ENERGY & TECHNOLOGY CORP. Files SEC form 10-K, Annual Report
Form 10-K for ENERGY & TECHNOLOGY CORP.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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 employees 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 and forming a marketing department in order to increase our market share.
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.
Introduction of complementary services: We are continually adding new services in order to meet customer demand. Most recently, we began drilling equipment inspection services and added a manufacturing facility and pipe and equipment sales company. Other areas management has identified as potential growth avenues include vessel inspection and inspection of pipelines in service. In 2010, we opened our Pipe threading facility containing threading equipment which can be attached to the inspection assembly line to 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 was ready for operations in 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 essential commodities, energy, technology manufacturing, reclamation, 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 60 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, 2010 and 2008, inventory consisted of 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, 2009 to December 31, 2010
At December 31, 2010, total assets amounted to $11,262,617 compared to $15,883,341 at December 31, 2009, a decrease of $4,620,724, or 29.1%. The decrease is primarily due to a decrease in inventory of $2,069,394, a decrease in accounts receivable of $676,513, a decrease of property and equipment of $1,309,305, and a decrease in the Company's cash of $1,203,671. These decreases were offset by an increase in the Company's deferred tax asset of $660,664.
Our liabilities at December 31, 2010, totaled $5.838.131 compared to $9,142,014 at December 31, 2008, a decrease $3,303,883, or 36.1%. The decrease is primarily due to a decrease in accounts payable of $3,237,083and a decrease in deferred taxes payable of $388,894. These decreases were partially offset by an increase in accrued rent of $150,000 and an increase in notes payable of $141,542.
Total stockholder's equity decreased from $6,741,327 at December 31, 2009, to $5,424,486 at December 31, 2010. This decrease was due to net loss from BP accident in the Gulf of Mexico generated for the year ended December 31, 2010 of $1,442,586, offset by the issuance of 115,500 shares of the Company's common stock in exchange for services performed in the amount of $124,094.
Cash and Cash Equivalents
The decrease in cash and cash equivalents was primarily due to the Company's net operating loss for the year.
We began purchasing pipe for sale to customers in late, 2007. This was an opportunity for us to expand our services to our customers. Inventory of pipe at December 31, 2010 was $3,494,163 compared to 5,563,557 at December 31, 2009. It is anticipated that the Company will continue its efforts to expand its sales of oilfield pipe. This decrease is primarily attributable to $1,866,777pipe inventory returned to the vendor during 2010.
Property and Equipment
The decrease in property and equipment is primarily due to the slowdown in the national and global economies during 2009 and 2010. The Abbeville facility, which was ready for operation in late 2007, was developed in order to serve the deep wells in the Gulf of Mexico. However, due to the recent BP Macondo accident and the 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. In 2010, the company began utilizing the facility on a limited basis, but determined to sell equipment with a cost of $736,000 and a net book value of $516,952 for $173,000 in order to generate cash flow for operations. Additionally, depreciation expense in the amount of $933,178 accounted for most of the decrease during the year.
Deferred Tax Asset/Income Taxes Payable
Due to the Company's loss for the year ended December 31, 2010, our deferred tax asset associated with the net operating loss, federal contributions, capital loss carryforwards, and general business credits have been increased by $660,664 to a balance of $734,175 at December 31, 2010. This balance includes a provision of $17,929 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.
Accounts payable at December 31, 2010 totaled $107,993 compared to $3,345,076 at December 31, 2009, a decrease of $3,237,083. This decrease is primarily due to the return of pipe acquired in 2009 and returned to the vendor during 2010. We reduced our inventory asset and vendor payable by approximately $3.1 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. In 2010, the Company re-issued 115,100,000 of those shares. 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, 2010.
Discussion of Results of Operations for the Year Ended December 31, 2010 compared to the Year Ended December 31, 2009
Our revenue for the year ended December 31, 2010, was $2,788,683 compared to $6,863,367 for the year ended December 31, 2009, a decrease of $4,074,684, or 59.4%. The decrease is attributable primarily to the lack of inspection fees which decreased $3,252,214 from $4,507,762 in the year ended December 31, 2009 to $1,255,548 during the year ended December 31, 2010. This was a result of the moratorium on deep water drilling in the Gulf of Mexico due the British Petroleum oil disaster. This decrease was accompanied by loss of additional income from rebillable job supplies which decreased $543,533 from $1,040,113 in 2009 to $496,580 in the year ended December 31, 2010. We store pipe and equipment inventory for our customers and expanded our facility in 2010 to accommodate other pipe manufacturers and distributors and our storage fees only decreased $80,345.
The following table presents the composition of revenue for the year December 31, 2010 and 2009:
|Revenue:||2010 Dollars||Percentage||2009 Dollars||Percentage||Variance Dollars|
|Inspection Fees||$ 1,255,548||45.1 %||$ 4,507,761||65.7 %||$ (3,252,213)|
|Sale of Pipe||$ 168,327||6.0 %||$ 75,073||1.1 %||$ 93,254|
|Storage Fees||$ 817,188||29.3 %||$ 1,175,203||17.1 %||$ (358,015)|
|Other Income||$ 547,620||19.6 %||$ 1,105,330||16.1 %||$ (557,710)|
|Total Revenue||$ 2,788,683||100.0 %||$ 6,863,367||100.0 %||$ (4,074,684)|
Cost of Revenue and Gross Profit
Our cost of revenue for the year ended December 31, 2010, was $2,870,547, or 102.9% of revenues, compared to $3,815,250, or 55.6% of revenues, for the year ended December 31, 2009. The overall decrease in our cost of revenue is primarily due to our reduction in payroll and related contract costs due to the decrease in inspection work. The primary reason for the increase in cost of sales as a percentage of revenues was due to the amount of fixed costs included in our cost of revenue, such as depreciation on equipment and facilities, and insurance costs.
During the year ended December 31, 2009, as a conservative measure, our accountants took back into our inventory from a customer, pipe that had been sold in the second quarter of 2009, a lawsuit filed by the customer to take back the pipe. The sale associated with the pipe was reversed in the third quarter of 2009, and the cost of the pipe returned to us was added back into inventory. Upon further inspection of the pipe returned to us, we noted that a certain amount of the pipe was damaged due to bad maintenance by the customer. We have since repaired the pipe and have charged the cost of repair back to the customer and believe the pipe should be listed at market value; however our accountant and auditors recorded based on GAAP rules. As such, we reduced the recorded value of this pipe to its estimated scrap market value. This adjustment was recognized in our cost of sales and reduced our overall profit until the matter is resolved.
The following table presents the composition of cost of revenue for the year ended December 31, 2010 and 2009:
|Revenue:||2010 Dollars||Percentage||2009 Dollars||Percentage||Variance Dollars|
|Labor and Related Costs||$ 600,175||20.9 %||$ 1,263,431||33.1 %||$ (663,256 )|
|Materials and Supplies||$ 479,015||16.7 %||$ 238,608||6.3 %||$ 240,407|
|Subcontract Labor||$ 640,077||22.3 %||$ 735,701||19.3 %||$ (95,624 )|
|Depreciation and amortization||$ 883,867||30.8 %||$ 688,943||18.1 %||$ 194,924|
|Maintenance||$ 48,714||1.7 %||$ 278,675||7.3 %||$ (229,961 )|
|Insurance||$ 119,622||4.2 %||$ 155,088||4.0 %||$ (35,466 )|
|Other||$ 99,077||3.4 %||$ 454,810||11.9 %||$ (355,733 )|
|Total Cost of Revenue||$ 2,870,547||100.0 %||$ 3,815,256||100.0 %||$ (944,709 )|
Due to the economy, we were unable to maintain our permanent employees and were forced to lay off employees in 2010 and utilized the services of subcontractors to assist us as needed to provide timely and quality service to our customers. We will continue our efforts to attract employees and retain qualified individuals to serve the needs of our customers. The increase in depreciation expense was the result of additional equipment pipe threading and manufacturing facility placed in service during 2010. The increase in other materials and supplies is due primarily to sales of pipe and below cost in order to facilitate agreements with customers.
For the year ended December 31, 2010, our operating expenses totaled $2,329,721, as compared to $2,300,071, in 2009, representing an increase of $29,650, or 1.3%. The largest component of our operating expenses for 2010 consists of salaries and wages, professional services, rent, and other expense. Salaries and wages for general and administrative personnel was $967,152 for the year ended December 31, 2010, compared to $947,669 for the year ended December 31, 2009, an increase of $19,483, or 2.9%. This increase was primarily the result of additional administrative personnel hired during 2010. Due to the current economy, management has made substantial reductions in management and executive salaries, including suspending the pay for the CEO and the lay-off of certain managers, engineers and supervisors not essential to operations.
Professional services expense increased from $299,197 for the year ended December 31, 2009, to $370,867 for the year ended December 31, 2010, an increase of $71,670, or 23.9%. The increase is primarily a result of expenses we incurred throughout the year ended December 31, 2010, for 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 acquisition of an equity interest in ITO Ventures, L.L.C., and a new wholly owned subsidiary, Energy Technology Manufacturing and Threading, LLC..
Rent expense totaled $265,105 for the year ended December 31, 2010, as compared to $267,313 for the year ended December 31, 2009, a decrease of $2,208, or 0.8%. Rent expense for both the year ended December 31, 2010, and for the year ended December 31, 2009, 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.
Other expenses increased from $223,193 for the year ended December 31, 2009, to $319,949 for the year ended December 31, 2010, an increase of $96,756, or 43.4%. The increase is primarily the result of the write off of bad debts in the amount of $182,344 for one customer for work performed on pipe which is involved in a lawsuit with the Company, regarding ownership.
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, 2010, other expense, net of other income, totaled $61,533, as compared to other expense, net of other income, of $92,902 for the year ended December 31, 2009.
Investment income, which consists of interest, dividends, realized gains and losses, and unrealized gains and losses, amounted to $25,348 for the year ended December 31, 2010, compared to an investment income of $13,020 for the year ended December 31, 2009. During the third quarter of 2009, 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, 2010, we recognized a gain of $14,091from our investment in ITO Ventures, LLC, as well as recognized interest and dividend income of $11,256. At December 31, 2010, the investment account consisted solely of cash equivalents.
Interest expense totaled $149,601 for the year ended December 31, 2010, as compared to $99,637 for the year ended December 31, 2009, an increase of $49,964, or 50.2%. 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 late 2009 and the year ended December 31, 2010.
During 2010, we disposed of equipment with an original cost of approximately $1,196,080, which had a remaining net book value of approximately $848,226.
During the first quarter of 2010, the Company entered into a settlement with North American Interpipe, Inc. whereby they paid $1 in exchange for forgiveness of all accounts payable balances in the amount of $1,298,074. In addition, the Company forgave accounts receivable balances totaling $919,751 offset by an allowance for doubtful accounts of $97,000. The net effect of the settlement in addition to reducing accounts payable and accounts receivable resulted in the recognition of $475,323 in other income.
Provision for income taxes
For the year ended December 31, 2010, we reported an income tax benefit of $1,030,532, compared to income tax expense of $346,061 for the year ended December 31, 2009, a decrease of $1,376,593, or 445.4%, which was attributable to the net loss for the year.
Discussion of Results of Operations for the Year Ended December 31, 2010 compared to the Year Ended December 31, 2009
Capital Resources and Liquidity
At December 31, 2010, we had $453,659 in cash and cash equivalents, which included two investment accounts, consisting of cash equivalents, with a fair value of $26,703. Our cash outflows have consisted primarily of expenses associated with continued operations. Cash outflows for investing purposes have consisted primarily the acquisition of equipment and other technology to better serve our customers. Most of the cost of those acquisitions have been offset by the sale of excess equipment. 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.
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.
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 2010, 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, 2010.
On January 1, 2010, the Company adopted new guidance that related to accounting for non-controlling 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 2009, 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, 2009, and interim periods within those years. All prior-period EPS data presented were to be adjusted retrospectively.
For additional information, contact Chris Johnson, ph. - 337-984-2000