ENERGY & TECHNOLOGY CORP. Files SEC form 10-K, Annual Report

General

We have a patented process which can help companies within the energy industry reach deep energy reserves other equipment cannot.

The following list highlights a few areas of opportunity to expand the Company's business:

Sales and marketing efforts: Although we have been impacted by the downturn in the national and global economies, we have grown over the historical period without an aggressive marketing and sales effort. Currently, new business is generated from referrals, technical sessions given to oil & gas and energy related companies, a website and through the use of a marketing company on a limited basis. To date, we have hired one in-house salesperson and another sales person based in Louisiana who visits with customers. Currently, we have two employee whose duties are focused on sales, marketing, and promotional activities for the Company. Management believes revenue can be increased by expanding the Company's sales force.

Applying for additional patents to protect proprietary rights: We have developed international patent-pending new inspection technology needed in order to reach deep energy reserves present technology cannot reach. Our expandable inspection technology helps the companies in the energy industry retrieve a large amount of energy reserves that cannot be retrieved with current technology. We have manufactured several pieces of equipment in-house that have enabled us to successfully serve the energy industry. Due to proprietary infringement risk, we have discontinued manufacturing the equipment for sale to third parties. By securing a patent protecting our proprietary technology, we could consider manufacturing equipment for sale again, which would open a new line of revenue.

Introduction of complementary services: We are continually adding new services in order to meet customer demand. Most recently, we began drilling equipment inspection services. Other areas management has identified as potential growth avenues include vessel inspection and inspection of pipelines in service. We are working to acquire pipe threading equipment which could be attached to the inspection assembly line and provide additional services for a very low increased cost to our customers.

Geographic expansion in the domestic and international markets: We currently derive the majority of revenue from the Houston, Texas market, where many of our clients are based. There are several other markets that could be better served, such as in Louisiana where a new plant in Abbeville, Louisiana has been constructed in order to serve the deep wells in the Gulf of Mexico. This plant became operational in late 2008. Other expansions are being considered through the opening of additional full-service, local plants. Furthermore, we maintain relations with sales representatives in the Mexico, Saudi Arabia, and Middle East markets that could be better utilized if we are able to locally serve customers. Lastly, we have Canadian customers that utilize our services on a limited basis, due to the high cost of shipping heavy pipes. To date, we have not had the capital or human resources to establish plants in these potential markets.

We continue to seek other companies which can complement our pipe and inspection business with the goal of securing these businesses through a combination of cash and stock payments. All of these expansion plans rely heavily on raising capital through a public offering of additional stock which would be used to fund our acquisitions.

We have a customer base of approximately 50 accounts, and are continually expanding our customer base to increase revenue growth. Currently, we serve customers that are oil companies, steel mills, material suppliers, drilling companies, material rental companies and engineering companies. Our customer relationships average over ten years which provides us repeat business.

Critical Accounting Policies

The Company has identified the following accounting policies to be the critical accounting policies of the Company:

Revenue Recognition. Revenue for inspection services is recognized upon completion of the services rendered. Revenue for the sales of pipe is recognized when pipe is delivered and the customer takes ownership and assumes the risks of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable.

Inventory. Inventory is stated at the lower of cost determined by the specific identification method or market. At December 31, 2009 and 2008, inventory consisted of drilling and casing pipe available for sale.

Property and Equipment. Property and equipment are stated at cost. Expenditures for property and equipment and items that substantially increase the useful lives of existing assets are capitalized at cost and depreciated. Routine expenditures for repairs and maintenance are expensed as incurred. The cost and related accumulated depreciation of property and equipment disposed of are eliminated from the accounts, and any resulting gain or loss is recognized. Depreciation is provided utilizing the straight-line method over the estimated useful lives of the assets capitalized.

Valuation of Long-Lived Assets. In the event facts and circumstances indicate that carrying amounts of long-lived assets may be impaired, the Company evaluates the recoverability of its long-lived assets using the estimated future undiscounted cash flows associated with the asset compared to the asset's carrying amount to determine if a write-down is required. Any impairment loss is measured as the difference between the carrying amount and the fair value of the impaired asset.

Discussion of Changes in Financial Condition from December 31, 2008 to December 31, 2009

At December 31, 2009, total assets amounted to $15,883,341 compared to $20,047,298 at December 31, 2008, a decrease of $4,163,957, or 20.8%. The decrease is primarily due to a decrease in inventory of $1,538,737, a decrease in accounts receivable of $617,853, a decrease of property and equipment of $2,938,493. These decreases were partially offset by an increase in the Company's cash of $1,054,055.

Our liabilities at December 31, 2009, totaled $9.142.014 compared to $17,587,249 at December 31, 2008, a decrease $8,445,235, or 25.6%. The decrease is primarily due to a decrease in accounts payable of $2,062,305, a decrease in accrued liability for capital expenditures of $7,235,717. These decreases were partially offset by an increase in accrued rent of $150,000, an increase in deferred taxes payable of $161,503 and an increase in notes payable of $551,581.

Total stockholder's equity increased from $2,460,049 at December 31, 2008, to $6,741,327 at December 31, 2009. This increase was due to net income generated for the year ended December 31, 2009 of $346,061, and the issuance of 3,580,000 shares of the Company's common stock in exchange for the reduction of debt owed to a vendor in the amount of $3,935,217.

Cash and Cash Equivalents

The increase in cash and cash equivalents was primarily due to the Company's ability to collect our trade receivable and to liquidate debt with stock issued, rather than utilizing cash payments.

Inventory

We began purchasing drilling pipe for sale to customers in late, 2007. This was an opportunity for us to expand our services to our customers. Inventory of drilling pipe at December 31, 2009 was $5,563,557 compared to 7,102,294 at December 31, 2008. It is anticipated that the Company will continue its efforts to expand its sales of oilfield pipe. This decrease is primarily attributable to approximately $1.3 million of pipe inventory returned to the vendor during 2009.

Property and Equipment

The decrease in property and equipment is primarily due to the slowdown in the national and global economies during 2008 and 2009. The Abbeville facility, which became operational in late 2008, was developed in order to serve the deep wells in the Gulf of Mexico. However, due to the recent slowdown in the oil and gas industry, we have not been able to maximize the capacity of this facility. As a result, we cancelled equipment orders and returned some equipment to suppliers in 2009. The equipment pertaining to the cancelled orders and returned to suppliers was recognized as construction in progress at December 31, 2008. The amount of the order canceled with the supplier totaled approximately $3.3 million.

Deferred Tax Asset/Income Taxes Payable

Due to the Company's profitability for the year ended December 31, 2009, our deferred tax asset associated with federal contribution and capital loss carryforwards and general business credits has been reduced to a balance of $62,687 at December 31, 2009. The remaining balance of $10,824 is associated with certain net operating losses recognized at the state level for which there is not sufficient net income generated to fully offset the balance. In addition to reducing our deferred tax asset, we have recorded income taxes payable for the estimated amount of state income taxes associated with our taxable income which exceeds available net operating loss carryforwards.

Accounts Payable

Accounts payable at December 31, 2009 totaled $3,345,076 compared to $5,407,381 at December 31, 2008, a decrease of $2,062,305. This decrease is primarily due to the return of drilling and casing pipe acquired in 2008 and returned to the vendor during 2009. We reduced our inventory asset and vendor payable by approximately $1.3 million.

Accrued Liability for Capital Expenditures

At December 31, 2008, we recognized a liability in the amount of $7,235,717 due to a supplier of equipment needed for the development of our Abbeville facility. As noted previously, we cancelled an order for equipment associated with the development of our Abbeville facility which amounted to approximately $3.3 million. In addition, in December 2009, we issued 3,3580,000 shares of our common stock to this vendor to liquidate the remaining liability owed this vendor for equipment purchased and placed into service. This transaction reduced our obligation to this vendor by approximately $3.9 million

Common Stock Outstanding

On April 1, 2009, we entered into an agreement with American Interest, LLC and the Sfeir Family Trust whereby the two stockholders agreed to cancel 118,046,500 common shares and 47,053,500 common shares, respectively, for the consideration to be re-issued in the future. On December 30, 2009, we agreed to issue 3,850,000 shares of our common stock in exchange for the remaining balance due to a supplier of equipment to the Company, which totaled $3,935,217 at December 31, 2009. Although the stock certificate was issued to the supplier on March 19, 2010, we considered the stock to be "paid but not issued" at December 31, 2009.

Discussion of Results of Operations for the Year Ended December 31, 2009 compared to the Year Ended December 31, 2008

Revenues

Our revenue for the year ended December 31, 2009, was $6,863,367 compared to $10,027,953 for the year ended December 31, 2008, a decrease of $3,164,586, or 31.6%. The decrease is attributable primarily to the lack of sales of drilling pipe during the year ended December 31, 2009 in comparison to sales for the year ended December 31, 2008. During 2008, we obtained agreements with three oilfield pipe steel mills and began selling Oil Country Tubular exploration and drilling pipe. This decrease was partially offset by the increase in pipe storage fees for 2009. Storage fee revenue increased $861,769, or 274.94%, from $1,175,203 for the year ended December 31, 2009 from $313,434 for the year ended December 31, 2008. We store pipe inventory for our customers and expanded our yard in 2009 to accommodate other pipe manufacturers and distributors.

The following table presents the composition of revenue for the year December 31, 2009 and 2008:

Cost of Revenue and Gross Profit

Our cost of revenue for the year ended December 31, 2009, was $3,815,250, or 55.6% of revenues, compared to $6,031,965, or 60.2% of revenues, for the year ended December 31, 2008. The overall decrease in our cost of revenue is primarily due to our lack of sales of oilfield drilling pipe. The lack of sales of oilfield drilling pipe is also the primary reason for the decrease in cost of sales as a percentage of revenues. Our margins with our pipe sales in 2008 were relatively low in comparison to the margins on our other revenue sources.

During the year ended December 31, 2008, we agreed to take back from a customer drilling pipe that had been sold in the second quarter of 2008 due to incorrect specifications associated with the drilling pipe. The sale associated with the drilling pipe was reversed in the third quarter of 2008, and the cost of the drilling pipe returned to us was added back into inventory. Upon further inspection of the drilling pipe returned to us, we noted that a certain amount of the pipe was damaged or had other defects. As such, we reduced the recorded value of this drilling pipe to its estimated market value. This adjustment was recognized in our cost of sales.

The following table presents the composition of cost of revenue for the year ended December 31, 2009 and 2008:

Due to limitations with the pool of qualified individuals, we utilized the services of subcontractors to assist us in providing timely and quality service to our customers. We will continue our efforts to attract employ and retain qualified individuals to serve the needs of our customers. The increase in depreciation expense was the result of additional equipment for the Abbeville, Louisiana plant being placed in service during 2008. The increase in other costs is due primarily to increases in hauling costs associated with hauling customer pipe that may be received at the Port of Houston to our Houston facility. Much of this cost is able to be charged back to the customer.

Operating Expenses

For the year ended December 31, 2009, our operating expenses totaled $2,300,071, as compared to $1,558,144, representing an increase of $741,927, or 47.6%. The largest component of our operating expenses for 2009 consists of salaries and wages, rent, professional services, and office supplies and expenses. Salaries and wages for general and administrative personnel was $947,669 for the year ended December 31, 2009, compared to $680,900 for the year ended December 31, 2008, an increase of $266,769, or 39.2%. This increase was primarily the result of additional administrative personnel hired during 2009. The additional personnel hired were to enhance the following areas: investor relations, business development, accounting, and information technology.

Rent expense totaled $267,313 for the year ended December 31, 2009, as compared to $244,145 for the year ended December 31, 2008, an increase of $23,168, or 9.5%. Rent expense for both the year ended December 31, 2009, and for the year ended December 31, 2008, pertains primarily to our rental of office space for our headquarters in Lafayette as well as our rental of land and facilities for operating purposes. The increase is attributable to normal escalation provisions within our lease agreements and the use of additional land in the Houston yard for storing pipe in accordance with agreements with the steel mills.

Professional services expense increased from $138,323 for the year ended December 31, 2008, to $299,197 for the year ended December 31, 2009, an increase of $160,874, or 116.3%. The increase is primarily a result of expenses we incurred throughout the year ended December 31, 2009 for consulting services pertaining to training and certification classes for our employees and consulting services for our compliance with ISO standards, legal fees associated with legal proceedings related to pipe agreements and negotiations with foreign parties, as well as an increase in accounting fees associated with the growth of the Company over the past year.

Office supplies and expenses increased from $90,956 for the year ended December 31, 2008, to $120,736 for the year ended December 31, 2009, an increase of $29,780, or 32.7%. The increase is primarily a result of the increase in administrative personnel and the overall costs associated with our efforts to grow the Company.

Other Income and Expense

Other income and expense consists of investment income, gain or loss on sale of assets, and interest expense. For the year ended December 31, 2009, other expense, net of other income, totaled $92,902, as compared to other expense, net of other income, of $99,590 for the year ended December 31, 2008.

Investment income, which consists of interest, dividends, realized gains and losses, and unrealized gains and losses, amounted to $13,020 for the year ended December 31, 2009, compared to an investment loss of $3,727 for the year ended December 31, 2008. During the third quarter of 2008, we opened an investment account which consists primarily of a fixed-income mutual fund. In accordance with accounting guidance for investment in marketable debt and equity securities,, we classified our investment in this fixed-income mutual fund as "Trading" since it is our intention to utilize this investment account as a source of liquidity when needed, and to invest excess cash we may have in to a relatively low-risk investment vehicle. Accordingly, we have recorded our investments at fair market value. For the year ended December 31, 2009, we realized a gain of approximately $6,736 on the sales of investments, as well as recognized interest and dividend income of $6,284. At December 31, 2009, the investment account consisted solely of cash equivalents.

Interest expense totaled $99,637 for the year ended December 31, 2009, as compared to $95,863 for the year ended December 31, 2008, an increase of $3,774, or 3.9%. Interest expense pertains primarily to amounts due to affiliates as well as to our notes payable with third parties, and the increase relates to the principal payments on new debts and obligations from financing activities in 2009.

During 2009, we disposed equipment with an original cost of approximately $20,500, which had a remaining net book value of approximately $6,200.

Provision for income taxes

For the year ended December 31, 2009, we reported an income tax expense of $309,077, compared to income tax expense of $879,598 for the year ended December 31, 2008, a decrease of $570,521, or 64.9%, which was attributable to the decreased revenues and income for the year.

Discussion of Results of Operations for the Year Ended December 31, 2009 compared to the Year Ended December 31, 2008

Capital Resources and Liquidity

At December 31, 2009, we had $1,657,330 in cash and cash equivalents, which included three investment accounts, consisting of cash equivalents, with a fair value of $259,991. Our cash outflows have consisted primarily of expenses associated with our expanded operations, including and the purchase of drilling pipe for sale primarily during 2008. These outflows have been offset by the timely inflows of cash from our customers regarding sales that have been made. Cash outflows for investing purposes have consisted primarily the acquisition of equipment and other technology to better serve our customers, as well as the acquisition of pipe racks at our Houston facility to better meet the demand for pipe storage services. Currently, we have been able to utilize our relationships with affiliated entities to stabilize our liquidity needs.

We believe we can satisfy our cash requirements for the next twelve months with our current cash and expected revenues. However, completion of our plan of operation is subject to attaining adequate revenue. We cannot assure investors that adequate revenues will be generated. In the absence of our projected revenues, we may be unable to proceed with our plan of operations. Even without adequate revenues within the next twelve months, we still anticipate being able to continue with our present activities, but we may require financing to potentially achieve our growth goals.

In the event we are not successful in reaching our initial revenue targets, additional funds may be required, and we may not be able to proceed with our business plan for the development and marketing of our core services. Should this occur, we would likely seek additional financing to support the continued operation of our business.

Critical Accounting Policies

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use if estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

Our significant accounting policies are summarized in Note 3 of our consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

Revenue Recognition

The Company recognizes revenue on arrangements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements and No. 104, Revenue Recognition. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability is reasonably assured.

Recent Accounting Pronouncements

In June 2009, the FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with the FASB Accounting Standards CodificationTM (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification was effective for financial statements issued for periods ending after September 15, 2009.

On January 1, 2009, the Company adopted new guidance that related to accounting for noncontrolling interests in consolidated financial statements. The new accounting guidance states for entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners separately within the consolidated statement of financial condition within equity, but separate from the parent's equity and separately on the face of the consolidated statement of operations. Further, the new guidance states that changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary should be accounted for consistently and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary should be initially measured at fair value. The adoption of this guidance had no impact on the Company.

In June 2008, the FASB issued guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, included in the earnings allocation in computing earnings per common share (EPS) under the two-class method. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented were to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform to the provisions of this guidance. Since the Company's unvested restricted stock awards do not contain nonforfeitable rights to dividends, they are not included under the scope of this pronouncement, and therefore, the adoption of this guidance had no impact on the Company.

In May 2009, FASB issued new guidance relating to subsequent events and established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance sets forth: