ITEM 1. FINANCIAL STATEMENTS
DEEP DOWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and par value amounts)
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,423
|
|
|
$
|
3,939
|
|
Short term investment (certificate of deposit)
|
|
|
1,026
|
|
|
|
1,017
|
|
Accounts receivable, net of allowance of $10
|
|
|
4,774
|
|
|
|
4,142
|
|
Contract Assets
|
|
|
653
|
|
|
|
925
|
|
Prepaid expenses and other current assets
|
|
|
126
|
|
|
|
302
|
|
Total current assets
|
|
|
9,002
|
|
|
|
10,325
|
|
Property, plant and equipment, net
|
|
|
12,367
|
|
|
|
12,352
|
|
Intangibles, net
|
|
|
60
|
|
|
|
63
|
|
Other assets
|
|
|
1,017
|
|
|
|
1,230
|
|
Total assets
|
|
$
|
22,446
|
|
|
$
|
23,970
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
844
|
|
|
$
|
1,511
|
|
Contract liabilities
|
|
|
241
|
|
|
|
612
|
|
Current portion of long-term debt
|
|
|
9
|
|
|
|
–
|
|
Total current liabilities
|
|
|
1,094
|
|
|
|
2,123
|
|
Long-term debt
|
|
|
53
|
|
|
|
–
|
|
Total liabilities
|
|
|
1,147
|
|
|
|
2,123
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and
outstanding
|
|
|
–
|
|
|
|
–
|
|
Common stock, $0.001 par value, 24,500,000 shares authorized, 15,438,660 shares issued
|
|
|
15
|
|
|
|
15
|
|
Treasury stock
|
|
|
(2,040
|
)
|
|
|
(2,040
|
)
|
Additional paid-in capital
|
|
|
73,256
|
|
|
|
73,246
|
|
Accumulated deficit
|
|
|
(49,932
|
)
|
|
|
(49,374
|
)
|
Total stockholders' equity
|
|
|
21,299
|
|
|
|
21,847
|
|
Total liabilities and stockholders' equity
|
|
$
|
22,446
|
|
|
$
|
23,970
|
|
The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements.
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(In thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,104
|
|
|
$
|
5,379
|
|
|
$
|
7,810
|
|
|
$
|
10,987
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,211
|
|
|
|
2,393
|
|
|
|
4,429
|
|
|
|
5,047
|
|
Depreciation expense
|
|
|
242
|
|
|
|
323
|
|
|
|
596
|
|
|
|
633
|
|
Total cost of sales
|
|
|
2,453
|
|
|
|
2,716
|
|
|
|
5,025
|
|
|
|
5,680
|
|
Gross profit
|
|
|
1,651
|
|
|
|
2,663
|
|
|
|
2,785
|
|
|
|
5,307
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,745
|
|
|
|
2,223
|
|
|
|
3,662
|
|
|
|
4,732
|
|
Depreciation and amortization
|
|
|
58
|
|
|
|
79
|
|
|
|
129
|
|
|
|
158
|
|
Total operating expenses
|
|
|
1,803
|
|
|
|
2,302
|
|
|
|
3,791
|
|
|
|
4,890
|
|
Operating (loss) income
|
|
|
(152
|
)
|
|
|
361
|
|
|
|
(1,006
|
)
|
|
|
417
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
10
|
|
|
|
12
|
|
|
|
19
|
|
|
|
26
|
|
Equity in net income of joint venture
|
|
|
–
|
|
|
|
94
|
|
|
|
–
|
|
|
|
94
|
|
Gain on sale of assets
|
|
|
439
|
|
|
|
14
|
|
|
|
439
|
|
|
|
14
|
|
Total other income
|
|
|
449
|
|
|
|
120
|
|
|
|
458
|
|
|
|
134
|
|
Income (loss) before income taxes
|
|
|
297
|
|
|
|
481
|
|
|
|
(548
|
)
|
|
|
551
|
|
Income tax expense
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Net income (loss)
|
|
$
|
292
|
|
|
$
|
476
|
|
|
$
|
(558
|
)
|
|
$
|
541
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.04
|
|
Fully diluted
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.04
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,436
|
|
|
|
15,154
|
|
|
|
13,436
|
|
|
|
15,264
|
|
Fully diluted
|
|
|
13,436
|
|
|
|
15,154
|
|
|
|
13,436
|
|
|
|
15,264
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(558
|
)
|
|
$
|
541
|
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
10
|
|
|
|
67
|
|
Depreciation and amortization
|
|
|
725
|
|
|
|
791
|
|
Gain on sale of assets
|
|
|
(439
|
)
|
|
|
(14
|
)
|
Equity in net income of joint venture
|
|
|
–
|
|
|
|
(94
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance
|
|
|
(842
|
)
|
|
|
2,096
|
|
Contract Assets
|
|
|
272
|
|
|
|
890
|
|
Prepaid expenses and other current assets
|
|
|
176
|
|
|
|
134
|
|
Other assets
|
|
|
205
|
|
|
|
(167
|
)
|
Accounts payable and accrued liabilities
|
|
|
(667
|
)
|
|
|
(481
|
)
|
Contract Liabilities
|
|
|
(371
|
)
|
|
|
(2,749
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(1,489
|
)
|
|
|
1,014
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(559
|
)
|
|
|
(1,588
|
)
|
Proceeds from sale of assets
|
|
|
538
|
|
|
|
18
|
|
Repayments on notes receivable
|
|
|
8
|
|
|
|
13
|
|
Short term investment-certificate of deposit
|
|
|
(9
|
)
|
|
|
–
|
|
Cash distribution received from joint venture
|
|
|
–
|
|
|
|
94
|
|
Net cash used in investing activities
|
|
|
(22
|
)
|
|
|
(1,463
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payment on long-term debt
|
|
|
(5
|
)
|
|
|
–
|
|
Cash paid for repurchase of our common stock
|
|
|
–
|
|
|
|
(558
|
)
|
Net cash used in financing activities
|
|
|
(5
|
)
|
|
|
(558
|
)
|
Change in cash
|
|
|
(1,516
|
)
|
|
|
(1,007
|
)
|
Cash, beginning of period
|
|
|
3,939
|
|
|
|
8,203
|
|
Cash, end of period
|
|
$
|
2,423
|
|
|
$
|
7,196
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of investing and financing activities:
|
|
|
|
|
|
|
|
|
Addition of property, plant and equipment (non-cash)
|
|
$
|
317
|
|
|
$
|
–
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
NOTE 1:
|
BASIS OF PRESENTATION
|
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements of Deep Down, Inc. and its directly and indirectly wholly-owned subsidiaries (“Deep Down,” “we,”
“us” or the “Company”) were prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions
to Form 10-Q. As permitted under those rules, certain footnotes or other financial information that are normally required by United
States generally accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements
should be read in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report
on Form 10-K for the year ended December 31, 2017, filed on March 28, 2018 with the Commission.
Preparation of financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the
disclosed amounts of contingent assets and liabilities and the reported amounts of revenues and expenses. If the underlying estimates
and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ from
those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Liquidity
The Company’s primary and potential sources of liquidity
include cash and cash equivalents on hand, cash from operating activities, and proceeds from opportunistic sales of non-core equipment.
The Company’s cash as of June 30, 2018 and December 31, 2017 was $2,423 and $3,939, respectively. The reduction in cash
was caused by cash used in operating activities of $1,489 primarily because of our net loss of $558 and an increase of $632 in
accounts receivable during the six months ended June 30, 2018.
The Company’s plans to mitigate its limited liquidity include:
closely monitoring capital expenditures planned for the remainder of 2018 and beyond to conserve capital; possibly selling certain
non-core equipment; further reducing administrative costs, if necessary; and potentially establishing a line of credit to further
supplement our operating requirements.
The Company’s operations are influenced by a number of factors
that are beyond its control, including general conditions of the offshore energy sector, oil and gas operators’ willingness
to spend development capital, and other factors that could adversely affect the Company’s financial position, results of
operations and liquidity.
Principles of Consolidation
The unaudited condensed consolidated financial
statements presented herein include the accounts of Deep Down, Inc. and its directly and indirectly wholly-owned subsidiaries.
All intercompany transactions and balances have been eliminated.
Segments
For the quarters ended June 30, 2018 and 2017,
we had one operating and reporting segment, Deep Down Delaware.
Recently Issued Accounting Standards Not
Yet Adopted
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic
842)” (“ASU 2016-02”). The amendments in this update require, among other things, that lessees recognize the
following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a
lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset,
which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessees
and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements. The amendments are effective for us beginning January
1, 2019. We do not anticipate the adoption of ASU 2016-02 will have a material effect on our results of operations or financial
position, but we are still evaluating the impact on both.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
All other new accounting pronouncements that have been issued but
not yet effective are currently being evaluated to determine if they will have a material impact on our financial position or
results of operations.
NOTE 2:
|
REVENUES: ADOPTION OF
ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS”
|
On January 1, 2018, we adopted ASC Topic 606
(“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January
1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts
are not adjusted and continue to be reported in accordance with our historic accounting under Revenue Recognition ASC Topic 605.
There was no significant impact upon the adoption
of ASC 606. We did not record any adjustments to opening retained earnings as of January 1, 2018 because the Company’s revenue
recognition methodologies for both fixed price contracts (over time using cost to cost as an input measure of performance) and
for service contracts (over time as services are incurred) do not materially change by the adoption of the new standard.
Revenues are recognized when control of the
promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled
to in exchange for those goods or services. To determine the proper revenue recognition method for our customer contracts, we
evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or
single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment
and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations
could change the amount of revenue and profit recorded in a given period. For most of our fixed price contracts, the customer
contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project
or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted
for as one performance obligation.
We account for a contract when it has approval
and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial
substance and collectability of consideration is probable.
Disaggregation of Revenue
The following table presents our revenues
disaggregated by revenue sources of fixed price and service contracts. Sales taxes are excluded from revenues.
Three Months Ended June 30, 2018 Compared
to Three Months Ended June 30, 2017
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Fixed Price Contracts
|
|
$
|
1,090
|
|
|
$
|
749
|
|
Service Contracts
|
|
|
3,014
|
|
|
|
4,630
|
|
Total
|
|
$
|
4,104
|
|
|
$
|
5,379
|
|
Six Months Ended June 30, 2018 Compared
to Six Months Ended June 30, 2017
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Fixed Price Contracts
|
|
$
|
2,933
|
|
|
$
|
2,419
|
|
Service Contracts
|
|
|
4,877
|
|
|
|
8,568
|
|
Total
|
|
$
|
7,810
|
|
|
$
|
10,987
|
|
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
Fixed price contracts
For fixed price contracts, we generally recognize
revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control
to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience,
pay us for costs incurred plus a reasonable profit and take control of any work in process. Additionally, in other fixed price
contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our
rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative
use to the Company.
Because of control transferring over time,
revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method
to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided.
We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the
customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards
completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance
obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.
Contracts are often modified to account for
changes in contract specifications and requirements. We consider contract modifications to exist when the modification either
creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or
services that are not distinct from the existing contract due to the significant integration service provided in the context of
the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the
transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment
to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
We have a companywide standard and disciplined
quarterly estimate at completion (EAC) process in which management reviews the progress and execution of our performance obligations.
As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress
towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of
revenues and costs. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized
quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current
and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these
estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred
exceed total estimates of revenue to be earned on a performance obligation related to fixed price contracts, a provision for the
entire loss on the performance obligation is recognized in the period the loss is estimated.
Service Contracts
We recognize revenue for service contracts
measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services
to the customer. The control over services is transferred over time when the services are rendered to the customer on a daily
basis. Specifically, we recognize revenue as the services are provided as we have the right to invoice the customer for the services
performed. Services are billed and paid on a monthly basis. Payment terms for services are usually 30 days from invoice receipt.
Contract balances
Costs and estimated earnings in excess of
billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis but cannot be invoiced
under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess of costs
and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related
costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer and contracts
are not shown as complete until virtually all anticipated costs have been incurred and the risk of loss has passed to the customer.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
Assets related to costs and estimated earnings
in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings
on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond
one year, thus complete collection of amounts related to these contracts may extend beyond one year, though such long-term contracts
include contractual milestone billings as discussed above. As of June 30, 2018, we had no contracts whose term extended beyond
one year.
The following table summarizes our contract
assets, which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract liabilities,
which are “Billings in excess of costs and estimated earnings on uncompleted contracts”.
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Costs incurred on uncompleted contracts
|
|
$
|
8,749
|
|
|
$
|
9,564
|
|
Estimated earnings on uncompleted contracts
|
|
|
9,019
|
|
|
|
10,741
|
|
|
|
|
17,768
|
|
|
|
20,305
|
|
Less: Billings to date on uncompleted contracts
|
|
|
(17,356
|
)
|
|
|
(19,992
|
)
|
|
|
$
|
412
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
|
|
Included in the accompanying unaudited condensed consolidated
|
|
|
|
|
|
|
|
|
balance sheets under the following captions:
|
|
|
|
|
|
|
|
|
Contract Assets
|
|
$
|
653
|
|
|
$
|
925
|
|
Contract Liabilities
|
|
|
(241
|
)
|
|
|
(612
|
)
|
|
|
$
|
412
|
|
|
$
|
313
|
|
The balance in contract assets at June 30,
2018 and December 31, 2017 consisted primarily of earned but unbilled revenues related to fixed-price contracts.
The balance in contract liabilities at June
30, 2018 and December 31, 2017 consisted primarily of unearned billings related to fixed-price contracts.
Remaining Performance Obligations
Remaining performance obligations represent
the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential
orders and also any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to
be considered a contract with a customer pursuant to the requirements of ASC 606.
As of June 30, 2018, all of our fixed price
contracts are short-term in nature with a contract term of one year or less.
Practical Expedients and Exemptions
We generally expense sales commissions when
incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and
administrative expenses.
Many of our services contracts are short-term
in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14
exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance
obligation is part of a contract that has an original expected duration of one year or less.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
Additionally, our payment terms are short-term
in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting
the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that
the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good
or service will be one year or less.
Further, in many of our service contracts
we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our
performance completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided).
For those contracts, we have utilized the practical expedient in ASC 606-10-55-18, which allows us to recognize revenue in the
amount for which we have the right to invoice.
Accordingly, we do not disclose the value
of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts
for which we recognize revenue at the amount to which we have the right to invoice for services performed.
NOTE
3:
|
PROPERTY,
PLANT AND EQUIPMENT
|
The components of property, plant and equipment,
net are summarized below:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
Range of Asset Lives
|
|
Buildings and improvements
|
|
|
285
|
|
|
|
285
|
|
|
|
7 - 36 years
|
|
Leasehold improvements
|
|
|
908
|
|
|
|
908
|
|
|
|
2 - 5 years
|
|
Equipment
|
|
|
17,343
|
|
|
|
18,933
|
|
|
|
2 - 30 years
|
|
Furniture, computers and office equipment
|
|
|
1,319
|
|
|
|
1,245
|
|
|
|
2 - 8 years
|
|
Construction in progress
|
|
|
2,867
|
|
|
|
2,127
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
22,722
|
|
|
|
23,498
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(10,355
|
)
|
|
|
(11,146
|
)
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
12,367
|
|
|
$
|
12,352
|
|
|
|
|
|
In January 2018, we financed a new Company
vehicle. The financed amount was $67 and is for a term of six years with an interest rate of 0.9%, with monthly payments of $1.
The financing company will hold a lien on the vehicle until all payments have been made.
NOTE 5:
|
SHARE-BASED COMPENSATION
|
On May 2, 2017, we granted 30 shares of restricted
stock to an independent director. These shares have a fair value grant price of $1.15 per share, based on the closing price of
our common stock on that day. These shares vest over three years in equal tranches on the grant date anniversary, subject to continued
service on our Board of Directors. We are amortizing the related share-based compensation of $34.50 over the three-year requisite
service period.
For the six months ended June 30, 2018 and
2017, we recognized a total of $10 and $67, respectively, of share-based compensation expense related to restricted stock awards,
which is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements
of operations. The unamortized estimated fair value of nonvested shares of restricted stock awards was $29 at June 30, 2018. These
costs are expected to be recognized as expense over a weighted-average period of 1.37 years.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
On March 26, 2018, the Board of Directors
authorized the repurchase of up to $1,000 of the Company’s outstanding common stock (the “Repurchase Program”).
The Repurchase Program will be funded from cash on hand and cash provided by operating activities.
The time of the purchases and amount of stock
purchased will be determined at the discretion of management subject to market conditions, business opportunities and other appropriate
factors and may include purchases through one or more broker-assisted plans and methods, including, but not limited to, open-market
purchases, privately negotiated transactions and Rule 10b-18 trading plans. The Repurchase Program will expire on March 31, 2019.
As of June 30, 2018, no stock repurchases
had been made under the Repurchase Program.
Income tax expense during interim periods
is based on applying the estimated annual effective income tax rate to interim period operations. The estimated annual effective
income tax rate may vary from the statutory rate due to the impact of permanent items relative to our pre-tax income, as well
as by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the
tax basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the
deferred tax assets will not be realized. At June 30, 2018 and December 31, 2017 management has recorded a full deferred tax asset
valuation allowance.
NOTE 8:
|
COMMITMENTS AND CONTINGENCIES
|
Litigation
From
time to time we are involved in legal proceedings arising from the normal course of business. As of the date of this Report, we
are involved in one material legal proceeding. On August 6, 2018, GE Oil and Gas UK Ltd (“GE”) requested that the
Company mediate a dispute between the parties in the ICC International Centre for ADR. The dispute involves alleged delays and
defects in products manufactured by the Company for GE dating back to 2013. The Company disputes GE’s allegations and intends
to vigorously defend itself against these allegations. The total amount in controversy is $2,630,261.08.
At
this
point in the legal process, the loss to the Company is not probable; therefore no liability has been recorded in the Company’s
consolidated financial statements.
Operating Leases
We lease certain offices, facilities, equipment
and vehicles under non-cancellable operating and capital leases expiring at various dates through 2023.
NOTE
9:
|
EARNINGS
PER COMMON SHARE
|
Basic earnings per share (“EPS”)
is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents
(warrants, nonvested stock awards and stock options) outstanding during the period. Diluted EPS reflects the potential dilution
that could occur if options to purchase common stock were exercised for shares of common stock and all nonvested stock awards
vest.
At June 30, 2018 and 2017, there were no potentially
dilutive securities outstanding.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides
information that management believes is relevant for an assessment and understanding of our results of operations and financial
condition. This information should be read in conjunction with our audited historical consolidated financial statements,
which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and
Exchange Commission (“SEC”) on March 28, 2018 and our unaudited condensed consolidated financial statements,
and notes thereto, included with this Quarterly Report on Form 10-Q (“Report”) in Part I. Item 1. “Financial
Statements,” and is available on the SEC’s website.
General
We are an oilfield services company specializing
in complex deepwater and ultra-deepwater oil production distribution system support services, serving the worldwide offshore exploration
and production industry. Our services and technological solutions include distribution system installation support and engineering
services, umbilical terminations, loose-tube steel flying leads, buoyancy products and services, remotely operated vehicles (“ROVs”)
and toolings. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly
experienced service teams and engineered technological solutions.
Industry and Executive Outlook
We believe industry demand for our specialized
equipment and services is in the early stages of an upward trend, driven by major oil companies and independents that are starting
to reinvest in new and existing projects following several years of industry challenges. This trend is susceptible to some bumps
in the road as we saw in the second quarter, when work we had expected to perform in the period was pushed into the second half
of 2018, resulting in lower revenues than expected. Despite the inevitable delays, we are seeing a variety of signs that support
our optimism for the future.
In particular, customers are increasingly
contacting us to help them address their maintenance needs, which consists of work that had been deferred in prior periods due
to budget constraints. With a clearer and more positive outlook for the industry, oil and gas operators are now moving forward
with routine maintenance and upgrade projects that we expect will drive increased demand for our solutions. Additionally, we believe
the improvement in operating results we are seeing from many oil industry leaders bodes well for their ability to invest in new
offshore projects, which we expect will provide future opportunities for us.
While cost cutting and operational streamlining
have been key focus points during the downturn, there has also been an upturn in industry consolidation activity, spanning companies
of all sizes. We are increasingly finding ourselves in discussions with other companies about finding ways to work together, often
leading to suggestions of consolidating our operations.
Another outcome of the downturn has been the
shift in contracting strategy by the super major operators, where they are now looking to award Engineering, Procurement, Construction
and Installation (“EPCI”) contracts. These EPCI contracts would be issued to the largest service providers, who would
then likely subcontract to companies like ours.
Coupling the interest in our company as a
consolidation candidate with the shift towards EPCI contracts, we have determined that it is in our shareholders’ and the
Company’s best interest for us to engage an investment bank to assist us as we evaluate our strategic alternatives. There
can be no assurance that the exploration of strategic alternatives will result in any transaction or other alternative. We have
not set a timetable for completion of the process, and do not intend to comment further regarding the process unless a specific
transaction or other alternative is approved by the Board of Directors, the process is concluded, or it is otherwise determined
that further disclosure is appropriate or required by law.
In the meantime, we continue to work with
our committed employees and supportive supplier base to provide unique solutions for our customers, while maximizing our shareholders’
value, aided in no small part by our continued strong balance sheet. With a committed backlog of about $15 million, we continue
to view the future as being exceedingly bright for the company.
Results of Operations
Three Months Ended June 30, 2018 Compared
to Three Months Ended June 30, 2017
Revenues.
Revenues for the three months
ended June 30, 2018 were $4,104 compared to revenues of $5,379 for the three months ended June 30, 2017. The $1,275, or 24 percent,
decrease was primarily the result of fewer projects in process in 2018.
Gross profit.
Gross profit for the
three months ended June 30, 2018 was $1,651, or 40 percent of revenues, compared to $2,663, or 50 percent of revenues, for the
three months ended June 30, 2017. The $1,012 decrease in gross profit, or 10 percent decrease in gross profit percentage, respectively,
was due to lower revenues in the three months ended June 30, 2018, compared to a larger proportion of higher-margin service projects
in the three months ended June 30, 2017, which resulted in above average margins.
Selling, general and administrative
expenses.
Selling, general and administrative (“SG&A”) expenses were $1,745, or 43 percent of revenues, for
the three months ended June 30, 2018 compared to $2,223, or 41 percent of revenues, for the three months ended June 30, 2017.
The $478 decrease in 2018 resulted primarily from a $313 decrease in SG&A labor as a result of personnel reductions, and a
$77 decrease in legal and professional fees, as well as the impact of other cost cutting measures. The increase in SG&A expense
as a percent of revenues was due to lower revenues during the three months ended June 30, 2018 as compared to the three months
ended June 30, 2017.
Modified EBITDA
. Our management evaluates
our performance based on a non-GAAP measure which consists of earnings (net income or loss) available to common shareholders before
net interest income, income taxes, non-cash share-based compensation expense, non-cash impairments, depreciation and amortization,
other non-cash items and one-time charges (“Modified EBITDA”). This measure may not be comparable to similarly titled
measures employed by other companies and is not a measure of performance calculated in accordance with US GAAP. The measure should
not be considered in isolation or as a substitute for operating income or loss, net income or loss, cash flows provided by operating,
investing or financing activities, or other cash flow data prepared in accordance with US GAAP. The amounts included in the Modified
EBITDA calculation, however, are derived from amounts included in the accompanying unaudited condensed consolidated statements
of operations.
We believe Modified EBITDA is useful to investors
in evaluating our operating performance because it is widely used to measure a company’s operating performance, which can
vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital
structure and the method by which assets were acquired. It helps investors more meaningfully evaluate and compare the results
of our operations from period to period by removing the impact of our capital structure (primarily interest); asset base (primarily
depreciation and amortization); actions that do not affect liquidity (share-based compensation expense from our operating results;
and it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a
component of operating income, are fixed at the time of the asset purchase or acquisition in accordance with the depreciable lives
of the related asset and as such are not a directly controllable period operating charge.
The following is a reconciliation of net income
to Modified EBITDA for the three months ended June 30, 2018 and 2017:
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net income
|
|
$
|
292
|
|
|
$
|
476
|
|
Deduct gain on sale of assets
|
|
|
(439
|
)
|
|
|
(14
|
)
|
Deduct interest income, net
|
|
|
(10
|
)
|
|
|
(12
|
)
|
Add depreciation and amortization
|
|
|
300
|
|
|
|
402
|
|
Add income tax expense
|
|
|
5
|
|
|
|
5
|
|
Add share-based compensation
|
|
|
5
|
|
|
|
33
|
|
Modified EBITDA
|
|
$
|
153
|
|
|
$
|
890
|
|
Modified EBITDA was $153 for the three months
ended June 30, 2018 compared to Modified EBITDA of $890 for the three months ended June 30, 2017. The $737 decrease in Modified
EBITDA was due primarily to the decrease in net income, which was driven by the previously discussed decreased revenues, an increase
in gain on sale of assets, and decreases in depreciation and amortization, and share-based compensation costs during the three
months ended June 30, 2018.
Six Months Ended June 30, 2018 Compared
to Six Months Ended June 30, 2017
Revenues.
Revenues for the six months
ended June 30, 2018 were $7,810 compared to revenues of $10,987 for the six months ended June 30, 2017. The $3,177, or 29 percent,
decrease was primarily the result of fewer projects in process in 2018.
Gross profit.
Gross profit for the
six months ended June 30, 2018 was $2,785, or 36 percent of revenues, compared to $5,307, or 48 percent of revenues, for the six
months ended June 30, 2017. The $2,522 decrease in gross profit, or 12 percent decrease in gross profit percentage, respectively,
was due to lower revenues in the three months ended June 30, 2018, compared to a larger proportion of higher-margin service projects
in the six months ended June 30, 2017, which resulted in above average margins.
Selling, general and administrative
expenses.
SG&A expenses were $3,662, or 47 percent of revenues, for the six months ended June 30, 2018 compared
to $4,732, or 43 percent of revenues, for the six months ended June 30, 2017. The $1,070 decrease in 2018 resulted primarily from
a $575 decrease in SG&A labor, as a result of personnel reductions, and a $212 decrease in legal and professional fees, as
well as the impact of other cost cutting measures. The percent of revenues increase was due to lower revenues during the first
six months of 2018 as compared to the first six months of 2017.
Modified EBITDA
. As noted above, our management evaluates
our performance based on Modified EBITDA. This measure may not be comparable to similarly titled measures employed
by other companies and is not a measure of performance calculated in accordance with GAAP. The measure should not be considered
in isolation or as a substitute for operating income or loss, net income or loss, cash flows provided by operating, investing
or financing activities, or other cash flow data prepared in accordance with GAAP. The amounts included in the Modified EBITDA
calculation, however, are derived from amounts included in the accompanying condensed consolidated statements of operations.
The following is a reconciliation of net (loss)
income to Modified EBITDA for the six months ended June 30, 2018 and 2017:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net (loss) income
|
|
$
|
(558
|
)
|
|
$
|
541
|
|
Deduct gain on sale of assets
|
|
|
(439
|
)
|
|
|
(14
|
)
|
Deduct interest income, net
|
|
|
(19
|
)
|
|
|
(26
|
)
|
Add depreciation and amortization
|
|
|
725
|
|
|
|
791
|
|
Add income tax expense
|
|
|
10
|
|
|
|
10
|
|
Add share-based compensation
|
|
|
10
|
|
|
|
67
|
|
Modified (EBITDA loss) EBITDA
|
|
$
|
(271
|
)
|
|
$
|
1,369
|
|
Modified EBITDA loss was $(271) for the six
months ended June 30, 2018 compared to Modified EBITDA of $1,369 for the six months ended June 30, 2017. The $1,640 decrease in
Modified EBITDA was due primarily to the decrease in net income, which was driven by the previously discussed decreased revenues,
an increase in gain on sale of assets, and decreases in depreciation and amortization, and share-based compensation costs during
the six months ended June 30, 2018.
Liquidity and Capital Resources
During the six months ended June 30, 2018
and June 30, 2017, we primarily financed our operating and capital needs through cash on hand and cash we generated from operations.
However, in January 2018, we financed a new company vehicle. The financed amount was $67 and is for a term of six years with an
interest rate of 0.9%, with monthly payments of $1. The financing company will hold a lien on the vehicle until all payments have
been made.
During the six months ended June 30, 2018,
our trade accounts receivable increased by $632, impacting our cash position which declined by $1,516. This increase in trade
accounts receivable reflected efforts by some of our larger customers to lengthen vendor payment terms, a situation we expect
to be resolved in the coming months. The decline in cash was also a result of a $667 decrease in our accounts payable and accrued
liabilities.
Through a combination of cash generated from
operations, opportunistic sales of non-core equipment, and reductions in our administrative costs and capital investments budget,
we believe we will have adequate liquidity to meet our future operating requirements. However, in light of the decline in our
working capital, we are also actively engaged in discussions with different financial institutions, with the intention of establishing
a line of credit to further supplement our operating requirements.
To the extent our then current and forecasted
liquidity allows, we will continue to repurchase our common stock. See “Share Repurchase Program” below for additional
information.
Inflation and Seasonality
We do not believe that our operations are
significantly impacted by inflation. Our business is not significantly seasonal in nature.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates
The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. The most significant estimates used in our financial statements relate to revenue recognition
where we use percentage-of-completion accounting on our large fixed-price contracts, the allowance for doubtful accounts, and
the valuation allowance for deferred income tax assets. These estimates require judgments, which we base on historical experience
and on various other assumptions, as well as specific circumstances. Estimates may change as new events occur, additional information
becomes available or operating environments change.
Refer to Part II. Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year
ended December 31, 2017 for a discussion of our critical accounting policies and estimates.
Recently Issued Accounting Standards
Except as set forth in Note 1 to our unaudited
condensed consolidated financial statements, management has not yet determined whether recently issued accounting standards, which
are not yet effective, will have a material impact on our condensed consolidated financial statements upon adoption.
Share Repurchase Program
On March 26, 2018, the Board of Directors
authorized the repurchase of up to $1,000 of the Company’s outstanding common stock (the “Repurchase Program”).
The Repurchase Program will be funded from cash on hand and cash provided by operating activities.
The time of the purchases and amount of stock
purchased will be determined at the discretion of management subject to market conditions, business opportunities and other appropriate
factors and may include purchases through one or more broker-assisted plans and methods, including, but not limited to, open-market
purchases, privately negotiated transactions and Rule 10b5-1 trading plans. The Repurchase Program will expire on March 31, 2019.
As of June 30, 2018, no stock repurchases
had been made under the Repurchase Program.
Recent Events
On July 31, 2018, we announced that
our Board of Directors had initiated a review of our strategic alternatives to maximize shareholder value, including
a potential sale of the Company. We have engaged the GulfStar Group, LLC as financial advisor and Gray, Reed & McGraw, LLP as legal advisor to assist in the process.
There can be no assurance that
the exploration of strategic alternatives will result in any transaction or other alternative. We have not set a timetable
for completion of the process, and we do not intend to comment further regarding the process unless a
specific transaction or other alternative is approved by the Board of Directors, the process is concluded, or it is
otherwise determined that further disclosure is appropriate or required by law.