MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes included elsewhere in this registration statement. This discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks, assumptions and uncertainties. You should review the “
Risk Factors
” section of this registration statement for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.
Plan of Operation For The Next Twenty-Four Months
We believe that we will be able to continue our business operations for approximately the next twelve months without raising any additional capital. We anticipate the need for approximately $9,250,000 in additional funding to support the planned expansion of our operations over the next approximately twelve months. Additional available capital may not be available on favorable terms, if at all. We anticipate the need for approximately $11,500,000 in additional funding to support our plans for expansion of our operations over the next approximately 24 months.
We are currently working on a new generation of coil tubing tools to aid in and facilitate well drilling. We expect the market for new applications of coiled tubing to continue to expand our operations throughout fiscal 2013, especially in drilling and workover applications, which we are actively pursuing, including working to provide additional sales to Canada and moving into international markets including Indonesia.
Moving forward, we anticipate spending a larger percentage of our working capital on research and development activities, which we believe will be required to provide technological advancement to our coiled tubing technologies and workover product lines. We also hope to undertake acquisitions of related businesses, tool companies and other companies with whom we believe we may have synergistic relationships with in the future, funding permitting; provided that we do not currently have any planned acquisitions, have not entered into any definitive agreements relating to acquisitions and will need to raise additional funding in the future to complete acquisitions, which funding we hope to raise through the sale of debt or equity, which we may not be able to undertake on favorable terms, if at all.
Since 2010, the Company has been aggressive in the development and introduction of new technology to the Coiled tubing service market. Based on our management’s personal knowledge of the market for our products, we believe that we have established a significant market share for certain of our products including the CTT H/H and CTT Oscillator. We feel that the product advancement for the Company, in the short term, has been maximized in North America and we are now focusing on growing our operations in international markets. Moving forward, we believe we must diversify into other areas of the oil services markets to continue our aggressive growth plans. We believe that the best way to accomplish this goal will be through acquisitions of established operating companies which will help to enhance our product lines.
Along those lines, we currently plan to seek to raise approximately $750,000 during the first quarter of fiscal 2013 in order to allow us to purchase an Inspection company and/or a Capillary Tool company. Additionally, we plan to seek to raise an additional $9.25 million in the second through fourth quarters of fiscal 2013 in order to allow us to purchase a Fishing Tool company and an additional $1.5 million in fiscal 2014 in order to allow us to acquire another Drilling tool rental company. The Company has not yet taken any steps to identify specific target companies and/or identified any target companies to date.
Total expenditures for acquisitions for the next approximate 24 months are summarized in the table below:
Acquisitions
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First Quarter of 2013
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Second Through Fourth Quarters of 2013
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2014
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Total Planned Acquisition Cost During The Next 24 Months
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Inspection Company (1)
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$
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250,000
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-
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-
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$
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250,000
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|
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Capillary Tool Company (2)
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$
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500,000
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|
|
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-
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|
|
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-
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$
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500,000
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|
|
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|
|
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|
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|
|
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Fishing Tool Company (3)
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|
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-
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$
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9,250,000
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|
|
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-
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|
|
$
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9,250,000
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|
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|
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Drilling Tool Rental (4)
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-
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|
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-
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|
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$
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1,500,000
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|
|
$
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1,500,000
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|
|
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|
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Totals
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$
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750,000
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|
|
$
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9,250,000
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|
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$
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1,500,000
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|
|
$
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11,500,000
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|
|
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(1) Acquiring an Inspection company is our first priority for expansion. We currently spend approximately $20,000 per month in inspection fees. The Coil Tubing service industry does not have an exclusive inspection service and we believe there is a need for someone to service this market. With a relatively small total investment, we believe we can enter this market segment. In addition, we can utilize the inspection service in house.
(2) Acquiring a Capillary company which is a production enhancement product that is used to chemically inject wells.
(3) Acquiring a Fishing Tool company whose products are used to remove items from well bores in large drilling operations and well work over processes.
(4) Acquiring a Drilling Tool company that has down hole tools utilized in the well drilling process.
We plan to raise the funds required for the acquisitions above through the sale of debt or equity securities. Assuming the Registration Statement of which this Prospectus is a part is declared effective the Securities and Exchange Commission and our common stock is approved for quotation on the OTCBB, a national securities exchange or the NASDAQ trading market, depending on where our management decides to quote/list our common stock in their sole discretion, and provided that we meet any and all applicable listing criteria, we believe investors may be more willing to purchase our common stock in private offerings allowing us to raise funding to use for the items described above. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then shareholders. We provide no assurance that financing will be available in amounts or on terms acceptable to us, or at all. In the event we are unable to raise additional funding we will not be able to undertake any of the proposed acquisitions described above.
Comparison Of Results Of Operations
Three Months Ended September 30, 2012, Compared To The Three Months Ended September 30, 2011
We had total revenue of $1,840,989 for the three months ended September 30, 2012, compared to total revenue of $1,789,309 for the three months ended September 30, 2011, an increase in total revenue of $51,680 or 3% from the prior period. Total revenues included $177,374 of product revenue for the three months ended September 30, 2012, compared to $110,793 for the three months ended September 30, 2011, an increase in product revenue of $66,581 or 60% from the prior period. The increase in product revenue was mainly due to lost tool sales to customers. Total revenues also included rental revenue of $1,663,615 for the three months ended September 30, 2012, compared to $1,678,516 for the three months ended September 30, 2011, a decrease of $14,901 or 1% from the prior period. The decrease in rental revenue was primarily due to the overall decline in natural gas lateral drilling using our tools in the state of Pennsylvania.
We had cost of products and rental revenues of $603,507 for the three months ended September 30, 2012, compared to cost of products and rental revenues of $565,415 for the three months ended September 30, 2011, an increase in cost of product and rental revenues of $38,092 or 7% from the prior period, which increase was directly attributable to the increase in revenue for the three months ended September 30, 2012, compared to the three months ended September 30, 2011.
We had cost of revenue – depreciation of rental tools of $256,664 for the three months ended September 30, 2012, compared to $169,701 for the three months ended September 30, 2011, an increase of $86,963 or 51% from the prior period, which increase was mainly due to the increase of tool inventory depreciation.
Cost of revenues (including depreciation) as a percentage of revenue was 46.7% for the three months ended September 30, 2012, compared to 41.1% for the three months ended September 30, 2011, an increase in cost of revenues as a percentage of revenue of 5.6%. The increase in cost of revenues as a percentage of revenues was due to increased tool inventory maintenance cost.
We had gross profit of $980,818 for the three months ended September 30, 2012, compared to gross profit of $1,054,193 for the three months ended September 30, 2011, a decrease in gross profit of $73,375 or 7% from the prior period.
We had total selling and marketing expenses of $386,985 for the three months ended September 30, 2012, compared to $377,368 for the three months ended September 30, 2011, an increase of $9,617 or 3% from the prior period, which increase was mainly due to
additional sales expenses associated with the increase in sales and service personnel.
We had total general and administrative expenses of $375,465 for the three months ended September 30, 2012, compared to total general and administrative expenses of $282,844 for the three months ended September 30, 2011, an increase in general and administrative expenses of $92,621 or 33% from the prior period. The main reasons for the increase in general and administrative expenses were mainly due to the increase in payroll, professional service fees and overhead.
Depreciation and amortization expense increased by $15,517 or 34%, to $60,773 for the three months ended September 30, 2012, compared to $45,256 for the three months ended September 30, 2011. The increase was primarily due to the associated depreciation expense on the addition of shop equipment and automobiles for the sales force.
We had total operating expenses of $823,223 for the three months ended September 30, 2012, compared to total operating expenses of $705,468 for the three months ended September 30, 2011, an increase in total operating expenses of $117,755 or 17% from the prior period.
We had income from operations of $157,595 for the three months ended September 30, 2012, compared to $348,725 for the three months ended September 30, 2011, a decrease of $191,130 or 55% from the prior period.
We had interest expense of $3,666 for the three months ended September 30, 2012, compared to interest expense of $3,079 for the three months ended September 30, 2011.
We had net income of $153,929 for the three months ended September 30, 2012, compared to net income of $345,646 for the three months ended September 30, 2011, a decrease in net income of $191,717 or 56% from the prior period. The main reasons for the decrease in net income were the 17% increase in total operating expenses and the 17% increase in total cost of revenue, offset by the 3% increase in revenues for the three months ended September 30, 2012, compared to the three months ended September 30, 2011.
Nine months Ended September 30, 2012, Compared To The Nine months Ended September 30, 2011
We had total revenue of $6,186,795 for the nine months ended September 30, 2012, compared to total revenue of $3,524,611 for the nine months ended September 30, 2011, an increase in total revenue of $2,662,184 or 76% from the prior period. Total revenues included $279,785 of product revenue for the nine months ended September 30, 2012, compared to $548,031 for the nine months ended September 30, 2011, a decrease in product revenue of $268,246 or 49% from the prior period. The decrease in product revenue was mainly due to a decrease in product sales with Weatherford. Total revenues also included rental revenue of $5,907,010 for the nine months ended September 30, 2012, compared to $2,976,580 for the nine months ended September 30, 2011, an increase of $2,930,430 or 98% from the prior period. The increase in rental revenue was primarily due to the increase in the production and inventory of rental tools and the increase in field sales personnel subsequent to September 30, 2011. Our rental tools increased from $463,439 for the year ended December 31, 2010 to $3,566,766 for the year ended December 31, 2011, an increase of $3,103,327.
We had cost of products and rental revenue of $1,937,951 for the nine months ended September 30, 2012, compared to cost of products and rental revenue of $1,174,699 for the nine months ended September 30, 2011, an increase in cost of products and rental revenue of $763,252 or 65% from the prior period, which increase was directly attributable to the increase in revenue for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011.
We had cost of revenue – depreciation of rental tools of $726,097 for the nine months ended September 30, 2012, compared to $335,140 for the nine months ended September 30, 2011, an increase of $390,957 or 117% from the prior period, which increase was mainly due to increased product and support equipment.
Cost of revenues (including depreciation) as a percentage of revenue was 43.1% for the nine months ended September 30, 2012, compared to 42.8% for the nine months ended September 30, 2011, an increase in cost of revenues as a percentage of revenue of 0.3%.
We had gross profit of $3,522,747 for the nine months ended September 30, 2012, compared to gross profit of $2,014,772 for the nine months ended September 30, 2011, an increase in gross profit of $1,507,975 or 75% from the prior period.
We had total selling and marketing expenses of $1,420,748 for the nine months ended September 30, 2012, compared to $798,460 for the nine months ended September 30, 2011, an increase of $622,288 or 78% from the prior period, which increase was mainly due to
due to additional sales expenses associated with the increase in sales and service personnel,
the increase in sales staff and sales expenses.
We had total general and administrative expenses of $1,056,415 for the nine months ended September 30, 2012, compared to total general and administrative expenses of $595,115 for the nine months ended September 30, 2011, an increase in general and administrative expenses of $461,300 or 78% from the prior period. The main reasons for the increase in general and administrative expenses were mainly due to the increase in payroll, professional service fees and overhead.
Depreciation and amortization expense increased by $56,859 or 47%, to $178,960 for the nine months ended September 30, 2012, compared to $122,101 for the nine months ended September 30, 2011. The increase was primarily due to the associated depreciation expense on the addition of shop equipment and automobiles for the sales force.
We had total operating expenses of $2,656,123 for the nine months ended September 30, 2012, compared to total operating expenses of $1,515,676 for the nine months ended September 30, 2011, an increase in total operating expenses of $1,140,447 or 75% from the prior period.
We had income from operations of $866,624 for the nine months ended September 30, 2012, compared to $499,096 for the nine months ended September 30, 2011, an increase of $367,528 or 74% from the prior period.
We had interest expense of $12,803 for the nine months ended September 30, 2012, compared to interest expense of $26,722 for the nine months ended September 30, 2011, a decrease of $13,919 or 52% from the prior period, which decrease was mainly
attributed to a decrease in the outstanding balance of the notes owed to Jerry Swinford in connection with the IP Purchase Agreement, as described in greater detail below under “
Liquidity and Capital Resources
”
.
We had net income of $853,821 for the nine months ended September 30, 2012, compared to net income of $472,374 for the nine months ended September 30, 2011, an increase in net income of $381,447 or 81% from the prior period. The main reasons for the increase in net income were the 76% increase in total revenue offset by the 76% increase in total cost of revenues and the 75% increase in total operating expenses, offset by the 52% decrease in interest expense for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011.
Year Ended December 31, 2011 Compared To The Year Ended December 31, 2010
We had total revenue of $5,541,131 for the year ended December 31, 2011, compared to total revenue of $1,751,850 for the year ended December 31, 2010, an increase in total revenue of $3,789,281 or 216.3% from the prior period. Total revenues included $281,697 of product revenue for the year ended December 31, 2011, compared to $533,026 for the year ended December 31, 2010, a decrease in product revenue of $251,329 or 47.2% from the prior period. The decrease in product revenue was mainly due to a decrease in sales to Weatherford International and the loss in whole tools. Total revenues also included rental revenue of $5,259,434 for the year ended December 31, 2011, compared to $1,218,824 for the year ended December 31, 2010, an increase in rental revenue of $4,040,610 or 331.5% from the prior period. The increase in rental revenue was mainly due to increased sales and marketing efforts of the Company and the increase in rental tool inventory.
We had cost of revenue products and rental revenues of $1,681,857 for the year ended December 31, 2011, compared to cost of products and rental revenues of $1,291,701 for the year ended December 31, 2010, an increase in cost of product and rental revenues of $390,156 or 30.2% from the prior period, which increase was directly attributable to the increase in revenue for the year ended December 31, 2011, compared to the year ended December 31, 2010.
We had cost of revenue – depreciation of rental tools of $544,013 for the year ended December 31, 2011, compared to $140,593 for the year ended December 31, 2010, an increase of $403,420 or 286.9% from the prior year, which increase was mainly due to increased inventory.
Cost of revenues (including depreciation) as a percentage of revenue was 40.2% for the year ended December 31, 2011, compared to 81.8% for the year ended December 31, 2010, a decrease in cost of revenues as a percentage of revenue of 41.6% from the prior period. The decrease in cost of revenues as a percentage of revenues was due to increased sales and rental revenue.
We had gross profit of $3,315,261 for the year ended December 31, 2011, compared to gross profit of $319,556 for the year ended December 31, 2010, an increase in gross profit of $2,995,705 or 937.5% from the prior period.
We had total general and administrative expenses of $2,384,787 for the year ended December 31, 2011, compared to total general and administrative expenses of $678,181 for the year ended December 31, 2010, an increase in general and administrative expenses of $1,706,606 or 251.6% from the prior period. The main reason for the increase in general and administrative expenses was mainly due to additional sales expenses associated with the increase in sales and service personnel.
Depreciation and amortization expense increased by $126,354 to $170,751 for the year ended December 31, 2011, compared to $44,397 for the year ended December 31, 2010. The increase was primarily due to the associated depreciation expense on the addition of shop equipment and automobiles for the sales force.
We had total operating expenses of $2,555,538 for the year ended December 31, 2011, compared to total operating expenses of $722,578 for the year ended December 31, 2010, an increase in total operating expenses of $1,832,960 or 253.7% from the prior period.
We had income from operations of $759,723 for the year ended December 31, 2011, compared to a loss from operations of $403,022 for the year ended December 31, 2010, an increase in income from operations of $1,162,745 from the prior period.
We had interest expense of $30,278 for the year ended December 31, 2011, compared to interest expense of $54,568 for the year ended December 31, 2010, a decrease of $24,290 or 44.5% from the prior year, which decrease was mainly
attributed to the interest on the related party convertible notes which were converted into shares of the Company's common stock in May 2011
.
We had net income of $729,445 for the year ended December 31, 2011, compared to net loss of $457,590 for the year ended December 31, 2010, an increase in net income of $1,187,035 from the prior year. The main reasons for the increase in net income were the 216.3% increase in total revenue offset by the 55.4% increase in total cost of revenues and the 253.7% increase in total operating expenses for the year ended December 31, 2011, compared to the year ended December 31, 2010.
Liquidity and Capital Resources
As of September 30, 2012, we had total assets of $8,513,419, which included total current assets of $3,190,589, consisting of $1,244,391 of cash, $1,887,618 of accounts receivable, net, and $58,580 of other current assets; and long term assets including $3,767,498 of rental tools, net; $502,002 of property and equipment, net; and $1,053,330 of intangible assets, net, consisting of our rights to the patents purchased from Jerry Swinford pursuant to the IP Purchase Agreement, described in greater detail below.
We had total liabilities of $1,336,636 as of September 30, 2012, which included total current liabilities of $902,752, consisting of accounts payable of $387,821; accrued liabilities of $304,100; current portion of related party notes payable of $155,556, relating to amounts owed to Jerry Swinford in connection with the IP Purchase Agreement, described below; and current portion of notes payable of $55,275, relating to the amount due on loans associated with equipment financing; and long term liabilities consisting of $285,184 of related party notes payable, net of current portion, relating to the long term portion of the amounts owed to Jerry Swinford in connection with the IP Purchase Agreement, described below, and $148,700 of notes payable, net of current portion relating to equipment financing.
We had $2,287,837 of working capital and an accumulated deficit of $2,092,304 as of September 30, 2012.
We had net cash provided by operating activities of $641,686 for the nine months ended September 30, 2012, which consisted of $853,821 of net income, $905,057 of increase in depreciation and amortization, $86,900 of stock based compensation and $27,279 in increase in accrued liabilities; offset by $498,907 of increase in accounts receivable, $4,090 of increase in other current assets and $758,914 of decrease in accounts payable.
We had $885,442 of net cash used in investing activities for the nine months ended September 30, 2012, which included $926,829 of purchase of rental tools, $120,263 of purchase of machinery and equipment and $161,650 of proceeds from disposal of assets.
Our principal recurring investing activity was the funding of capital expenditures to ensure that we have the appropriate levels and types of equipment in place to generate revenue from operations. Expenditures for capital assets totaled approximately $1 million and $3.5 million in the nine months ended September 30, 2012 and 2011, respectively. While the majority of these expenditures were for the expansion of our rental tool fleet, we have continued our purchase of machinery and equipment necessary for our operations. Proceeds from the disposal of assets were approximately $162,000 and $118,000 in the nine months ended September 30, 2012 and 2011, respectively. These disposals related to equipment that was lost-in-hole throughout the period.
We had $1,262,397 of net cash provided by financing activities for the nine months ended September 30, 2012, which included $1,452,500 of proceeds from sale of common stock and warrants (representing funds received in connection with the Unit sales to Mr. Pohlmann and Mr. Connaughton, as described below) offset by $116,667 of payments on related party notes payable, relating to amounts paid to Jerry Swinford in connection with the IP Purchase Agreement, described below, and $73,436 of payments on notes payable.
As described below under “
Certain Relationships and Related Transactions
”, the Company’s majority shareholder, Herbert C. Pohlmann loaned the Company an aggregate of $471,951 in fiscal 2010, which loans were evidenced and memorialized by four Convertible Promissory Notes, which accrued interest at the rate of 12% per annum, and were due and payable on February 1, 2012 (as to three notes totaling $212,404) and May 13, 2012 (as to one note totaling $259,547). The Convertible Promissory Notes provided Mr. Pohlmann the right to convert the principal and accrued interest under the Convertible Promissory Notes into shares of the Company’s common stock at a conversion price of $0.90 per share, which Convertible Promissory Notes, along with accrued and unpaid interest thereon in the amount of $63,006 were converted into shares of the Company’s common stock pursuant to the Make Whole Agreement, described below.
As described in greater detail below under “
Certain Relationships and Related Transactions
”, in November 2010, the Company entered into an IP Purchase Agreement with Jerry Swinford, the Company’s Executive Vice President and Chairman, pursuant to which the Company purchased Mr. Swinford’s rights to the Patents for $25,000 in cash and $1,175,000 in the form of two promissory notes payable to Mr. Swinford (the “
Swinford Notes
”). The Company obtained an independent valuation in order to determine the value of the Patents. The first note, in the amount of $475,000 was due January 20, 2011, together with interest at the rate of 12% per annum, which note was paid in full in January 2011.
The second note in the amount of $700,000 is due September 15, 2015, and is payable in monthly installments of the lesser of $12,963 or the amount outstanding under such note per month, with the first such payment due on February 15, 2011. The Company also agreed to grant Mr. Swinford a security interest in all of the Company’s assets in connection with and to secure the repayment of the Swinford Notes and Holdings also agreed, pursuant to a Guaranty, to guaranty the repayment of the Swinford Notes.
The IP Purchase Agreement also provide that in the event Mr. Swinford was required to pay taxes totaling more than 15% of the proceeds received by Mr. Swinford in connection with the payment of the Swinford Notes in any calendar year (the “
15% Limit
”), the Company would reimburse Mr. Swinford for any and all taxes due over such 15% Limit, which may substantially increase the amount due to Mr. Swinford from the Company in connection with the payment of the Swinford Notes.
During the year ended December 31, 2010, the Company sold 466,666 shares of restricted common stock to Mr. Pohlmann for aggregate consideration of $1,000,000 as follows:
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In August 2010, the Company sold 33,333 shares of the Company’s common stock to Herbert C. Pohlmann, in consideration for $100,000 or $3.00 per share;
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In September 2010, the Company sold 100,000 shares of the Company’s common stock to Mr. Pohlmann in consideration for $300,000 or $3.00 per share;
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In October 2010, the Company sold 66,667 shares of the Company’s common stock to Mr. Pohlmann in consideration for $200,000 or $3.00 per share;
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·
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In November 2010, the Company sold 133,333 shares of the Company’s common stock to Mr. Pohlmann in consideration for $200,000 or $1.50 per share; and
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·
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In December 2010, the Company sold 133,333 shares of the Company’s common stock to Mr. Pohlmann in consideration for $200,000 or $1.50 per share.
|
During the nine months ended September 30, 2011, the Company sold an aggregate of 1,900,001 shares of the Company’s restricted common stock for aggregate consideration of $2,800,000 as follows:
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·
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In January 2011, the Company sold 666,667 shares of the Company’s common stock to Mr. Herbert C. Pohlmann for consideration of $1,000,000 or $1.50 per share;
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·
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In February 2011, the Company sold 333,333 shares of the Company’s common stock to Mr. Herbert C. Pohlmann for consideration of $500,000 or $1.50 per share;
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·
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In May 2011, the Company sold 166,667 shares of the Company’s common stock to Mr. Herbert C. Pohlmann for consideration of $250,000 or $1.50 per share;
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·
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In May 2011, the Company sold 233,333 shares of the Company’s common stock to Mr. Herbert C. Pohlmann for consideration of $350,000 or $1.50 per share;
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·
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In July 2011, the Company sold 333,334 shares of the Company’s common stock to Richard J. Connaughton, a former Director of the Company, for consideration of $500,000 or $1.50 per share; and
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·
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Effective in September 2011, the Company sold 166,667 shares of the Company’s common stock to John Callis, a former Director of the Company, in consideration for $200,000 or $1.20 per share.
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In May 2011, the Company and Mr. Pohlmann entered into an Anti-Dilution and Make Whole Agreement, which was subsequently amended in June 2011 (as amended, the “
Make Whole Agreement
”). Pursuant to the Make Whole Agreement, we agreed to adjust the purchase price of Mr. Pohlmann’s August 2010, September 2010 and October 2010 purchases of 200,000 shares of our common stock from $3.00 per share to $1.50 per share (and to therefore issue Mr. Pohlmann an additional 200,000 shares of common stock). We also agreed to provide Mr. Pohlmann anti-dilutive rights in connection with the 761,408 shares of common stock issuable to shareholders of Grifco and the Company as described under “
Organizational History
”, in connection with the shares of common stock which he held as of the issuance date of such shares and the Convertible Promissory Notes which he held as of such issuance date. The consideration for the Make Whole Agreement was Mr. Pohlmann’s continued funding of the Company throughout 2010 and through the date of such Make Whole Agreement. As a result of the anti-dilutive rights, Mr. Pohlmann was issued 6,474,154 shares of common stock in connection with the anti-dilutive rights associated with the shares of common stock he held and 3,511,580 shares of common stock in connection with the conversion of the Convertible Promissory Notes (and accrued interest thereon) into shares of the Company’s common stock, which notes were automatically converted into shares of common stock in connection with the parties’ entry into the Make Whole Agreement in order that Mr. Pohlmann could maintain his proportional ownership rights in the Company following such issuance of 761,408 shares in May through August 2011 in connection with the settlement of a lawsuit described in greater detail above under “
Organizational History
”. Mr. Pohlmann received 230,972 shares of common stock in connection with the Company’s Section 3(a)(10) distribution, which shares were issued as restricted securities and which were due to Mr. Pohlmann as a result of his ownership of the Company on the date of the Grifco distribution.
In October 2011, the Company
sold 166,667 shares of the Company’s common stock to Mr. Pohlmann in consideration for $200,000 or $1.20 per share.
In December 2011, the Company sold an aggregate of 1,600,000 units to Mr. Pohlmann, each consisting of (a) one share of common stock and (b) one common stock purchase warrant to purchase one share of common stock with a five year term and an exercise price of $1.00 per share (collectively the “
Units
”) for an aggregate of $1,600,000 or $1.00 per Unit. A total of $200,000 of the amount due in connection with the purchase of the Units was due prior to December 31, 2011; a total of $200,000 was due prior to January 25, 2012; a total of $100,000 was due prior to February 28, 2012; a total of $1,000,000 was due prior to April 30, 2012; and a total of $100,000 was due prior to May 31, 2012, with any and all unpaid amounts treated for all purposes as an outstanding promissory note due to the Company from Mr. Pohlmann, which notes did not accrue interest. The entire $1,600,000 owed in connection with the purchase of the Units has been paid to date.
In January 2012, the Company sold 52,500 Units to Richard J. Connaughton, a former Director of the Company, in consideration for $52,500 or $1.00 per unit. A total of $22,500 of the amount due in connection with the purchase of the Units was payable at the time of the parties’ entry into the subscription agreement evidencing the sale; a total of $2,500 was due prior to February 28, 2012; a total of $25,000 was due prior to April 30, 2012; and a total of $2,500 was due prior to May 31, 2012, with any and all unpaid amounts treated for all purposes as an outstanding promissory note due to the Company from Mr. Connaughton, which notes did not accrue interest. All of the amounts due in connection with the January 2012 subscription have been paid to date.
We believe that we will be able to continue our business operations for approximately the next twelve months without raising any additional capital. We anticipate the need for approximately $9,250,000 in additional funding to support the planned expansion of our operations and acquisitions over the next approximately twelve months and $11,500,000 in additional funding to support our planned expansion and acquisitions over the next 24 months. See also, “
Management's Discussion and Analysis of Financial Condition and Results of Operations
” – “
Plan of Operation for the Next Twenty-Four Months
”, above.
In the future, we may be required to seek additional capital by selling additional debt or equity securities, or otherwise be required to bring cash flows in balance when we approach a condition of cash insufficiency. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then shareholders. We provide no assurance that financing will be available in amounts or on terms acceptable to us, or at all. In the event we are unable to raise additional funding and/or obtain revenues sufficient to support our expenses, we will be forced to curtail or abandon our business operations, and any investment in the Company could become worthless.
Critical Accounting Policies:
Noncontrolling Interest.
The Company follows paragraph 810-10-45 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) to recognize noncontrolling interest in Coil Tubing Technology Holdings, Inc., its current wholly-owned subsidiary (which was formerly a majority-owned subsidiary prior to November 2010), in the equity section of the consolidated balance sheets. During November 2010, the Company acquired the outstanding noncontrolling interest and now owns 100% of the equity of the Company’s subsidiary, Coil Tubing Technology Holdings, Inc. In accordance with ASC 810-10, the Company accounted for the transaction as an equity transaction.
Use of Estimates in Financial Statement Preparation.
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.
Cash Equivalents.
The Company considers all highly liquid investments with original purchased maturities of three months or less to be cash equivalents.
Revenue Recognition.
The Company's revenue is generated primarily from the rental of its tools used for oilfield services primarily in the States of Texas and Pennsylvania. The Company also generates income from the sale of tools. Rental income is recognized over the rental periods, which are generally from one to thirty days. The estimated amounts of sales discounts, returns and allowances are accounted for as reductions of sales when the sale occurs and the realization of collectability is reasonably assured. These estimates are based on historical amounts and adjusted periodically based on changes in facts and circumstances when the changes become known to the Company.
Sales of coil tubing related products are primarily derived from instances where a customer has a specific need for a particular coil tubing related product and desires to have the Company obtain and/or manufacture the particular product. These sales may include replacement parts, as well as proprietary tools which are manufactured to the customer’s specification, but which are not part of the Company’s tool line. This is not a significant source of revenue for the Company at this time. The Company generally recognizes product revenue at the time the product is shipped. Concurrent with the recognition of revenue, the Company provides for the estimated cost of product returns. Sales incentives are generally classified as a reduction of revenue and are recognized at the later of when revenue is recognized or when the incentive is offered. Shipping and handling costs are included in cost of goods sold.
Allowance for Doubtful Accounts.
Accounts receivable consists of amounts billed and currently due from customers. The Company monitors the aging of its accounts receivable and related facts and circumstances to determine if an allowance should be established for doubtful accounts.
Machinery and Equipment.
Machinery and Equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight line method over the useful lives of the assets of five to seven years. Maintenance, repairs, and minor renewals and betterments are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized.
Rental Tools.
Rental tools are recorded on the Company’s books as rental equipment at cost. The primary focus of the rental equipment is to generate rental income. As a result, the Company does not list inventory as a line item on the Company’s balance sheet. Depreciation is calculated using the straight line method over the useful lives of the assets of five years.
Lost or destroyed tools are not a significant source of revenue for the Company; however, the Company bills customers for the full cost of any tools which are lost and/or damaged in use and the cost and related accumulated depreciation are removed from the accounts and any resulting revenue or expense is recognized. The gain or loss on lost tools is recognized in the revenue section and cost of sales expense, respectively.
Intangible Assets.
The Company’s intangible assets, which are recorded at cost, consist primarily of the unamortized cost basis of issued and pending patents. These assets are being amortized on a straight line basis over the estimated useful lives of 15 years. The Company continually evaluates the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or impairment in value. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our Intangible assets, we may incur charges for impairment in the future.
Earnings or Loss Per Share
. Basic earnings or loss per common share equals net earnings or loss attributable to common shareholders divided by the weighted average shares outstanding during the year. Diluted earnings per share include the impact on dilution from all contingently issuable shares, including options, warrants and convertible securities. The common stock equivalents from contingent shares are determined by the treasury stock method.
Stock Based Compensation.
The Company accounts for stock-based employee compensation arrangements using the fair value method that requires that the fair value of employee awards issued, modified, repurchased or cancelled after implementation, under share-based payment arrangements, be measured as of the date the award is issued, modified, repurchased or cancelled. The resulting cost is then recognized in the statement of earnings over the service period.
The Company periodically issues common stock for acquisitions and services rendered. Common stock issued is valued at the estimated fair market value, as determined by management and the board of directors. Management and the board of directors consider market price quotations, recent stock offering prices and other factors in determining fair market value for purposes of valuing the common stock. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the various weighted average assumptions, including dividend yield, expected volatility, average risk-free interest rate and expected lives.
Income Taxes.
The Company uses the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.
Financial instruments.
Financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, notes payable, and debt.
The Company carries cash, accounts receivable, accounts payable and accrued expenses at historical costs; their respective estimated fair values approximate carrying values due to their current nature. The Company also periodically carries convertible debt. The fair values of the convertible debt instruments approximate carrying values based on the comparable market interest rates applicable to similar instruments.
Impairment of Long-Lived Assets.
The carrying values of long-lived assets, which include intangible assets, are evaluated whenever changes in circumstances indicate the carrying amount of such assets may not be recoverable. If necessary, the Company recognizes an impairment loss for the difference between the carrying amount of the assets and their estimated fair value. Fair value is based on current and anticipated future undiscounted cash flows.
Customer Deposits.
The Company receives deposits from customers under certain agreements. Deposits are usually liquidated over the period of product deliveries.
Recently Issued Accounting Pronouncements.
We have adopted recently issued accounting pronouncements and have determined that they have no material effect on our financial position, results of operations, or cash flow. We do not expect any recently issued but not yet adopted accounting pronouncements to have a material effect on our financial position, results of operations or cash flow.
Emerging Growth Company
.
Section 107 of the JOBS Act provides that an ”
emerging growth company
” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “
emerging growth company
” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
In June 2009, the Company entered into a Line of Credit Promissory Note (the “
Line of Credit
”) with Charles Wayne Tynon, the former Chief Executive Officer of the Company’s wholly-owned subsidiary Holdings. Pursuant to the Line of Credit, Mr. Tynon agreed to loan the Company up to $250,000. Any amounts borrowed under the Line of Credit bear interest at the rate of 6% per annum, and are payable at maturity, which maturity date was June 1, 2011. The Line of Credit is secured by a Security Agreement entered into between the Company and Mr. Tynon (the “
Security Agreement
”). At any time after June 1, 2010, Mr. Tynon could convert the then outstanding amount of the Line of Credit into shares of the Company’s common stock at a conversion price of $0.99 per share. The Security Agreement provided Mr. Tynon a first priority security interest in all of the Company’s current or future, machinery and equipment, inventory and proceeds or products derived therefrom, and rights under contracts, causes of action, documents, and evidence of title to inventory and contract rights. In December 2010, the Line of Credit and associated interest were paid in full.
In February 2010, the Company entered into a Convertible Promissory Note (as amended and restated from time to time, the “
First Note
”) with Herbert C. Pohlmann our majority shareholder and Director, pursuant to which Mr. Pohlmann converted $100,000 of a prior advance, $10,000 of expenses associated with the loan and accrued interest of $3,950 into the First Note in the principal amount of $113,950. The First Note was due and payable on or before February 1, 2012. Interest on the unpaid balance of the First Note accrued at a rate of 12% per annum payable monthly.
In February 2010, the Company entered into a second Convertible Promissory Note (as amended and restated from time to time, the “
Second Note
”) with Mr. Pohlmann, pursuant to which Mr. Pohlmann converted prior advances totaling $42,880 plus $5,574 in interest on said loans into the Second Note evidencing the principal sum of $48,454. The Second Note was due and payable on or before February 1, 2012. Interest on the unpaid balance of the Second Note accrued at a rate of 12% per annum payable monthly.
In February 2010, the Company entered into a third Convertible Promissory Note (as amended and restated from time to time, the “
Third Note
”) with Mr. Pohlmann, pursuant to which Mr. Pohlmann loaned the Company $50,000. The Third Note was due and payable on or before February 1, 2012. Interest on the unpaid balance of the Third Note accrued at a rate of 12% per annum payable monthly.
In May 2010, the Company entered into a fourth Convertible Promissory Note (as amended and restated from time to time, the “
Fourth Note
” and together with the First Note, Second Note and Third Note, the “
Convertible Promissory Notes
”) with Mr. Pohlmann, pursuant to which Mr. Pohlmann converted prior advances totaling $225,000, plus $34,547 of expenses incurred by Mr. Pohlmann in connection with such note into the Fourth Note evidencing the principal sum of $259,547. The Fourth Note was due and payable on or before May 13, 2012. Interest on the unpaid balance of the Fourth Note accrued at a rate of 12% per annum payable monthly.
The Convertible Promissory Notes were convertible into shares of the Company’s common stock, at a conversion price equal to $0.90 per share. In connection with the Company’s and Mr. Pohlmann’s entry into the Make Whole Agreement, described in greater detail under “
Liquidity and Capital Resources
”, above, the entire amount of the principal and accrued interest on the Convertible Promissory Notes was converted into an aggregate of 3,511,580 shares of the Company’s common stock in May 2011.
In November 2010, the Company entered into a Cancellation, Resignation, Repayment and Issuance Agreement (the “
Cancellation Agreement
”), with Charles Wayne Tynon, the former Chief Executive Officer of Holdings, the Company’s wholly-owned subsidiary, and the Company, pursuant to which Mr. Tynon agreed to (a) resign as Chief Executive Officer of Holdings; (b) agree to a payment schedule for the repayment of the Line of Credit; (c) cancel 1,140,000 shares of Holdings which he either held or was due pursuant to the terms of a Compensation Agreement, previously entered into between Holdings and Mr. Tynon (the “
Compensation Agreement
”); and to (d) cancel the Compensation Agreement. The Company in turn agreed to repay the Line of Credit pursuant to the terms of the Cancellation Agreement and to issue Mr. Tynon 10,000 shares of the Company’s common stock.
In November 2010, the Company entered into an Intellectual Property Purchase Agreement (the “
IP Purchase Agreement
”) with Jerry Swinford, the Company’s Executive Vice President and Chairman. Pursuant to the IP Purchase Agreement, the Company agreed to purchase the patents and pending patents owned and held by Mr. Swinford (including those Patents described above under “
Patents, Trademarks and Licenses
” for $25,000 in cash and $1,175,000 in the form of two promissory notes payable to Mr. Swinford (the “
Swinford Notes
”). The Company obtained an independent valuation in order to determine the value of the Patents. The first note, in the amount of $475,000 was due January 20, 2011, together with interest at the rate of 12% per annum, which note was paid in full in January 2011.
The second note in the amount of $700,000 is due September 15, 2015, and is payable in monthly installments of the lesser of $12,963 or the amount outstanding under such note per month, with the first such payment due on February 15, 2011. The Company also agreed to grant Mr. Swinford a security interest in all of the Company’s assets in connection with and to secure the repayment of the Swinford Notes and Holdings also agreed, pursuant to a Guaranty, to guaranty the repayment of the Swinford Notes. Mr. Pohlmann agreed to subordinate the repayment of his Convertible Promissory Notes (as described above) to the repayment of the Swinford Notes.
The IP Purchase Agreement also provided that in the event Mr. Swinford was required to pay taxes totaling more than 15% of the proceeds received by Mr. Swinford in connection with the payment of the Swinford Notes in any calendar year (the “
15% Limit
”), the Company would reimburse Mr. Swinford for any and all taxes due over such 15% Limit, which may substantially increase the amount due to Mr. Swinford from the Company in connection with the payment of the Swinford Notes.
In November 2010, the Company entered into an Executive Employment Agreement with Jerry Swinford, pursuant to which Mr. Swinford agreed to serve as Chief Executive Officer of the Company (which was subsequently amended by the parties entry into an amended agreement pursuant to which Mr. Swinford agreed to serve as Executive Vice President in December 2011 and was subsequently amended again in August 2012 and October 2012 (effective August 2012), in each case to revise certain sections of the agreement, which amendments have been reflected in the discussion below) for five years (automatically renewable for additional one year terms unless terminated by either party as provided in the agreement), which is described in greater detail above under
“
Directors, Executive Officers And Corporate Governance
”, “
Employment Agreements
”.
Pursuant to the Executive Employment Agreement, the Company granted Mr. Swinford an option to purchase 401,667 shares of the Company’s common stock (the “
Option
”), with 1,667 options vesting upon the parties entry into the agreement (the “
Initial Option
”), options to purchase the remaining amount of the Option vesting to Mr. Swinford as follows: 100,000 options on December 14, 2011 (the “
2011 Option
”); 100,000 options on December 31, 2012 (the “
2012 Option
”); 100,000 options on December 31, 2013 (the “
2013 Option
”); and 100,000 options on December 31, 2014 (the “
2014 Option
”), provided that Mr. Swinford is still employed (either as an officer or Director) by the Company on such vesting date(s). The Initial Option has an exercise price of $7.50 per share, the 2011 Option, 2012 Option, 2013 Option and 2014 Option have an exercise price of $1.00 per share. The Options have a term of 10 years from the original grant date (November 30, 2010) and include a cashless exercise provision.
The Board of Directors (consisting of himself and his son, Jason Swinford) along with the Company’s majority shareholder also agreed to pay Mr. Swinford a discretionary bonus of $108,000 in December 2011, which was not granted based on any certain revenue or EBITDA targets, but was instead granted at the discretion of the Board of Directors based on new technology developed for the Company by Mr. Swinford during the 2011 calendar year.
Finally, pursuant to the Executive Employment Agreement, Mr. Swinford agreed to cancel the 2,050,000 shares of common stock of Holdings which he was previously issued and any rights to additional shares pursuant to the employment agreement he previously entered into with Holdings as well as 1,000,000 shares of Series A Preferred Stock of the Company which he then held in consideration for 10,000 shares of the Company’s common stock. A required term and condition of the cancellation of the Series A Preferred Stock of the Company was the entry by Mr. Pohlmann into the Voting Agreement described below. As a result of this cancellation, there was a change of control whereby Mr. Pohlmann obtained voting control over the Company.
In November 2010, Jason Swinford, Jerry Swinford’s son, also entered into an Executive Employment Agreement with the Company, whereby Jason Swinford agreed to serve as the Chief Operating Officer of the Company (which agreement was revised and amended to provide for Mr. Swinford to serve as Chief Executive Officer in December 2011 and was subsequently amended again in August 2012 and October 2012 (effective August 2012), in each case to revise certain other sections of the agreement, which amendments have been reflected in the discussion below) in consideration for an annual base salary of $132,000 per year ($200,000 per year subsequent to the December 2011 amendment), for a term of five years (automatically renewable for additional one year terms unless terminated by either party as provided in the agreement), which is described in greater detail above under “
Employment Agreements.
” Jason Swinford was also granted an identical Option as Jerry Swinford was granted as discussed above.
The Board of Directors (consisting of himself and his father, Jerry Swinford) along with the Company’s majority shareholder also agreed to pay Mr. Swinford a discretionary bonus of $144,000 in December 2011, which was not granted based on any certain revenue or EBITDA targets, but was instead granted at the discretion of the Board of Directors based on new sales generated by Mr. Swinford for the Company during the 2011 calendar year.
In January 2011, the Company’s majority shareholder and Director, Mr. Pohlmann, and the Company’s then Chief Executive Officer and then sole Director, Jerry Swinford, entered into a Voting Agreement, pursuant to which Mr. Herbert C. Pohlmann agreed to vote the shares of the Company which he owns as directed by Mr. Swinford from time to time, to appoint at least 40% of the Company’s Board of Directors, rounded up to the nearest whole number of Directors. The Company currently anticipates increasing the number of its Board of Directors to five (5) members in the future, which would provide Mr. Swinford the rights to direct Mr. Pohlmann to appoint two (2) of such five (5) Directors, as determined by Mr. Swinford in his sole discretion, pursuant to the Voting Agreement, which remains in effect until December 31, 2015.
In January 2011, the Company entered into a consulting agreement with Charles Wayne Tynon, the former Chief Executive Officer of Holdings, pursuant to which Mr. Tynon agreed to provide the Company consulting services in consideration for $5,000 per month, which agreement was terminated effective March 31, 2012.
In June 2011, Mr. Pohlmann, the Company’s largest shareholder and a current Director, agreed to provide Mr. Swinford, the Company’s Executive Vice President and Chairman, an aggregate of $3.75 million, adjusted for the payment of Mr. Pohlmann’s estate taxes, from Mr. Pohlmann’s estate upon his death; provided that if Mr. Swinford were to pre-decease Mr. Pohlmann, such funds would be distributed 50% to Mr. Swinford’s spouse and 50% to his descendants. Mr. Pohlmann’s provision for Mr. Swinford from his estate after his death was not a required term or condition of any agreement, was voluntarily provided to Mr. Swinford by Mr. Pohlmann, and can be changed at any time by Mr. Pohlmann prior to his death.
From May 2007 to October 2011, Mr. Pohlmann purchased an aggregate of 2,184,854 shares of the Company’s common stock in consideration for an aggregate of $4.3 million in funding, which does not include the effects of the Make Whole Agreement or the Convertible Promissory Notes.
In December 2011, the Company sold an aggregate of 1,600,000 units to Mr. Pohlmann, each consisting of (a) one share of common stock and (b) one common stock purchase warrant to purchase one share of common stock with a five year term and an exercise price of $1.00 per share (collectively the “
Units
”) for an aggregate of $1,600,000 or $1.00 per Unit. A total of $200,000 of the amount due in connection with the purchase of the Units was due prior to December 31, 2011; a total of $200,000 was due prior to January 25, 2012; a total of $100,000 was due prior to February 28, 2012; a total of $1,000,000 was due prior to April 30, 2012; and a total of $100,000 was due prior to May 31, 2012, with any and all unpaid amounts treated for all purposes as an outstanding promissory note due to the Company from Mr. Pohlmann, which notes did not accrue interest. All of the amounts due in connection with the December 2011 subscription have been paid to date.
In January 2012, Jerry Swinford, the Company’s Executive Vice President and Chairman entered into an Intellectual Property Assignment agreement with the Company, pursuant to which he assigned all rights to the Patents (defined above under “
Patents, Trademarks and Licenses
”) to the Company
, provided that Mr. Swinford has a first priority security interest over the Patents until such time as the promissory notes he was provided in connection with the IP Purchase Agreement (described above) are satisfied in full
.
In January 2012, the Company sold 52,500 Units to Richard J. Connaughton, a former Director of the Company, in consideration for $52,500 or $1.00 per unit. A total of $22,500 of the amount due in connection with the purchase of the Units was payable at the time of the parties’ entry into the subscription agreement evidencing the sale; a total of $2,500 was due prior to February 28, 2012; a total of $25,000 was due prior to April 30, 2012; and a total of $2,500 was due prior to May 31, 2012, with any and all unpaid amounts treated for all purposes as an outstanding promissory note due to the Company from Mr. Connaughton, which notes did not accrue interest.
All of the amounts due in connection with the January 2012 subscription have been paid to date.
The shares of common stock and the shares of common stock issuable upon exercise of the warrants are being registered herein.
Effective February 1, 2012, the number of Directors of the Company was increased from two (2) to five (5) and Herbert C. Pohlmann, Richard J. Connaughton and John Callis were appointed as Directors of the Company. Mr. Callis is the son-in-law of our Director and majority shareholder, Herbert C. Pohlmann.
Effective June 20, 2012 and June 21, 2012, respectively, Mr. Callis and Mr. Connaughton resigned as Directors of the Company.
Effective August 28, 2012, the Board of Directors of the Company granted the Company’s Director and majority shareholder, Herbert C. Pohlmann, options to purchase an aggregate of 400,000 shares of the Company’s common stock at an exercise price of $1.00 per share and with a term of ten years in consideration for among other things, services rendered as the Company’s Director from February 1, 2012 to August 28, 2012.
Effective August 28, 2012, the Board of Directors of the Company granted John Callis, a former Director of the Company, (a) warrants to purchase 220,000 shares of common stock of the Company with a term of one (1) year and an exercise price of $1.00 per share; and (b) warrants to purchase 52,500 shares of common stock of the Company with a term expiring on January 5, 2017 and an exercise price of $1.00 per share (collectively, the “
Warrants
”), in consideration for funding previously provided to the Company. The shares of common stock and the shares of common stock issuable upon exercise of the Warrants are being registered herein.
In September 2012, the Board of Directors approved a discretionary bonus of $108,000 for Jerry Swinford and a discretionary bonus of $200,000 for Jason Swinford, for the year ended December 31, 2012. The bonuses were not granted based on any certain revenue or EBITDA targets, but were instead granted at the discretion of the Board of Directors based on new technology developed for the Company by Jerry Swinford and on new sales generated by Jason Swinford during the 2012 calendar year.
On December 5, 2012, and effective November 30, 2010, the Company, Jerry Swinford and Holdings entered into a Series A Preferred Stock Cancellation Agreement pursuant to which Mr. Swinford cancelled the 1,000,000 shares of Series A Preferred Stock of Holdings which he held and the Company agreed to pay Mr. Swinford $1,000 ($0.001 per share of Series A Preferred Stock) in connection with such cancellation. As a result of the cancellation, the Company has sole voting control over and holds 100% of the outstanding securities of Holdings.
In January 2013, Mr. Pohlmann gifted 1,650,000 shares of restricted common stock of the Company which he held to two irrevocable family trusts in the names of his daughters (825,000 shares in total to each trust).
DESCRIPTION OF CAPITAL STOCK
Common Stock
We have authorized capital stock consisting of 200,000,000 shares of common stock, $0.001 par value per share and 5,000,000 shares of preferred stock, $0.001 par value per share ("
Preferred Stock
"). We have 1,000,000 designated shares of Series A Preferred Stock and 1,000,000 designated shares of Series B Preferred Stock.
Holders of shares of common stock are entitled to one vote per share on each matter submitted to a vote of shareholders. In the event of liquidation, holders of common stock are entitled to share pro rata in the distribution of assets remaining after payment of liabilities, if any. Holders of common stock have no cumulative voting rights, and, accordingly, the holders of a majority of the outstanding shares have the ability to elect all of the Directors. Holders of common stock have no preemptive or other rights to subscribe for shares. Holders of common stock are entitled to such dividends as may be declared by the Board out of funds legally available therefore. The outstanding shares of common stock are validly issued, fully paid and non-assessable.
Common Stock
Voting Rights
. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders. Directors are appointed by a plurality of the votes present at any special or annual meeting of shareholders (by proxy or in person), and a majority of the votes present at any special or annual meeting of shareholders (by proxy or in person) shall determine all other matters. There is no cumulative voting of the election of Directors then standing for election. The common stock is not entitled to pre-emptive rights and is not subject to conversion or redemption.
Dividend Rights
. The holders of outstanding shares of common stock are entitled to receive dividends out of assets or funds legally available for the payment of dividends at such times and in such amounts as the board from time to time may determine.
Liquidation
. Upon liquidation, dissolution or winding up of the Company, the assets legally available for distribution to stockholders are distributable ratably among the holders of the common stock after payment of liquidation preferences, if any, on any outstanding payment of other claims of creditors.
Other Rights
. All of our outstanding shares of common stock are fully paid and non-assessable. The holders of our common stock have no preemptive rights and no rights to convert their common stock into any other securities, and our common stock is not subject to any redemption or sinking fund provisions.
Preferred Stock
Shares of Preferred Stock may be issued from time to time in one or more series, each of which shall have such distinctive designation or title as shall be determined by our Board prior to the issuance of any shares thereof. Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be adopted from time to time by the Board prior to the issuance of any shares thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of our capital stock entitled to vote generally in the election of the directors, voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation.
Additionally, while it is not possible to state the actual effect of the issuance of any additional shares of Preferred Stock on the rights of holders of the common stock until the Board determines the specific rights of the holders of any additional shares of Preferred Stock, such rights may be superior to those associated with our common stock, and may include:
o
|
Restricting dividends on the common stock;
|
o
|
Rights and preferences including dividend and dissolution rights, which are superior to our common stock;
|
o
|
Diluting the voting power of the common stock;
|
o
|
Impairing the liquidation rights of the common stock; or
|
o
|
Delaying or preventing a change in control of the Company without further action by the stockholders.
|
Series A Preferred Stock
We designated 1,000,000 shares of Series A Preferred Stock, $0.001 par value per share in May 2007 (the "
Series A Preferred Stock
"). The Series A Preferred Stock had no dividend rights, no liquidation preference, no redemption rights and no conversion rights. Shortly after being designated, we granted all 1,000,000 shares of such Series A Preferred Stock to our Executive Vice President and Chairman, Jerry Swinford, who held such shares until his entry into the Executive Employment Agreement in November 2010, described above under “
Employment Agreements
” pursuant to which the Series A Preferred Stock was cancelled. The Series A Preferred Stock had the right, voting in aggregate, to vote on all shareholder matters equal to fifty-one percent (51%) of the total vote. Additionally, we were not allowed to adopt any amendments to our Bylaws, Articles of Incorporation, as amended, make any changes to the Certificate of Designations establishing the Series A Preferred Stock, or effect any reclassification of the Series A Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of the Series A Preferred Stock.
In addition to our Series A Preferred Stock, Holdings has 1,000,000 shares of Series A Preferred Stock designated and previously had 1,000,000 shares outstanding with substantially similar terms and conditions to our Series A Preferred Stock as described above, which shares were held by Jerry Swinford, our Executive Vice President and Chairman. On December 5, 2012, and effective November 30, 2010, the Company, Jerry Swinford and Holdings entered into a Series A Preferred Stock Cancellation Agreement pursuant to which Mr. Swinford cancelled the 1,000,000 shares of Series A Preferred Stock of Holdings which he held and the Company agreed to pay Mr. Swinford $1,000 ($0.001 per share of Series A Preferred Stock) in connection with such cancellation.
Series B Preferred Stock
In June 2007, we designated 1,000,000 shares of Series B Preferred Stock and subsequently issued such Series B Preferred Stock to Grifco. The Series B Preferred Stock have no voting rights, no dividend rights, and no conversion rights (provided that such shares were previously convertible into 66,667 shares of our common stock (0.0667 of one share for each share of Series B Preferred Stock outstanding), prior to November 30, 2012, only if Grifco exercised its option to acquire the Series A Preferred Stock of the Company for aggregate consideration of $100, which option and which conversion rights have since expired). We believe that Grifco is no longer an operating entity.
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market for Common Stock
The common stock of the Company is currently quoted on the OTC Pink Market (otherwise known as the "
pink sheets
") under the symbol "
CTBG
". However, the fact that our securities have limited and sporadic trading on the OTC Pink Market does not by itself constitute a public market, and as such, historical price quotations relating to trades in our stock on the OTC Pink Market have not been included in this registration statement. In the future, following the effectiveness of our registration statement, we plan to apply for quotation on the Over-The-Counter Bulletin Board,
a national securities exchange or the NASDAQ trading market, depending on where our management decides to quote/list our common stock in their sole discretion, and provided that we meet any and all applicable listing criteria.
Holders of Our Common Stock and Preferred Stock
As of January 28, 2013, we had 15,651,827 shares of common stock outstanding, held by 861 shareholders of record, no shares of Series A Preferred Stock issued or outstanding, and 1,000,000 shares of Series B Preferred Stock issued and outstanding held by one shareholder of record, as described in greater detail above under “
Description of Capital Stock.
”
Dividends
To date, we have not declared or paid any dividends on our outstanding shares. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings to finance our operations and future growth, our Board of Directors will have discretion to declare and pay dividends in the future. Payment of dividends in the future will depend upon our earnings, capital requirements and other factors, which our Board of Directors may deem relevant.
There are no restrictions in our Articles of Incorporation or Bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:
|
1.
|
We would not be able to pay our debts as they become due in the usual course of business, or;
|
|
2.
|
Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
|
Equity Compensation Plan Information
On January 19, 2011, and with an effective date of November 30, 2010, the Company’s then sole Director, Jerry Swinford and its majority shareholder, Herbert C. Pohlmann approved the Company’s 2010 Stock Incentive Plan, which allows the Board of Directors to grant up to an aggregate of 83,333 qualified and non-qualified stock options, restricted stock and performance based awards of securities to the Company’s officers, Directors and consultants to help attract and retain qualified Company personnel (the “2010 Stock Plan”).
On and effective January 12, 2012, the Company’s Board of Directors and its majority shareholder, Herbert C. Pohlmann, approved the Company’s 2012 Stock Incentive Plan, which allows the Board of Directors to grant up to an aggregate of 750,000 qualified and non-qualified stock options, restricted stock and performance based awards of securities to the Company’s officers, Directors and consultants to help attract and retain qualified Company personnel (the “2012 Stock Plan” and together with the 2010 Stock Plan, the “Stock Plans”).
The following table provides information as of the filing of this report regarding the Plans (including individual compensation arrangements) under which equity securities are authorized for issuance:
Plan Category
|
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
|
|
Weighted-average exercise price of outstanding options, warrants and rights
|
|
Number of securities available for future issuance under equity compensation plans (excluding those in first column)
*
|
Equity compensation plans approved by the security holders
|
|
600,000
|
|
$1.04
|
|
233,333
|
Equity compensation plans not approved by the security holders
|
|
875,834
|
|
$1.00
|
|
-
|
Total
|
|
1,475,834
|
|
|
|
233,333
|
* Also takes into account modified and terminated options originally issued under the 2010 Stock Plan.
SELLING STOCKHOLDERS
This Prospectus relates to the resale of 887,501 shares of common stock by the Selling Stockholders. The table below sets forth information with respect to the resale of shares of common stock by the Selling Stockholders. We will not receive any proceeds from the resale of common stock by the Selling Stockholders for shares currently outstanding. The Selling Stockholders are not broker/dealers and/or affiliated with a broker/dealer. Except as described in footnotes below, the Selling Stockholders have not had a material relationship with us, our predecessors or affiliates during the past three years.
Selling Stockholder
|
Common Stock Beneficially Owned Before Resale
|
|
Amount Offered
|
|
Shares Beneficially Owned After Resale(1)
|
Percentage Owned After Offering
|
|
|
|
|
|
|
|
Charles Wayne Tynon (2)
|
10,000
|
|
10,000
|
|
-
|
-
|
John Callis (3)
|
439,167
|
(4)
|
439,167
|
(5)
|
-
|
-
|
Richard Connaughton (6)
|
438,334
|
(7)
|
438,334
|
(8)
|
-
|
-
|
TOTAL
|
887,501
|
|
887,501
|
|
|
|
|
|
|
|
|
|
|
Notes
(1)
|
Assumes all shares offered herein are sold.
|
|
|
(2)
|
Former Chief Executive Officer and President of Holdings, the Company’s wholly-owned subsidiary, which position he held from June 1, 2009 to November 23, 2010. Mr. Tynon no longer holds any position with the Company or its subsidiaries and the consulting agreement the Company previously had with Mr. Tynon was terminated on March 31, 2012.
|
|
|
(3)
|
Former Director of the Company from February 1, 2012 to June 20, 2012. Mr. Callis no longer holds any position with the Company or its subsidiaries. Mr. Callis is the son-in-law of our Director and majority shareholder, Herbert C. Pohlmann.
|
|
|
(4)
|
Includes (a) warrants to purchase 220,000 shares of common stock of the Company which expire on August 28, 2013, with an exercise price of $1.00 per share; and (b) warrants to purchase 52,500 shares of common stock of the Company with a term expiring on January 5, 2017 and an exercise price of $1.00 per share.
|
|
|
(5)
|
Includes shares of common stock issuable upon exercise of the warrants described in footnote 4, above.
|
|
|
(6)
|
Former Director of the Company from February 1, 2012 to June 21, 2012. Mr. Connaughton no longer holds any position with the Company or its subsidiaries.
|
|
|
(7)
|
Includes warrants to purchase 52,500 shares of common stock of the Company with a term expiring on January 5, 2017 and an exercise price of $1.00 per share.
|
|
|
(8)
|
Includes shares of common stock issuable upon exercise of the warrants described in footnote 7, above.
|
The Selling Stockholders and any broker or dealers who act in connection with the sale of the shares may be deemed to be “
underwriters
” within the meaning of the Securities Act of 1933, as amended, and any commissions received by them and any profit on any resale of the shares as a principal might be deemed to be underwriting discounts and commissions under the Securities Act.
SHARES AVAILABLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock could adversely affect market prices prevailing from time to time, and could impair our ability to raise capital through the sale of equity securities.
Upon the date of this Prospectus, there are
15,651,827
shares of common stock issued and outstanding. Upon the effectiveness of this Registration Statement, 887,501 shares of common stock to be resold pursuant to this Prospectus (including 325,000 shares issuable upon exercise of warrants) will be eligible for immediate resale in the public market if and when any market for the common stock develops. Additionally, 14,422,699 shares of our currently issued and outstanding common stock which are not being registered pursuant to this Registration Statement will constitute “
restricted securities
” as that term is defined by Rule 144 of the Securities Act of 1933, as amended (the “
Act
”) and bear appropriate legends, restricting transferability. The Company may also raise capital in the future by issuing additional restricted shares to investors. In addition to the 887,501 shares being registered herein and the 14,422,699 “
restricted securities
” which are currently outstanding, an aggregate of 666,627 shares of the Company are non-“
restricted securities
” currently eligible to be freely traded on the OTC Pink Sheets market and will be eligible to be freely traded on the Over-The-Counter Bulletin Board, a national securities exchange or the NASDAQ trading market, depending on where our management decides to quote/list our common stock in their sole discretion, and provided that we meet any and all applicable listing criteria, following the effectiveness of our Registration Statement of which this Prospectus is a part.
“
Restricted securities
” may not be sold except pursuant to an effective registration statement filed by us or an applicable exemption from registration, including an exemption under Rule 144 promulgated under the Act.
Pursuant to Rule 144 of the Securities Act of 1933, as amended (“
Rule 144
”), a “
shell company
” is defined as a company that has no or nominal operations; and, either no or nominal assets; assets consisting solely of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets. As such, we were previously a “
shell company
” pursuant to Rule 144 and as such sales of our securities pursuant to Rule 144 are not able to be made until 1) we have ceased to be a “
shell company
” (we believe that we ceased to be a “shell company” in approximately November 2005); 2) we are subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (which we will be following the effectiveness of the Registration Statement of which this Prospectus is a part), and have filed all of our required periodic reports for the previous one year period prior to any sale; and a period of at least twelve months has elapsed from the date “
Form 10 information
” has been filed with the Commission reflecting the Company’s status as a non-“
shell company
” (which information is included in our Registration Statement). As such, none of our securities will be eligible to be sold pursuant to Rule 144 until at least a year after the date that our Registration Statement is declared effective by the Commission and any “
restricted shares
” which are not registered herein will have no liquidity and will in fact be ineligible to be resold until and unless such securities are registered with the Commission and/or until a year after our Registration Statement has been declared effective and the other requirements of Rule 144 have been complied with, as described above.
Assuming our Registration Statement is declared effective by the Commission and we are not deemed to be a “
shell company
” in the future and we otherwise meet the requirements of Rule 144, including our status as a “
reporting company
”, a person (or persons whose shares are aggregated) who owns “
restricted securities
” that were purchased from us (or any affiliate) at least one year previously (six months after a period of at least one year has elapsed after the date of the Registration Statement), would be entitled to sell such securities without restrictions other than the availability of current public information about us and the requirement that we continue to timely file our periodic filings for one year from the date they acquired such securities. A person who may be deemed our affiliate, who owns “
restricted securities
” that were purchased from us (or any affiliate) at least one year previously (six months after a period of at least one year has elapsed after the date of our Registration Statement), would be entitled to sell within any three-month period a number of shares that does not exceed 1% of the then outstanding shares of the Company’s common stock. Sales by affiliates are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us. If the Company has complied with the requirements above, and continues to be a “
reporting company
” and timely file its filings, a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale, and who owns “
restricted securities
” that were purchased from us (or any affiliate) at least one year previously, would be entitled to sell such shares under Rule 144 without restrictions.
In the event we become a “
shell company
” or non-“
reporting company
” in the future, under Rule 144, due to the fact that we are deemed to be a former “
shell company
”, no sales of our “
restricted securities
” are eligible to be made pursuant to Rule 144 until we comply with the requirements of Rule 144, as described above, including, in the event we do not become a “
shell company
”, becoming current in our filings with the Commission and in the event we do become a “
shell company
”, complying with Rule 144 above, as such relates to “
shell companies.
”