, 2009, the last business day of the Registrant’s most recent completed second quarter. For purposes of this computation, all executive officers and directors have been deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers and directors are, in fact, affiliates of the Registrant.
Number of the issuer’s Common Stock outstanding as of April 14, 2010: 53,668,000
Documents incorporated by reference: None.
1
TABLE OF CONTENTS
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PART I
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PAGE
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ITEM 1.
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3 | |||
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ITEM 1A
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4 | |||
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ITEM 1B
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5 | |||
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ITEM 2.
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5 | |||
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ITEM 3.
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5 | |||
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ITEM 4.
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5 | |||
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PART II
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ITEM 5.
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5 | |||
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ITEM 6.
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6 | |||
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ITEM 7.
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6 | |||
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ITEM 7A.
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13 | |||
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ITEM 8.
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ITEM 9.
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ITEM 9A.
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PART III
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ITEM 10.
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ITEM 11.
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ITEM 12.
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ITEM 13.
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ITEM 14.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
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19 | ||
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PART IV
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ITEM 15.
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SIGNATURES
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21 |
2
PART I
Technical Industries & Energy, Corp. (“TIE” or the “Company”) was founded in the State of Delaware on November 29, 2006. On January 3, 2007, we entered into a Stock Purchase and Share Exchange Agreement with Technical Industries, Inc., (“TII”) a Louisiana corporation founded May 11, 1971 whereby TII became our wholly owned operating subsidiary. On September 9, 2008 we changed our name to Energy & Technology Corp. We plan to expand our operations and may acquire other companies with services and products which complements existing services related to the energy industry and offer the new three dimensional exploration technology where needed, help the energy company reach deep energy reserves that present technology cannot reach and increase opportunities for income, growth and financing. Our business offices are located at Petroleum Towers, Suite 530 P.O. Box 52523, Lafayette, LA, 70505. Our telephone number is (337) 984-2000.
We are headquartered in Lafayette, Louisiana with a branch office and production facilities in Houston, Texas. We offer several services, which can be described as engineering, manufacturing, sales, and non-destructive testing (“NDT”) services for pipes and equipment utilized in the energy industry.
NDT is more fully described as the application of industry-wide and/or proprietary test methods to examine pipe and equipment utilized in the energy industry, or any object, material or system associated therewith, without impairing their future usefulness. An essential characteristic of NDT is that the examination process does not change the composition, shape, integrity or properties of the test object, thus allowing the object to be utilized for the purpose for which it was manufactured. The end result is less time involved in testing, lower costs and less waste of materials than other forms of pipe inspection that require that the test object be destroyed.
Through our staff of industrial, electrical and computer engineers, we offer engineering services to assist our customers in the design, improvement, installation, and/or integration of NDT components and systems. The services, which vary according to the needs of the customer, focus on design, layout, testing, and troubleshooting of NDT systems hardware and software.
We also manufacture our own proprietary NDT electronic equipment systems, which perform the NDT services including ultrasonic inspection, electromagnetic inspection and others. The layout and design of the systems’ physical components are produced and tested by our engineers. Once the design has passed testing, the individual components are built into the design. Some of the components, such as the circuit boards, may be assembled by a third party before being incorporated into the design. Last, the final assembly is integrated with proprietary inspection software developed by our programmers.
Another component of our business consists of selling pipe and equipment used in exploration, drilling, and production of oil and gas. The manufactured pipe and equipment is supplied to us by various steel mills. Before the pipe and equipment is offered to our customers for sale, it must undergo further processing, such as blasting, threading, coating, and non-destructive testing inspection before being turned into a final product. We only sell oilfield pipe and equipment that has passed inspection and meets or exceeds API (American Petroleum Institute) and/or customer specifications.
Lastly, we provide ultrasonic pipe inspection technology. Services include full-length electromagnetic inspection for pipe and equipment utilized in the energy industry, and full length ultrasonic inspection systems for new and used drill pipe, tubing, casing, and line pipe. We offer several different types of electromagnetic and ultrasonic inspection processes, each of which is tailored to the inspection of a particular pipe characteristic, such as size, length, wall thickness, ovality, or detection of a particular pipe defect. The type of process is determined by the customer according to their particular needs.
All of the pipe that enters our facilities are carefully documented and incorporated into our propriety inventory tracking system, which is accessible to customers on the World Wide Web. Through this system, the customer is able to obtain real-time storage and inspection information on his pipe that is located at our facilities.
We operate year-round, 24 hours a day, seven days a week when needed, and currently employ approximately 100 employees.
Today, we continue to serve the energy industry by manufacturing and maintaining proprietary systems that detect, and collect all available defects and wall thickness and outside diameter/ovality readings and store them in their proper position on the pipe, produce a three-dimensional image of the pipe, and allow the engineer to simulate burst, collapse, and pull apart the pipe on the computer prior to drilling. This helps energy companies reach reserves that otherwise cannot be reached with present technology. As a result of this advanced technology, the American Petroleum Institute (API) appointed Mr. George M. Sfeir, to serve on their 2008 committee for non-contact inspection. Recently, Technical Industries, Inc. developed new US Patent No. 7,263,887 and international patent pending inspection technology needed in order to reach deep energy reserves present technology cannot reach. The U.S. patent is current until 2039.
3
We serve customers in Houston, Texas, Newfoundland, Canada, and Lafayette, Louisiana, the Rockies, and we are expanding to Saudi Arabia, Egypt, UAE, Mexico, and other parts of the World. Our customer base of over 50 accounts consists of oil companies, steel mills, material suppliers, drilling companies, material rental companies, and engineering companies. We handle regular projects and specialize in deep water projects including BP Crazy Horse, ExxonMobil Alabama Bay and ExxonMobil Grand Canyon, Sakhalin Island and Caspian Sea, Texas A&M University Ocean Explorer, and other projects.
Additional services include full-length electromagnetic inspection for oil-field pipe and equipment and full length ultrasonic inspection systems for new and used drill pipe, tubing, casing and line-pipe, wet or dry Magnetic Particle Inspection ("MPI"); Dye Penetrant Testing ("PT"), or Ultrasonic Testing of the End Areas ("UT SEA") of plain end and threaded connections, including drill collars and drilling rig inspection; mill systems and mill surveillance; testing and consulting services. Today we continue to serve the energy industry niche by manufacturing and maintaining proprietary systems that are capable of detecting defects through the use of our patented technology.
COMPETITORS MAY DEVELOP SIMILAR TECHNOLOGY OR PATENT SIMILAR TECHNOLOGY, AND MAKE THIS TECHNOLOGY AVAILABLE TO OUR CUSTOMERS.
Competitors may develop similar technology or similar patents and make the technology available to our current customers at a lower cost or on better contractual terms. If this were to occur our customer base would be reduced which would in turn lower our revenues.
OUR FUTURE SUCCESS IS DEPENDENT, IN PART, ON THE PERFORMANCE AND CONTINUED SERVICE OF GEORGE M. SFEIR, WITHOUT HIS CONTINUED SERVICE, WE MAY BE FORCED TO INTERRUPT OR EVENTUALLY CEASE OUR OPERATIONS.
We are presently dependent to a great extent upon the experience, abilities and continued services of George M. Sfeir our Chief Executive Officer and director. We currently do not have an employment agreement with Mr. Sfeir. The loss of his services could have a material adverse effect on our business, financial condition or results of operation.
GEORGE M. SFEIR HAS MAJORITY VOTING CONTROL OF OUR COMMON STOCK.
Mr. Sfeir has the voting proxy for the majority of the voting stock of the Company. Although Mr. Sfeir only owns 5,000 shares of the Company’s outstanding shares individually, Mr. Sfeir controls the voting rights for 47,791,875 shares, which include shares held by 2 entities (the Sfeir Family Trust, and American Interest, LLC), in addition to the shares he owns individually.
WE ARE IN A HIGHLY COMPETITIVE MARKET AND WE ARE UNSURE AS TO WHETHER OR NOT THERE WILL BE ANY CONSUMER DEMAND FOR OUR PRODUCTS AND SERVICES.
Some of our competitors are much larger and better capitalized than we are. It may be that our competitors will better address the same market opportunities that we are addressing. These competitors, either alone or with collaborative partners, may succeed in developing business models that are more effective or have greater market success than our own. The Company is especially susceptible to larger manufacturers that invest more money in research and development. Moreover, the market for our products is large but highly competitive. There is little or no hard data that substantiates the demand for our products or how this demand will be segmented. It is possible that there will be low consumer demand for our products, or that interest in our products could decline or die out, which would cause us to be unable to sustain our operations.
We primarily serve the energy industry, which is a highly volatile and politically driven industry. Significant decreases in oil prices or changes in the political landscape could adversely affect the demand for our products and services.
WHILE NO CURRENT LAWSUITS ARE FILED AGAINST THE COMPANY, THE POSSIBILITY EXISTS THAT A CLAIM OF SOME KIND MAY BE MADE IN THE FUTURE.
The company is involved in two lawsuits and the possibility exists that additional claims of some kind may be made in the future. While we will work to insure high product quality and accuracy in all marketing and labeling, no assurance can be given that some claims for damages will not arise. While we plan to properly insure ourselves with standard product liability insurance, there can be no assurance that this insurance will be adequate to cover litigation expenses and any awards to plaintiffs.
The types of claims that could be made against the Company consists primarily of product liability claims associated with a failure of drilling pipe stem and oil country tubular products used for exploration. The Company maintains general liability insurance with an annual aggregate of $2,000,000, as well as a $2,000,000 umbrella policy. The Company’s deductible for claims is $5,000.
4
Not Applicable
We presently maintain our principal offices at 3639 Ambassador Caffery, Petroleum Towers, Suite 530 P.O. Box 52523, Lafayette, LA, 70505. Our telephone number is (337) 984-2000.
Our main facility in Houston, Texas, consists of approximately 8 acres and includes a building capable of performing all inspection work in an environmentally protected area, and providing storage areas for pipe and equipment. Additional storage areas of approximately 29 acres adjoining our main operating plant are available for future expansion.
We have constructed a similar facility in Abbeville, Louisiana on property leased from the City of Abbeville for a 25 year term plus another 25 year option at the same rate beginning in 2005 with payments to begin when the property is fully operational. This facility consists of a building which houses the testing operations and a yard for storage and is expected to employ an additional 32 people. Both facilities provide excellent year-round pipe and equipment storage and maintenance services.
We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
None.
PART II
Market Information
A symbol was assigned for our securities so that our securities may be quoted for trading on the OTCBB under symbol ENGT. Minimal trading has occurred through the date of this Report.
The following table sets forth the high and low trade information for our common stock. The prices reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions. All prices are adjusted for the recent 5 to 1 split.
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Quarter ended
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Low Price | High Price | ||||||
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December 31, 2008
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N/A | N/A | ||||||
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March 31, 2009
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2.00 | 2.00 | ||||||
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June 30, 2009
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0.60 | 2.00 | ||||||
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September 30, 2009
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0.98 | 1.10 | ||||||
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December 31, 2009
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$ |
0.40
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$ |
1.85
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Holders
As of April 14, 2010 in accordance with our transfer agent records, we had 147 record holders of our Common Stock plus other unknown shareholders included in brokerage and omnibus accounts.
Dividends
To date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock, when issued pursuant to this offering. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our Board of Directors will have the discretion to declare and pay dividends in the future.
5
Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may deem relevant.
Stock Option Grants
To date, we have not granted any stock options.
Registration Rights
We have not granted registration rights to the selling shareholders or to any other persons.
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2009
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2008
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2007
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2006
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2005
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Revenues
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$ | 6,863,367 | $ | 10,027,953 | $ | 4,041,494 | $ | 2,609,890 | $ | 2,158,989 | ||||||||||
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Cost of Revenues
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3,815,256 | 6,031,965 | 1,876,310 | 1,135,632 | 1,142,617 | |||||||||||||||
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Gross Profit
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3,048,111 | 3,995,988 | 2,165,184 | 1,474,258 | 1,016,372 | |||||||||||||||
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Operating Expenses
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General & Administrative Expenses
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2,110,989 | 1,470,700 | 983,285 | 531,817 | 602,593 | |||||||||||||||
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Depreciation
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189,082 | 87,444 | 93,395 | 91,603 | 92,315 | |||||||||||||||
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Total Operating Expenses
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2,300,071 | 1,558,144 | 1,076,680 | 623,420 | 694,908 | |||||||||||||||
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Income from Operations
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748,040 | 2,437,844 | 1,088,504 | 850,838 | 321,464 | |||||||||||||||
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Other Income (Expense)
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(92,902 | ) | (99,590 | ) | (94,525 | ) | (103,906 | ) | (100,179 | ) | ||||||||||
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Income Before Income Taxes
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655,138 | 2,338,254 | 993,979 | 746,932 | 221,285 | |||||||||||||||
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Provision for Income Taxes
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309,077 | 879,598 | 498,395 | 285,061 | 85,759 | |||||||||||||||
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Net Income
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$ | 346,061 | $ | 1,458,656 | $ | 495,584 | $ | 461,871 | $ | 135,526 | ||||||||||
General
We have a patented process which can help companies within the energy industry reach deep energy reserves other equipment cannot.
The following list highlights a few areas of opportunity to expand the Company's business:
Sales and marketing efforts: Although we have been impacted by the downturn in the national and global economies, we have grown over the historical period without an aggressive marketing and sales effort. Currently, new business is generated from referrals, technical sessions given to oil & gas and energy related companies, a website and through the use of a marketing company on a limited basis. To date, we have hired one in-house salesperson and another sales person based in Louisiana who visits with customers. Currently, we have two employee whose duties are focused on sales, marketing, and promotional activities for the Company. Management believes revenue can be increased by expanding the Company's sales force.
Applying for additional patents to protect proprietary rights: We have developed international patent-pending new inspection technology needed in order to reach deep energy reserves present technology cannot reach. Our expandable inspection technology helps the companies in the energy industry retrieve a large amount of energy reserves that cannot be retrieved with current technology. We have manufactured several pieces of equipment in-house that have enabled us to successfully serve the energy industry. Due to proprietary infringement risk, we have discontinued manufacturing the equipment for sale to third parties. By securing a patent protecting our proprietary technology, we could consider manufacturing equipment for sale again, which would open a new line of revenue.
6
Introduction of complementary services: We are continually adding new services in order to meet customer demand. Most recently, we began drilling equipment inspection services. Other areas management has identified as potential growth avenues include vessel inspection and inspection of pipelines in service. We are working to acquire pipe threading equipment which could be attached to the inspection assembly line and provide additional services for a very low increased cost to our customers.
Geographic expansion in the domestic and international markets: We currently derive the majority of revenue from the Houston, Texas market, where many of our clients are based. There are several other markets that could be better served, such as in Louisiana where a new plant in Abbeville, Louisiana has been constructed in order to serve the deep wells in the Gulf of Mexico. This plant became operational in late 2008. Other expansions are being considered through the opening of additional full-service, local plants. Furthermore, we maintain relations with sales representatives in the Mexico, Saudi Arabia, and Middle East markets that could be better utilized if we are able to locally serve customers. Lastly, we have Canadian customers that utilize our services on a limited basis, due to the high cost of shipping heavy pipes. To date, we have not had the capital or human resources to establish plants in these potential markets.
We continue to seek other companies which can complement our pipe and inspection business with the goal of securing these businesses through a combination of cash and stock payments. All of these expansion plans rely heavily on raising capital through a public offering of additional stock which would be used to fund our acquisitions.
We have a customer base of approximately 50 accounts, and are continually expanding our customer base to increase revenue growth. Currently, we serve customers that are oil companies, steel mills, material suppliers, drilling companies, material rental companies and engineering companies. Our customer relationships average over ten years which provides us repeat business.
Critical Accounting Policies
The Company has identified the following accounting policies to be the critical accounting policies of the Company:
Revenue Recognition. Revenue for inspection services is recognized upon completion of the services rendered. Revenue for the sales of pipe is recognized when pipe is delivered and the customer takes ownership and assumes the risks of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable.
Inventory. Inventory is stated at the lower of cost determined by the specific identification method or market. At December 31, 2009 and 2008, inventory consisted of drilling and casing pipe available for sale.
Property and Equipment. Property and equipment are stated at cost. Expenditures for property and equipment and items that substantially increase the useful lives of existing assets are capitalized at cost and depreciated. Routine expenditures for repairs and maintenance are expensed as incurred. The cost and related accumulated depreciation of property and equipment disposed of are eliminated from the accounts, and any resulting gain or loss is recognized. Depreciation is provided utilizing the straight-line method over the estimated useful lives of the assets capitalized.
Valuation of Long-Lived Assets. In the event facts and circumstances indicate that carrying amounts of long-lived assets may be impaired, the Company evaluates the recoverability of its long-lived assets using the estimated future undiscounted cash flows associated with the asset compared to the asset’s carrying amount to determine if a write-down is required. Any impairment loss is measured as the difference between the carrying amount and the fair value of the impaired asset.
Discussion of Changes in Financial Condition from December 31, 2008 to December 31, 2009
At December 31, 2009, total assets amounted to $15,883,341 compared to $20,047,298 at December 31, 2008, a decrease of $4,163,957, or 20.8%. The decrease is primarily due to a decrease in inventory of $1,538,737, a decrease in accounts receivable of $617,853, a decrease of property and equipment of $2,938,493. These decreases were partially offset by an increase in the Company’s cash of $1,054,055.
Our liabilities at December 31, 2009, totaled $9.142.014 compared to $17,587,249 at December 31, 2008, a decrease $8,445,235, or 25.6%. The decrease is primarily due to a decrease in accounts payable of $2,062,305, a decrease in accrued liability for capital expenditures of $7,235,717. These decreases were partially offset by an increase in accrued rent of $150,000, an increase in deferred taxes payable of $161,503 and an increase in notes payable of $551,581.
Total stockholder’s equity increased from $2,460,049 at December 31, 2008, to $6,741,327 at December 31, 2009. This increase was due to net income generated for the year ended December 31, 2009 of $346,061, and the issuance of 3,580,000 shares of the Company’s common stock in exchange for the reduction of debt owed to a vendor in the amount of $3,935,217.
Cash and Cash Equivalents
The increase in cash and cash equivalents was primarily due to the Company’s ability to collect our trade receivable and to liquidate debt with stock issued, rather than utilizing cash payments.
7
Inventory
We began purchasing drilling pipe for sale to customers in late, 2007. This was an opportunity for us to expand our services to our customers. Inventory of drilling pipe at December 31, 2009 was $5,563,557 compared to 7,102,294 at December 31, 2008. It is anticipated that the Company will continue its efforts to expand its sales of oilfield pipe. This decrease is primarily attributable to approximately $1.3 million of pipe inventory returned to the vendor during 2009.
Property and Equipment
The decrease in property and equipment is primarily due to the slowdown in the national and global economies during 2008 and 2009. The Abbeville facility, which became operational in late 2008, was developed in order to serve the deep wells in the Gulf of Mexico. However, due to the recent slowdown in the oil and gas industry, we have not been able to maximize the capacity of this facility. As a result, we cancelled equipment orders and returned some equipment to suppliers in 2009. The equipment pertaining to the cancelled orders and returned to suppliers was recognized as construction in progress at December 31, 2008. The amount of the order canceled with the supplier totaled approximately $3.3 million.
Deferred Tax Asset/Income Taxes Payable
Due to the Company’s profitability for the year ended December 31, 2009, our deferred tax asset associated with federal contribution and capital loss carryforwards and general business credits has been reduced to a balance of $62,687 at December 31, 2009. The remaining balance of $10,824 is associated with certain net operating losses recognized at the state level for which there is not sufficient net income generated to fully offset the balance. In addition to reducing our deferred tax asset, we have recorded income taxes payable for the estimated amount of state income taxes associated with our taxable income which exceeds available net operating loss carryforwards.
Accounts Payable
Accounts payable at December 31, 2009 totaled $3,345,076 compared to $5,407,381 at December 31, 2008, a decrease of $2,062,305. This decrease is primarily due to the return of drilling and casing pipe acquired in 2008 and returned to the vendor during 2009. We reduced our inventory asset and vendor payable by approximately $1.3 million.
Accrued Liability for Capital Expenditures
At December 31, 2008, we recognized a liability in the amount of $7,235,717 due to a supplier of equipment needed for the development of our Abbeville facility. As noted previously, we cancelled an order for equipment associated with the development of our Abbeville facility which amounted to approximately $3.3 million. In addition, in December 2009, we issued 3,3580,000 shares of our common stock to this vendor to liquidate the remaining liability owed this vendor for equipment purchased and placed into service. This transaction reduced our obligation to this vendor by approximately $3.9 million
Common Stock Outstanding
On April 1, 2009, we entered into an agreement with American Interest, LLC and the Sfeir Family Trust whereby the two stockholders agreed to cancel 118,046,500 common shares and 47,053,500 common shares, respectively, for the consideration to be re-issued in the future. On December 30, 2009, we agreed to issue 3,850,000 shares of our common stock in exchange for the remaining balance due to a supplier of equipment to the Company, which totaled $3,935,217 at December 31, 2009. Although the stock certificate was issued to the supplier on March 19, 2010, we considered the stock to be “paid but not issued” at December 31, 2009.
Discussion of Results of Operations for the Year Ended December 31, 2009 compared to the Year Ended December 31, 2008
Revenues
Our revenue for the year ended December 31, 2009, was $6,863,367 compared to $10,027,953 for the year ended December 31, 2008, a decrease of $3,164,586, or 31.6%. The decrease is attributable primarily to the lack of sales of drilling pipe during the year ended December 31, 2009 in comparison to sales for the year ended December 31, 2008. During 2008, we obtained agreements with three oilfield pipe steel mills and began selling Oil Country Tubular exploration and drilling pipe. This decrease was partially offset by the increase in pipe storage fees for 2009. Storage fee revenue increased $861,769, or 274.94%, from $1,175,203 for the year ended December 31, 2009 from $313,434 for the year ended December 31, 2008. We store pipe inventory for our customers and expanded our yard in 2009 to accommodate other pipe manufacturers and distributors.
8
The following table presents the composition of revenue for the year December 31, 2009 and 2008:
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Revenue:
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2009
Dollars
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Percentage
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2008
Dollars
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Percentage
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Variance
Dollars
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||||||||||||||||
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Inspection Fees
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$ | 4,507,761 | 65.7 | % | $ | 4,495,722 | 44.8 | % | $ | 12,039 | |||||||||||
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Sale of Pipe
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$ | 75,073 | 1.1 | % | $ | 4,664,036 | 46.5 | % | $ | (4,588,963 | ) | ||||||||||
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Storage Fees
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$ | 1,175,203 | 17.1 | % | $ | 313,434 | 3.1 | % | $ | 861,769 | |||||||||||
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Other Income
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$ | 1,105,330 | 16.1 | % | $ | 554,761 | 5.6 | % | $ | 550,569 | |||||||||||
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Total Revenue
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$ | 6,863,367 | 100.0 | % | $ | 10,027,953 | 100.0 | % | $ | (3,164,586 | ) | ||||||||||
Cost of Revenue and Gross Profit
Our cost of revenue for the year ended December 31, 2009, was $3,815,250, or 55.6% of revenues, compared to $6,031,965, or 60.2% of revenues, for the year ended December 31, 2008. The overall decrease in our cost of revenue is primarily due to our lack of sales of oilfield drilling pipe. The lack of sales of oilfield drilling pipe is also the primary reason for the decrease in cost of sales as a percentage of revenues. Our margins with our pipe sales in 2008 were relatively low in comparison to the margins on our other revenue sources.
During the year ended December 31, 2008, we agreed to take back from a customer drilling pipe that had been sold in the second quarter of 2008 due to incorrect specifications associated with the drilling pipe. The sale associated with the drilling pipe was reversed in the third quarter of 2008, and the cost of the drilling pipe returned to us was added back into inventory. Upon further inspection of the drilling pipe returned to us, we noted that a certain amount of the pipe was damaged or had other defects. As such, we reduced the recorded value of this drilling pipe to its estimated market value. This adjustment was recognized in our cost of sales.
The following table presents the composition of cost of revenue for the year ended December 31, 2009 and 2008:
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Cost of Revenue:
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2009
Dollars
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Percentage
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2008
Dollars
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Percentage
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Variance
Dollars
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Labor and Related Costs
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$ | 1,263,431 | 33.1 | % | $ | 1,182,809 | 19.6 | % | $ | 80,622 | ||||||||||
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Materials and Supplies
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$ | 238,608 | 6.3 | % | $ | 3,171,907 | 52.6 | % | $ | (2,933,299 | ) | |||||||||
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Subcontract Labor
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$ | 735,701 | 19.3 | % | $ | 593,863 | 9.9 | % | $ | 141,838 | ||||||||||
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Depreciation and amortization
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$ | 688,943 | 18.1 | % | $ | 406,632 | 6.7 | % | $ | 282,311 | ||||||||||
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Maintenance
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$ | 278,675 | 7.3 | % | $ | 242,569 | 4.0 | % | $ | 36,106 | ||||||||||
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Insurance
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$ | 155,088 | 4.0 | % | $ | 103,770 | 1.7 | % | $ | 51,318 | ||||||||||
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Other
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$ | 454,810 | 11.9 | % | $ | 330,415 | 5.5 | % | $ | 124,395 | ||||||||||
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Total Cost of Revenue
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$ | 3,815,2506 | 100.0 | % | $ | 6,031,965 | 100.0 | % | $ | 2,216,709 | ||||||||||
Due to limitations with the pool of qualified individuals, we utilized the services of subcontractors to assist us in providing timely and quality service to our customers. We will continue our efforts to attract employ and retain qualified individuals to serve the needs of our customers. The increase in depreciation expense was the result of additional equipment for the Abbeville, Louisiana plant being placed in service during 2008. The increase in other costs is due primarily to increases in hauling costs associated with hauling customer pipe that may be received at the Port of Houston to our Houston facility. Much of this cost is able to be charged back to the customer.
Operating Expenses
For the year ended December 31, 2009, our operating expenses totaled $2,300,071, as compared to $1,558,144, representing an increase of $741,927, or 47.6%. The largest component of our operating expenses for 2009 consists of salaries and wages, rent, professional services, and office supplies and expenses. Salaries and wages for general and administrative personnel was $947,669 for the year ended December 31, 2009, compared to $680,900 for the year ended December 31, 2008, an increase of $266,769, or 39.2%. This increase was primarily the result of additional administrative personnel hired during 2009. The additional personnel hired were to enhance the following areas: investor relations, business development, accounting, and information technology.
Rent expense totaled $267,313 for the year ended December 31, 2009, as compared to $244,145 for the year ended December 31, 2008, an increase of $23,168, or 9.5%. Rent expense for both the year ended December 31, 2009, and for the year ended December 31, 2008, pertains primarily to our rental of office space for our headquarters in Lafayette as well as our rental of land and facilities for operating purposes. The increase is attributable to normal escalation provisions within our lease agreements and the use of additional land in the Houston yard for storing pipe in accordance with agreements with the steel mills.
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Professional services expense increased from $138,323 for the year ended December 31, 2008, to $299,197 for the year ended December 31, 2009, an increase of $160,874, or 116.3%. The increase is primarily a result of expenses we incurred throughout the year ended December 31, 2009 for consulting services pertaining to training and certification classes for our employees and consulting services for our compliance with ISO standards, legal fees associated with legal proceedings related to pipe agreements and negotiations with foreign parties, as well as an increase in accounting fees associated with the growth of the Company over the past year.
Office supplies and expenses increased from $90,956 for the year ended December 31, 2008, to $120,736 for the year ended December 31, 2009, an increase of $29,780, or 32.7%. The increase is primarily a result of the increase in administrative personnel and the overall costs associated with our efforts to grow the Company.
Other Income and Expense
Other income and expense consists of investment income, gain or loss on sale of assets, and interest expense. For the year ended December 31, 2009, other expense, net of other income, totaled $92,902, as compared to other expense, net of other income, of $99,590 for the year ended December 31, 2008.
Investment income, which consists of interest, dividends, realized gains and losses, and unrealized gains and losses, amounted to $13,020 for the year ended December 31, 2009, compared to an investment loss of $3,727 for the year ended December 31, 2008. During the third quarter of 2008, we opened an investment account which consists primarily of a fixed-income mutual fund. In accordance with accounting guidance for investment in marketable debt and equity securities,, we classified our investment in this fixed-income mutual fund as “Trading” since it is our intention to utilize this investment account as a source of liquidity when needed, and to invest excess cash we may have in to a relatively low-risk investment vehicle. Accordingly, we have recorded our investments at fair market value. For the year ended December 31, 2009, we realized a gain of approximately $6,736 on the sales of investments, as well as recognized interest and dividend income of $6,284. At December 31, 2009, the investment account consisted solely of cash equivalents.
Interest expense totaled $99,637 for the year ended December 31, 2009, as compared to $95,863 for the year ended December 31, 2008, an increase of $3,774, or 3.9%. Interest expense pertains primarily to amounts due to affiliates as well as to our notes payable with third parties, and the increase relates to the principal payments on new debts and obligations from financing activities in 2009.
During 2009, we disposed equipment with an original cost of approximately $20,500, which had a remaining net book value of approximately $6,200.
Provision for income taxes
For the year ended December 31, 2009, we reported an income tax expense of $309,077, compared to income tax expense of $879,598 for the year ended December 31, 2008, a decrease of $570,521, or 64.9%, which was attributable to the decreased revenues and income for the year.
Discussion of Results of Operations for the Year Ended December 31, 2009 compared to the Year Ended December 31, 2008
Capital Resources and Liquidity
At December 31, 2009, we had $1,657,330 in cash and cash equivalents, which included three investment accounts, consisting of cash equivalents, with a fair value of $259,991. Our cash outflows have consisted primarily of expenses associated with our expanded operations, including and the purchase of drilling pipe for sale primarily during 2008. These outflows have been offset by the timely inflows of cash from our customers regarding sales that have been made. Cash outflows for investing purposes have consisted primarily the acquisition of equipment and other technology to better serve our customers, as well as the acquisition of pipe racks at our Houston facility to better meet the demand for pipe storage services. Currently, we have been able to utilize our relationships with affiliated entities to stabilize our liquidity needs.
We believe we can satisfy our cash requirements for the next twelve months with our current cash and expected revenues. However, completion of our plan of operation is subject to attaining adequate revenue. We cannot assure investors that adequate revenues will be generated. In the absence of our projected revenues, we may be unable to proceed with our plan of operations. Even without adequate revenues within the next twelve months, we still anticipate being able to continue with our present activities, but we may require financing to potentially achieve our growth goals.
In the event we are not successful in reaching our initial revenue targets, additional funds may be required, and we may not be able to proceed with our business plan for the development and marketing of our core services. Should this occur, we would likely seek additional financing to support the continued operation of our business.
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Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use if estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 3 of our consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
Revenue Recognition
The Company recognizes revenue on arrangements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements and No. 104, Revenue Recognition. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability is reasonably assured.
Recent Accounting Pronouncements
In June 2009, the FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with the FASB Accounting Standards CodificationTM (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification was effective for financial statements issued for periods ending after September 15, 2009.
On January 1, 2009, the Company adopted new guidance that related to accounting for noncontrolling interests in consolidated financial statements. The new accounting guidance states for entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners separately within the consolidated statement of financial condition within equity, but separate from the parent’s equity and separately on the face of the consolidated statement of operations. Further, the new guidance states that changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary should be accounted for consistently and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary should be initially measured at fair value. The adoption of this guidance had no impact on the Company.
In June 2008, the FASB issued guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, included in the earnings allocation in computing earnings per common share (EPS) under the two-class method. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented were to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform to the provisions of this guidance. Since the Company's unvested restricted stock awards do not contain nonforfeitable rights to dividends, they are not included under the scope of this pronouncement, and therefore, the adoption of this guidance had no impact on the Company.
In May 2009, FASB issued new guidance relating to subsequent events and established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance sets forth:
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· the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;
· the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and
· the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
The Company has adopted the new guidance that was effective for financial statements issued for interim and annual periods ending after June 15, 2009.
In April 2009, the FASB amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria are met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded. This guidance was effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance had no impact on the Company.
FASB ASC Topic 825 “Financial Instruments” (formerly FSP SFAS 107-1 Interim Disclosures about Fair Value of Financial Instruments, which also amended APB Opinion No. 28 Interim Financial Reporting) was issued in April 2009. This Topic requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The Topic is effective for interim reporting periods ending after June 15, 2009. Adoption of this Topic did not have a monetary effect on the financial position and results of operations of the Company, but resulted in expanded disclosures.
In June 2009, the FASB changed the accounting guidance for the consolidation of variable interest entities. The current quantitative-based risks and rewards calculation for determining which enterprise is the primary beneficiary of the variable interest entity will be replaced with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. The new guidance will be effective for the Company beginning January 1, 2010. Management believes the adoption of this guidance will not have a material impact on the financial statements.
In June 2009, the FASB changed the accounting guidance for transfers of financial assets. The new guidance increases the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its statement of financial condition, financial performance and cash flows; and a continuing interest in transferred financial assets.
In addition, the guidance amends various concepts associated with the accounting for transfers and servicing of financial assets and extinguishments of liabilities including removing the concept of qualified special purpose entities. This new guidance must be applied to transfers occurring on or after January 1, 2010. Management believes the adoption of this guidance will not have a material impact on the financial statements.
In August 2009, the FASB updated its guidance for the fair value measurement of liabilities. The update provided clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of the liability using: (1) the quoted price of the identical liability when traded as an asset, (2) quoted prices for similar liabilities or similar liabilities when traded as assets, (3) an income approach, such as a present value technique, (4) a market approach such as the amount the reporting entity would pay to transfer the liability or enter into the identical liability. The update also states that a reporting entity would not adjust the fair value of a liability for restrictions that prevent the transfer of the liability. The updated liability fair value measurement guidance is effective as of September 30, 2009. This update did not have a material effect on the Company’s financial statements.
In March 2008, FASB ASC Topic 815 “Derivative and Hedging” (formerly SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities) was issued. Topic 815 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. Topic 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not expect that the adoption of Topic 815 will have a material impact on its consolidated financial statements.
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In May 2008, FASB ASC Topic 105 “Generally Accepted Accounting Principles” (formerly SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles) was issued. This Topic identifies the sources of accounting principles and the framework for selecting the accounting principles to be used in the preparation of financial statements prepared in conformity with generally accepted accounting principles (GAAP) in the United States. The statement is effective November 15, 2008, and is not expected to result in changes to current practices nor have a material effect on the Company.
In September 2008 FASB ASC Topic 815 “Derivatives and Hedging” (which includes former FASB Staff Position (FSP) FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Financial Guarantees) was issued. This Topic requires companies that sell credit derivatives to disclose information that will enable financial statement users to assess the potential effect of the credit derivatives on the seller’s financial position, financial performance, and cash flows. Topic 815 is effective for interim and annual periods ending after November 15, 2008. This pronouncement is not expected to have an effect on the financial position and results of operations of the Company.
In February 2008, FASB ASC Topic 860 “Transfers and Servicing” (which includes former FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions) was issued, which provides guidance on accounting for a transfer of a financial asset and a repurchase financing. The Topic presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement under Topic 860. However, if certain criteria are met, the initial transfer and repurchase shall not be evaluated as a linked transaction and therefore evaluated separately under Topic 860. The Topic is effective for repurchase financing in which the initial transfer is entered in fiscal years beginning after November 15, 2008. The pronouncement did not have a material impact on the Company’s consolidated financial statements.
In April 2008, FASB ASC Topic 350 “Intangibles – Goodwill and Other” (which includes former FSP 142-3) was issued which amends the list of factors an entity should consider in developing renewal of extension assumptions used in determining the useful life of recognized intangible assets under Topic 350. The new guidance applies to intangible assets that are acquired individually or with a group of other assets and to intangible assets acquired in both business combinations and asset acquisitions. The Topic is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The guidance must be applied prospectively only to intangible assets acquired after the Topic’s effective date. This pronouncement did not have a material impact on the Company’s financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
We do not hold any derivative instruments and do not engage in any hedging activities.
