Update ISO Certification
Energy & Technology, Corp. recognizes that quality is every bit as important as price and prompt service. This is even truer of the Company’s typical client, who often contracts for services that other companies are not able to provide. In response to our clients requirements, the Company has obtained the latest ISO:9001 certification by Moody’s, recognized in the industry as representing the highest quality control available. As the Company’s business lines are very synergistic, management feels that it can leverage this dominant position to increase share in the markets in which it competes, and likely more in the critical service arena.
Foreign Trade Zone Status
Energy & Technology, Corp. has selected the well know auditing and financial consulting firm KPMG to assist the Company in meeting the requirements to establish a Foreign Trade Zone at its Houston, Texas facility. KPMG has started the initial feasibility analysis with the formal application to follow. The establishment of a Foreign Trade Zone is expected to produce a substantial increase in the Company’s ability to sell to overseas markets, and make the Company a far more attractive distribution partner for foreign manufacturers. Management feels that market share could be taken through a successful designation as an FTZ subzone.
Increased Sales and Marketing Effort
Energy & Technology, Corp. has grown over the historical period without an aggressive marketing and sales effort. New business was generated from referrals, technical sessions given to oil and gas and industry related companies, the Company website, and through the use of a marketing company on a limited basis. Recently, several new deep water well permits were issued in the Gulf of Mexico. As a result, ENGT has experienced significant new interest from major oil and gas companies - including site visits and evaluations - for its VisonArray™ deep water and critical well technologies, and ENGT Manufacturing facilities. Currently, there are several employees whose duties are focused on sales, and one marketing and promotional activity director. Management believes revenue can be greatly increased by expanding the Company's sales force.
Diversification
Energy & Technology, Corp. has diligently worked to diversify its business model by adding sales, service, and storage of OCTG and all types of oilfield pipe, as well as equipment leasing and sales. The Company’s new threading and repair facility, located on our Houston campus, became operational in July 2010 and on September 30, 2011 received numerous ISO and API certifications.
Additional growth will come domestically, but management feels that overseas expansion is critical to the ultimate success of the business plan.
Critical Accounting Policies
Management 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 September 30, 2012, inventory consisted of tubing, casing, and drill 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, pursuant to the provisions of SFAS Financial Accounting Standards Board (FASB) ASC 360-10-35. 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, 2011 to September 30, 2012
At September 30, 2012, total assets amounted to $12,880,191 compared to $11,069,539 at December 31, 2011, an increase of $1,810,652 or 16.4%. The increase is primarily due to an increase in cash of $2,342,583 and an increase in property held for investment of $1,095,583, partially offset by a decrease in accounts receivable of $695,016, a decrease in inventory of $46,794, a decrease in deferred tax asset of $318,064, a decrease in prepaid expenses of $29,608 and a decrease of property and equipment of $527,430.
Our liabilities at September 30, 2012, totaled $ 7,452,734 compared to $5,978,805 at December 31, 2011, an increase of $1,473,929, or 24.7%. The increase is primarily due to an increase in accounts payable of $1,588,428, an increase in due to affiliates of $141,877, an increase in accrued rent of $112,500, partially offset by a decrease in deferred taxes payable of $158,633, and a decrease in notes payable of $178,342.
Total stockholder’s equity increased from $5,090,734 at December 31, 2011, to $5,427,457 at September 30, 2012. This increase was due our net income for the nine months ended September 30, 2012 and the issuance of 92,550 shares of common stock.
Cash and Cash Equivalents
Cash and Cash Equivalents totaled $3,286,477 at September 30, 2012, an increase of $2,342,583 from the balance of $943,894 at December 31, 2011. The increase in cash and cash equivalents was primarily due to the net operating income and cash provided by operating activities, in the amount of $3,595,895, partially offset by cash used in the investing activities in the amount of $1,216,847 for the nine months ended September 30, 2012.
Inventory
Inventory consists primarily of pipe held for sale to our customers. We began purchasing pipe for sale to customers in December, 2007. This was an opportunity for us to expand our services to our customers. It is anticipated that the Company will continue its efforts to expand its sales of pipe, even though the market has contracted substantially due to the current economy. During the nine months ending September 30, 2012, the Company had sales of approximately $3,601,005 of pipe, but most of this pipe was special order pipe that was purchased for specific sales.
Property and Equipment
The increase in property and equipment is primarily due to purchase of investment property for $1,095,583, partially offset by depreciation for the nine months ended September 30, 2012 of $638,457.
Deferred Tax Asset/Income Taxes Payable
Due to the Company’s income for the nine months ended September 30, 2012, our deferred tax asset has decreased by $318,064. We have decreased our deferred income taxes by $158,633 due to the change in book and tax depreciation differences.
Accounts Payable
Accounts payable at September 30, 2012 totaled $1,958,827 compared to $370,399 at December 31, 2011, an increase of $1,588,428. The increase is primarily due to amounts owed to a pipe vendor for purchases on credit.
Discussion of Results of Operations for the Three Months Ended September 30, 2012 compared to the Three Months Ended September 30, 2011
Revenues
Our revenue for the three months ended September 30, 2012, was $1,447,967 compared to $1,168,540, for the three months ended September 30, 2011, an increase of $279,427 or 23.9%. The increase is attributable primarily to increased inspection fees attributable to the current recovery of the recession.
The following table presents the composition of revenue for the three months ended September 30, 2012 and 2011:
|
Revenue:
|
|
2012
Dollars
|
|
Percentage
|
|
|
2011
Dollars
|
|
Percentage
|
|
Variance
Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
Cost of Revenue and Gross Profit
Our cost of revenue for the three months ended September 30, 2012, was $925,021, or 63.9% of revenues, compared to $863,817, or 73.9% of revenues, for the three months ended September 30, 2011. The overall increase in our cost of revenue is primarily due to our increased sales. The decrease in cost of revenue as a percentage of revenues was due to the fixed costs which are included in operations.
The following table presents the composition of cost of revenue for the three months ended September 30, 2012 and 2011:
|
Cost of Revenue:
|
|
2012
Dollars
|
|
Percentage
|
|
|
2011
Dollars
|
|
Percentage
|
|
|
Variance
Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
11,583
|
|
1.3
|
%
|
|
|
26,662
|
|
3.1
|
%
|
|
|
(15,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Operating Expenses
For the three months ended September 30, 2012, our operating expenses totaled $409,910 as compared to $421,292 in 2011, representing a decrease of $11,382 or 2.7%. The largest components of our operating expense for 2012 consists of salaries and wages, professional services, rent, and depreciation expenses. Salaries and wages for general and administrative personnel was $118,518 for the three months ended September 30, 2012, compared to $75,690 for the three months ended September 30, 2011, an increase of $42,828, or 56.6%.
Rent expense totaled $61,481 for the three months ended September 30, 2012, as compared to $59,615 for the three months ended September 30, 2011, an increase of $1,866, or 3.1%. Rent expense for both the three months ended September 30, 2012, and for the three months ended September 30, 2011, 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.
Professional services expense decreased from $139,057 for the three months ended September 30, 2011, to $51,772 for the three months ended September 30, 2012, a decrease of $87,285, or 62.8%. The decrease is primarily a result of management’s desire to decrease expenses.
Travel, Lodging and Meals totaled $26,755 for the three months ended September 30, 2012, as compared to $13,095 for the three months ending September 30, 2011, an increase of $13,660 or 104.3%.
Other operating expenses increased from $32,551 at September 30, 2011 to $36,495 for the three months ended September 30, 2012, an increase of $3,944, or 12.1%.
Other Income and Expense
Other income and expense consists of recovery of bad debt, investment income, and interest expense. Investment income, which consists of interest, dividends, realized gains and losses, and unrealized gains and losses, amounted to income of $12,218 for the three months ended September 30, 2012, compared to a loss of $66,704 for the three months ended September 30, 2011.
Interest expense totaled $38,276 for the three months ended September 30, 2012, as compared to $40,817 for the three months ended September 30, 2011, a decrease of $2,541, or 6.2%. Interest expense pertains primarily to amounts due to affiliates as well as to our notes payable with third parties.
Provision for income taxes
For the three months ended September 30, 2012, we reported an income tax expense of $26,427 compared to an income tax expense of $94,602 for the three months ended September 30, 2011, a decrease of $68,175, or 72.1%, which is the result of a reduction of income for the quarter in comparison to the previous year.
Discussion of Results of Operations for the Nine months Ended September 30, 2012 compared to the Nine months Ended September 30, 2011
Revenues
Our revenue for the nine months ended September 30, 2012, was $6,717,626 compared to $1,624,817 for the nine months ended September 30, 2011, an increase of $5,092,809, or 313.4%. During late 2009, we placed in service additional inspection equipment to enable us to meet the overall increased demand we expected for pipe inspection services. In June, 2011, we opened our threading facility in our Houston yard. In addition to our inspection services, we provide hauling and storage of tubular goods at our Houston facility for customers and suppliers. Due to general economic conditions and to the oil spill in the Gulf of Mexico, the demand for our services decreased substantially during 2011 and 2012.
The following table presents the composition of revenue for the nine months ended September 30, 2012 and 2011:
|
Revenue:
|
|
2012
Dollars
|
|
Percentage
|
|
|
2011
Dollars
|
|
Percentage
|
|
|
Variance
Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inspection Fees
|
|
$
|
2,048,790
|
|
30.5
|
%
|
|
$
|
648,135
|
|
39.9
|
%
|
|
$
|
1,400,655
|
|
|
Storage Fees
|
|
$
|
626,456
|
|
9.3
|
%
|
|
$
|
416,000
|
|
25.6
|
%
|
|
$
|
210,456
|
|
|
Pipe Sales
|
|
$
|
3,548,782
|
|
52.8
|
%
|
|
$
|
150,498
|
|
9.3
|
%
|
|
$
|
3,398,284
|
|
|
Commissions
|
|
$
|
0
|
|
0.0
|
%
|
|
$
|
173,866
|
|
10.7
|
%
|
|
$
|
(173,866
|
)
|
|
Other Income
|
|
$
|
493,598
|
|
7.4
|
%
|
|
$
|
236,318
|
|
14.5
|
%
|
|
$
|
257,280
|
|
|
Total Revenue
|
|
$
|
6,717,626
|
|
100.0
|
%
|
|
$
|
1,624,817
|
|
100.0
|
%
|
|
$
|
5,092,809
|
|
Cost of Revenue and Gross Profit
Our cost of revenue for the nine months ended September 30, 2012, was $4,744,738, or 70.6 % of revenues, compared to $1,885,632, or 116.1% of revenues, for the nine months ended September 30, 2011. The overall increase in our cost of revenue is due to our increase in inspection services and pipe sales as a result of the current economy. The decrease in cost of revenue as a percentage of revenues was due to the fixed costs reported in cost of revenues. Materials and supplies increased $2,396,636 due to the increased sales of pipe, or 536.4%. Subcontract labor costs increased by $292,284, or 79.8%. Labor and related costs increased by $16,817, or 4.7%. These increases are primarily attributable to the overall increase in volume of inspection services. The increase of $29,410 or 6.1% in depreciation expense for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 is primarily due to equipment purchases.
The following table presents the composition of cost of revenue for the nine months ended September 30, 2012 and 2011:
|
Cost of Revenue:
|
|
2012
Dollars
|
|
Percentage
|
|
|
2011
Dollars
|
|
Percentage
|
|
|
Variance
Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor and Related Costs
|
|
$
|
372,642
|
|
7.9
|
%
|
|
$
|
355,825
|
|
18.9
|
%
|
|
$
|
16,817
|
|
|
Depreciation and Amortization
|
|
|
514,937
|
|
10.9
|
%
|
|
|
485,527
|
|
25.7
|
%
|
|
|
29,410
|
|
|
Subcontract Labor
|
|
|
658,709
|
|
13.9
|
%
|
|
|
366,425
|
|
19.4
|
%
|
|
|
292,284
|
|
|
Materials and Supplies
|
|
|
2,843,397
|
|
59.9
|
%
|
|
|
446,761
|
|
23.7
|
%
|
|
|
2,396,636
|
|
|
Insurance
|
|
|
93,314
|
|
1.9
|
%
|
|
|
76,419
|
|
4.1
|
%
|
|
|
16,895
|
|
|
Maintenance
|
|
|
176,007
|
|
3.7
|
%
|
|
|
64,052
|
|
3.4
|
%
|
|
|
111,955
|
|
|
Other
|
|
|
85,732
|
|
1.8
|
%
|
|
|
90,623
|
|
4.8
|
%
|
|
|
(4,891
|
)
|
|
Total Cost of Revenue
|
|
$
|
4,744,738
|
|
100.0
|
%
|
|
$
|
1,885,632
|
|
100.0
|
%
|
|
$
|
2,859,106
|
|
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.
Operating Expenses
For the nine months ended September 30, 2012, our operating expenses totaled $1,388,619 as compared to $1,313,129 for the nine months ended September 30, 2011, representing an increase of $75,490, or 5.7%. Salaries and wages for general and administrative personnel was $361,643 for the nine months ended September 30, 2012, compared to $306,551 for the nine months ended September 30, 2011, an increase of $55,092, or 18.0%. The increase was the result of the increase in bonuses, commissions, and selling expense for the new sales manager in addition to the issuance of 92,550 shares of common stock valued at $5,183 as bonuses.
Professional services expense decrease from $327,077 for the nine months ended September 30, 2011, to $237,658 for the nine months ended September 30, 2012, a decrease of $89,419 or 27.3%. The decrease is primarily a result of decreased fees primarily related to the free trade zone application.
Utilities expense increased from $39,949 for the nine months ended September 30, 2011 to $78,068 for the nine months ended September 30, 2012, an increase of $38,119 or 95.4%. The increase is attributable to the new facilities opened and to the increase in inspection services rendered during the current year.
Rent expense totaled $182,088 for the nine months ended September 30, 2012, as compared to $191,799 for the nine months ended September 30, 2011, a decrease of $9,711, or 5.1%. Rent expense for both the nine months ended September 30, 2012, and for the nine months ended September 30, 2011, 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 decrease is attributable to reduced equipment rentals during the nine months ended September 30, 2012.
Other Income and Expense
Other income and expense consists of investment income, and interest expense. Investment income, which consists of interest, dividends, realized gains and losses, and unrealized gains and losses, amounted to a gain of $23,440 for the nine months ended September 30, 2012, compared to a loss of $66,438 for the nine months ended September 30, 2011. The increase is due primarily to income from temporary cash invested during the period.
Interest expense totaled $116,739 for the nine months ended September 30, 2012, as compared to $120,048 for the nine months ended September 30, 2011, a decrease of $3,309, or 2.8%. 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 financing of new equipment, less the principal payments on those debts and obligations.
Provision for income taxes
For the nine months ended September 30, 2012, we reported an income tax expense of $159,431 compared to income tax benefit of $493,754 for the nine months ended September 30, 2011, an increase of $653,185, or 132.3%, which is the result of the pre-tax net income for the current period compared to the prior year.
Comparative financial information for the nine months ended September 30:
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,717,626
|
|
|
$
|
1,624,817
|
|
|
$
|
2,084,957
|
|
|
$
|
6,188,436
|
|
|
$
|
7,861,390
|
|
|
Cost of Revenues
|
|
|
4,744,738
|
|
|
|
1,885,632
|
|
|
|
2,060,343
|
|
|
|
2,981,794
|
|
|
|
4,917,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
|
1,972,888
|
|
|
|
(260,815
|
)
|
|
|
24,614
|
|
|
|
3,206,642
|
|
|
|
2,944,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & Administrative
Expenses
|
|
|
1,265,098
|
|
|
|
1,189,374
|
|
|
|
1,612,229
|
|
|
|
1,480,022
|
|
|
|
956,570
|
|
|
Depreciation
|
|
|
123,520
|
|
|
|
123,755
|
|
|
|
115,505
|
|
|
|
131,606
|
|
|
|
57,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,388,618
|
|
|
|
1,313,129
|
|
|
|
1,727,734
|
|
|
|
1,611,628
|
|
|
|
1,014,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations
|
|
|
584,270
|
|
|
|
(1,573,944
|
)
|
|
|
(1,703,120
|
)
|
|
|
1,595,014
|
|
|
|
1,930,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
(93,299
|
)
|
|
|
408,790
|
|
|
|
400,573
|
|
|
|
(66,409
|
)
|
|
|
(65,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
490,971
|
|
|
|
(1,165,154
|
)
|
|
|
(1,302,547
|
)
|
|
|
1,528,605
|
|
|
|
1,865,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
159,431
|
|
|
|
(493,754
|
)
|
|
|
(430,478
|
)
|
|
|
562,665
|
|
|
|
724,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
331,540
|
|
|
$
|
(671,400
|
)
|
|
$
|
(872,069
|
)
|
|
$
|
965,940
|
|
|
$
|
1,140,436
|
|
Capital Resources and Liquidity
As of September 30, 2012 we had $3,286,477 in cash and cash equivalents. Our cash outflows have consisted primarily of expenses associated with our operations. These outflows have been offset by the timely inflows of cash from our customers regarding sales that have been made. Additionally, 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.