ITEM 1. FINANCIAL STATEMENTS
DEEP DOWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and par value amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Cash
|
|
$
|
7,196
|
|
|
$
|
8,203
|
|
Short term investment (certificate of deposit)
|
|
|
1,005
|
|
|
|
1,005
|
|
Accounts receivable, net of allowance of $10
|
|
|
3,849
|
|
|
|
5,945
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
187
|
|
|
|
1,077
|
|
Prepaid expenses and other current assets
|
|
|
717
|
|
|
|
864
|
|
Total current assets
|
|
|
12,954
|
|
|
|
17,094
|
|
Property, plant and equipment, net
|
|
|
8,751
|
|
|
|
7,938
|
|
Intangibles, net
|
|
|
66
|
|
|
|
69
|
|
Long term asset - Carousel
|
|
|
3,117
|
|
|
|
3,117
|
|
Other assets
|
|
|
361
|
|
|
|
211
|
|
Total assets
|
|
$
|
25,249
|
|
|
$
|
28,429
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,297
|
|
|
$
|
1,778
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
600
|
|
|
|
3,349
|
|
Total current liabilities
|
|
|
1,897
|
|
|
|
5,127
|
|
Total liabilities
|
|
|
1,897
|
|
|
|
5,127
|
|
|
|
|
|
|
|
|
|
|
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 and 15,408,660 shares
issued, respectively
|
|
|
15
|
|
|
|
15
|
|
Treasury stock, 1,084,755 and 587,847 shares at cost, respectively
|
|
|
(1,125
|
)
|
|
|
(567
|
)
|
Additional paid-in capital
|
|
|
73,180
|
|
|
|
73,112
|
|
Accumulated deficit
|
|
|
(48,718
|
)
|
|
|
(49,258
|
)
|
Total stockholders' equity
|
|
|
23,352
|
|
|
|
23,302
|
|
Total liabilities and stockholders' equity
|
|
$
|
25,249
|
|
|
$
|
28,429
|
|
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)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,379
|
|
|
$
|
5,968
|
|
|
$
|
10,987
|
|
|
$
|
10,323
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,393
|
|
|
|
3,737
|
|
|
|
5,047
|
|
|
|
6,337
|
|
Depreciation expense
|
|
|
323
|
|
|
|
290
|
|
|
|
633
|
|
|
|
612
|
|
Total cost of sales
|
|
|
2,716
|
|
|
|
4,027
|
|
|
|
5,680
|
|
|
|
6,949
|
|
Gross profit
|
|
|
2,663
|
|
|
|
1,941
|
|
|
|
5,307
|
|
|
|
3,374
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,223
|
|
|
|
2,378
|
|
|
|
4,732
|
|
|
|
5,166
|
|
Depreciation and amortization
|
|
|
79
|
|
|
|
94
|
|
|
|
158
|
|
|
|
200
|
|
Total operating expenses
|
|
|
2,302
|
|
|
|
2,472
|
|
|
|
4,890
|
|
|
|
5,366
|
|
Operating income (loss)
|
|
|
361
|
|
|
|
(531
|
)
|
|
|
417
|
|
|
|
(1,992
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
12
|
|
|
|
(6
|
)
|
|
|
26
|
|
|
|
(61
|
)
|
Equity in net income of joint venture
|
|
|
94
|
|
|
|
–
|
|
|
|
94
|
|
|
|
–
|
|
Gain on sale of assets
|
|
|
14
|
|
|
|
–
|
|
|
|
14
|
|
|
|
1,070
|
|
Total other income (expense)
|
|
|
120
|
|
|
|
(6
|
)
|
|
|
134
|
|
|
|
1,009
|
|
Income (loss) before income taxes
|
|
|
481
|
|
|
|
(537
|
)
|
|
|
551
|
|
|
|
(983
|
)
|
Income tax expense
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Net income (loss)
|
|
$
|
476
|
|
|
$
|
(542
|
)
|
|
$
|
541
|
|
|
$
|
(993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.06
|
)
|
Fully diluted
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,154
|
|
|
|
15,546
|
|
|
|
15,264
|
|
|
|
15,555
|
|
Fully diluted
|
|
|
15,154
|
|
|
|
15,546
|
|
|
|
15,264
|
|
|
|
15,555
|
|
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)
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
541
|
|
|
$
|
(993
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
67
|
|
|
|
274
|
|
Depreciation and amortization
|
|
|
791
|
|
|
|
812
|
|
Gain on sale of assets
|
|
|
(14
|
)
|
|
|
(1,070
|
)
|
Write-off of deferred financing fees
|
|
|
–
|
|
|
|
23
|
|
Equity in net income of joint venture
|
|
|
(94
|
)
|
|
|
–
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance
|
|
|
2,096
|
|
|
|
584
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
890
|
|
|
|
(920
|
)
|
Prepaid expenses and other current assets
|
|
|
134
|
|
|
|
(55
|
)
|
Other assets
|
|
|
(167
|
)
|
|
|
15
|
|
Accounts payable and accrued liabilities
|
|
|
(481
|
)
|
|
|
207
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(2,749
|
)
|
|
|
3,218
|
|
Net cash provided by operating activities
|
|
|
1,014
|
|
|
|
2,095
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(1,588
|
)
|
|
|
(588
|
)
|
Proceeds from sale of assets
|
|
|
18
|
|
|
|
3,800
|
|
Repayments received on employee receivable
|
|
|
13
|
|
|
|
7
|
|
Cash distribution received from joint venture
|
|
|
94
|
|
|
|
161
|
|
Net cash provided by (used in) investing activities
|
|
|
(1,463
|
)
|
|
|
3,380
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Cash paid for purchase of our common stock
|
|
|
(558
|
)
|
|
|
(4
|
)
|
Proceeds from bank loans
|
|
|
–
|
|
|
|
300
|
|
Cash paid for deferred financing costs
|
|
|
–
|
|
|
|
(15
|
)
|
Release of compensating balance
|
|
|
–
|
|
|
|
3,900
|
|
Repayments of long-term debt
|
|
|
–
|
|
|
|
(3,047
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(558
|
)
|
|
|
1,134
|
|
Change in cash
|
|
|
(1,007
|
)
|
|
|
6,609
|
|
Cash, beginning of period
|
|
|
8,203
|
|
|
|
374
|
|
Cash, end of period
|
|
$
|
7,196
|
|
|
$
|
6,983
|
|
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, 2016, filed on March 31, 2017 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.
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, 2017 and
2016, we had one operating and reporting segment, Deep Down Delaware.
Recently Issued Accounting Standards
Not Yet Adopted
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with
Customers” (“ASU 2014-09”). This update provides a five-step approach to be applied to all contracts with customers
and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue (and the related cash flows) arising
from customer contracts, significant judgments and changes in judgments used in applying the revenue model and the assets recognized
from costs incurred to obtain or fulfill a contract. The effective date for this standard was deferred in July 2015 and will now
be effective for us beginning January 1, 2018. The standard provides for different application methods during adoption. We are
currently in the process of evaluating the potential impact this new pronouncement will have on our financial statements. We are
reviewing our existing contracts to identify any that may be impacted by this standard, and evaluating new contracts we are negotiating
to ensure compliance with this standard. We have not completed our full evaluation and therefore cannot conclude whether the pronouncement
will have a significant impact on our financial statements at this time, but we expect requirements of this standard to significantly
enhance our revenue disclosures. We currently anticipate that we will utilize the modified retrospective method of adoption, however,
this expectation may change following the completion of our evaluation of the impact of this pronouncement on our financial statements.
In February 2016, the FASB issued 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 and are still evaluating the impact on our financial position.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
In October 2016, the FASB issued ASU No.
2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” This update requires that income tax consequences
are recognized on an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU
are effective for us on January 1, 2018. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-01, “Business Combinations.” This new ASU clarified the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. The new standard is effective for us January 1, 2018 and will be applied prospectively. We are currently evaluating
the impact of our pending adoption of the new standard, but do not expect it to have a material impact on our consolidated financial
position or results of operations.
In February 2017, the FASB issued ASU No.
2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets” (“ASU 2017-05”).
This update clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets to exclude all businesses
and nonprofit activities. ASU 2017-05 also provides a definition for in-substance nonfinancial assets and additional guidance on
partial sales of nonfinancial assets. We are currently evaluating the effect of ASU No. 2017-05 on our consolidated financial statements
and will adopt ASU 2017-05 in conjunction with ASU 2014-09 on January 1, 2018.
In May 2017, the FASB issued ASU No. 2017-09,
“Scope of Modification Accounting” (“ASU 2017-09”), which amends the scope of modification accounting for
share-based payment arrangements. This update clarifies when a change to the terms or conditions of a share-based payment award
should be accounted for as a modification. An entity should account for the effects of a modification unless the fair value, vesting
conditions and classification, as an entity instrument or a liability instrument, of the modified award are the same before and
after a change to the terms or conditions of the share-based payment award. The new standard is effective for us January 1, 2018.
We do not expect ASU 2017-09 to have a material impact on our consolidated financial position or results of operations.
NOTE 2:
|
BILLINGS, COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
|
The components of billings, costs and estimated earnings on
uncompleted contracts are summarized below:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Costs incurred on uncompleted contracts
|
|
$
|
7,956
|
|
|
$
|
8,858
|
|
Estimated earnings on uncompleted contracts
|
|
|
8,231
|
|
|
|
6,777
|
|
|
|
|
16,187
|
|
|
|
15,635
|
|
Less: Billings to date on uncompleted contracts
|
|
|
(16,600
|
)
|
|
|
(17,907
|
)
|
|
|
$
|
(413
|
)
|
|
$
|
(2,272
|
)
|
|
|
|
|
|
|
|
|
|
Included in the accompanying condensed consolidated balance sheets under the following
captions:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
187
|
|
|
$
|
1,077
|
|
Billings in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(600
|
)
|
|
|
(3,349
|
)
|
|
|
$
|
(413
|
)
|
|
$
|
(2,272
|
)
|
The balance in costs and estimated earnings
in excess of billings on uncompleted contracts at June 30, 2017 and December 31, 2016 consisted primarily of earned but unbilled
revenues related to fixed-price projects.
The balance in billings in excess of costs
and estimated earnings on uncompleted contracts at June 30, 2017 and December 31, 2016 consisted primarily of unearned billings
related to fixed-price projects.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
NOTE 3:
|
PROPERTY, PLANT AND EQUIPMENT
|
The components of net property, plant and
equipment are summarized below:
|
|
|
|
|
|
|
|
Range of
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
Asset Lives
|
|
Buildings and improvements
|
|
$
|
5
|
|
|
$
|
5
|
|
|
|
7 - 36 years
|
|
Leasehold improvements
|
|
|
908
|
|
|
|
908
|
|
|
|
2 - 5 years
|
|
Equipment
|
|
|
16,977
|
|
|
|
16,360
|
|
|
|
2 - 30 years
|
|
Furniture, computers and office equipment
|
|
|
1,245
|
|
|
|
1,274
|
|
|
|
2 - 8 years
|
|
Construction in progress
|
|
|
1,543
|
|
|
|
586
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
20,678
|
|
|
|
19,133
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(11,927
|
)
|
|
|
(11,195
|
)
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
8,751
|
|
|
$
|
7,938
|
|
|
|
|
|
Credit Facility
From 2008 through June 30, 2016, we maintained
a credit facility (the “Facility”) with Whitney Bank.
In March 2016, we paid all borrowings under
the Facility with proceeds received from the sale of our Channelview location.
Following the expiration
of the Facility on June 30, 2016, we no longer have any credit facilities available to us.
NOTE 5:
|
SHARE-BASED COMPENSATION
|
We have a share-based compensation plan,
the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”).
Awards of common stock and options to purchase common stock granted under the Plan have vesting periods of three years and options
are exercisable for two years once fully vested. Share-based compensation expense related to awards is based on the fair value
at the date of grant, and is recognized over the requisite expected service period, net of estimated forfeitures. Under the Plan,
the total number of options permitted is 15 percent of issued and outstanding common shares.
Summary of Nonvested Shares of Restricted
Stock
On May 2, 2017, we granted 30 shares of
restricted stock to an independent director, par value $0.001 per share. These shares have a fair value grant price of $1.15 per
share, based on the closing price of Deep Down’s stock on that day. These shares vest over three years in equal tranches
on the grant date anniversary, with continued service on our Board of Directors; we are amortizing the related share-based compensation
of $33 over the three-year requisite service period.
For the six months ended
June
30
, 2017 and 2016, we recognized a total of $67 and $274, 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 $106 at
June
30
, 2017. These costs are expected to be recognized as expense over a weighted average period of 0.48 years.
On May 23, 2016, our Board of Directors
authorized a repurchase program (the “Repurchase Program”) under which we were originally authorized to repurchase
up to $1,000 of our outstanding stock. Subsequently, on March 29, 2017, our Board of Directors authorized a renewal and extension
of the Repurchase Program for an additional $1,000 until March 31, 2018. The purchases may be made from time to time in the open
market, through privately negotiated transactions and Rule 10b5-1 trading plans in accordance with applicable laws, rules and regulations.
The Repurchase Program is being funded from cash on hand and cash provided by operating activities. As of June 30, 2017, a total
of $1,125 of our stock (1,085 shares) has been purchased under the Repurchase Program. The average price per share of treasury
stock through
June 30
, 2017 was $1.05. Treasury shares are accounted for using the cost method.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
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. Although our future projections indicate that we may be able to realize some
of these deferred tax assets, due to the degree of uncertainty of these projections, at
June 30
,
2017 and December 31, 2016 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 were not involved in any material legal
proceedings.
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
, 2017 and 2016,
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 Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”)
on March 31, 2017 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.
In Part I. Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” all dollar and share amounts are in thousands
of dollars and shares, respectively, unless otherwise indicated.
Industry and Executive Outlook
Not too long ago, it would have been hard
to imagine $50 per barrel of oil being viewed as a positive benchmark. But in a day when major projects are being sanctioned at
break-even prices around $40 per barrel, the industry has become accustomed to the current price levels, and has found ways to
adjust operations to these prices.
One unintended consequence of the recent
slowdown has been the immense knowledge drain out of the industry, and the subsequent knowledge gap within many organizations.
This is leading to project decision making taking longer than in the past, thus pushing projects farther and farther into the future.
While we were able to realize markedly
improved gross margins during the first half of the year, delays in contract executions will likely hamper our performance during
the latter part of the year. While we are engaged in discussions around several large projects, our customers are increasingly
pushing these projects into 2018.
Our backlog of contracted projects has
continued to shrink, even as we are called upon to provide more and more solutions in the inspection, maintenance and repair market.
These solutions are executed on short notice, so while we may not be in a position to cumulatively forecast them, we expect to
perform a significant number of these kinds of projects over the foreseeable future. Our customers are increasingly looking to
extend the life of their existing fields, and are appreciative of our ability to service equipment built by the different equipment
manufacturers, given our long history of working with these companies.
Similarly, we have recently been in serious
discussions with operators in emerging oil frontiers, and expect to see increased activity in these areas. A common theme has been
the challenge of getting the multinational equipment manufacturers to simply service their existing assets, rather than proposing
new equipment requiring significant capital investments; a challenge whose solution is within our core expertise.
We therefore anticipate focusing more on
service projects, and feel confident that our strong balance sheet, and continuous organizational optimization efforts, will enable
us to continue being a preferred solution provider, as we continue creating the most value for our customers, shareholders and
employees.
Results of Operations
Three Months Ended June 30, 2017 Compared
to Three Months Ended June 30, 2016
Revenues.
Revenues for the three
months ended June 30, 2017 were $5,379 compared to revenues of $5,968 for the three months ended June 30, 2016. The $589, or 11
percent, decrease was primarily the result of fewer jobs in process in 2017.
Gross profit.
Gross profit for
the three months ended June 30, 2017 was $2,663, or 50 percent of revenues, compared to $1,941, or 33 percent of revenues,
for the three months ended June 30, 2016. Despite the lower revenues in 2017, the $722 increase in gross profit, or 17
percent gross profit percentage respectively, was due primarily to a larger portion of higher margin service work in 2017
compared to 2016 and resolution of an outstanding customer issue.
Selling, general
and administrative expenses.
Selling, general and administrative expenses (“SG&A”) were $2,223, or 41
percent of revenues, for the three months ended June 30, 2017 compared to $2,378, or 40 percent of revenues, for the three
months ended June 30, 2016. The $155 decrease in 2017 resulted primarily from lower rent expense, professional fees, and
stock-based compensation, offset by a marginal increase in advertising fees.
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 expense, income taxes, non-cash share-based compensation expense, equity in net income or loss of joint venture,
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, equity in net income or
loss of joint venture) 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 (loss) to Modified EBITDA (EBITDA loss) for the three months ended June 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net income (loss)
|
|
$
|
476
|
|
|
$
|
(542
|
)
|
(Deduct) add back interest (income) expense, net
|
|
|
(12
|
)
|
|
|
6
|
|
Add back depreciation and amortization
|
|
|
402
|
|
|
|
384
|
|
Add back income tax expense
|
|
|
5
|
|
|
|
5
|
|
Add back share-based compensation
|
|
|
33
|
|
|
|
119
|
|
Modified EBITDA ( EBITDA loss)
|
|
$
|
904
|
|
|
$
|
(28
|
)
|
Modified EBITDA was $904 for the
three months ended June 30, 2017 compared to Modified EBITDA loss of $(28) for the three months ended June 30, 2016. The $932
increase in Modified EBITDA was due primarily to the increase in net income, which was driven by increased gross
profit and lower SG&A expenses, as discussed previously.
Six Months Ended June 30, 2017 Compared
to Six Months Ended June 30, 2016
Revenues.
Revenues for the six months
ended June 30, 2017 were $10,987 compared to revenues of $10,323 for the six months ended June 30, 2016. The $664, or 6 percent,
increase was primarily a result of the commencement of service portions of certain large projects during the six months ended
June 30, 2017, which included long-term rental of our equipment.
Gross Profit.
Gross profit for the
six months ended June 30, 2017 was $5,307, or 48 percent of revenues, compared to gross profit of $3,374, or 33 percent of revenues,
for the six months ended June 30, 2016. The higher margins during the six months ended June 30, 2017 related to our increased revenues,
a larger proportion of higher margin service work, and the resolution of an outstanding customer issue.
Selling, general and
administrative expenses.
Selling, general and administrative expenses (“SG&A”) for the six months ended
June 30, 2017 was $4,732, or 43 percent of revenues, compared to $5,166, or 50 percent of revenues, for the six months ended
June 30, 2016. The $434 decrease in 2017 resulted primarily due to a reduction in certain SG&A salaries and rent
expense incurred in 2016, related to the sale and move from our Channelview
location in 2016, we did not incur in 2017.
Equity in net income of joint venture.
During the six months ended June 30, 2017, we recorded $94 of equity in net income of joint venture, related to net income, for
the year ended December 31, 2016, of Cuming Flotation Technologies, LLC, in which we previously owned a 20 percent interest.
Other income (expense)
. During the
six months ended June 30, 2016, we recognized a gain on the sale of property, plant and equipment of $1,070 related to the sale
of our Channelview location.
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
income (loss) to Modified EBITDA (EBITDA loss) for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net income (loss)
|
|
$
|
541
|
|
|
$
|
(993
|
)
|
Less gain on sale of assets
|
|
|
(14
|
)
|
|
|
(1,070
|
)
|
(Deduct) add back interest (income) expense, net
|
|
|
(26
|
)
|
|
|
61
|
|
Add back depreciation and amortization
|
|
|
791
|
|
|
|
812
|
|
Add back income tax expense
|
|
|
10
|
|
|
|
10
|
|
Add back share-based compensation
|
|
|
67
|
|
|
|
274
|
|
Modified EBITDA (EBITDA loss)
|
|
$
|
1,369
|
|
|
$
|
(906
|
)
|
Modified EBITDA for the six months ended
June 30, 2017 was $1,369 compared to Modified EBITDA loss of $(906) for the six months ended June 30, 2016. The $2,275 increase
was primarily due to the 2016 impact of the gain on the sale of assets from our Channelview property and increased net income,
as previously discussed.
Liquidity and Capital Resources
Overview
Historically, we have supplemented the
financing of our capital needs through debt and equity financings.
From 2008 through June 30, 2016, we maintained
a credit facility (the “Facility”) with Whitney Bank.
In March 2016, we paid all borrowings under
the Facility with proceeds received from the sale of our Channelview location.
Following the expiration
of the Facility on June 30, 2016, we no longer have any credit facilities available to us.
As a result of cash we expect to generate
from operations, we believe we will have adequate liquidity to meet our future operating requirements.
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 2 “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, 2016 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 May 23, 2016, our Board of Directors
authorized a repurchase program (the “Repurchase Program”) under which we may repurchase up to $1,000 of our outstanding
stock. Subsequently, on March 29, 2017, our Board of Directors authorized a renewal and extension of the Repurchase Program for
an additional $1,000 until March 31, 2018. The purchases may be made from time to time in the open market, through privately negotiated
transactions and Rule 10b5-1 trading plans in accordance with applicable laws, rules and regulations. The Repurchase Program is
being funded from cash on hand and cash provided by operating activities.
As of June 30, 2017, a total of $1,125
of our stock (1,085 shares) has been purchased under the Repurchase Program.