ITEM 1. FINANCIAL STATEMENTS
DEEP DOWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and par value amounts)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,697
|
|
|
$
|
3,939
|
|
Short term investment (certificate of deposit)
|
|
|
1,032
|
|
|
|
1,017
|
|
Accounts receivable, net of allowance of $10
|
|
|
3,001
|
|
|
|
4,142
|
|
Contract assets
|
|
|
1,174
|
|
|
|
925
|
|
Prepaid expenses and other current assets
|
|
|
122
|
|
|
|
302
|
|
Total current assets
|
|
|
9,026
|
|
|
|
10,325
|
|
Property, plant and equipment, net
|
|
|
12,235
|
|
|
|
12,352
|
|
Intangibles, net
|
|
|
58
|
|
|
|
63
|
|
Other assets
|
|
|
1,116
|
|
|
|
1,230
|
|
Total assets
|
|
$
|
22,435
|
|
|
$
|
23,970
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,212
|
|
|
$
|
1,511
|
|
Contract liabilities
|
|
|
508
|
|
|
|
612
|
|
Current portion of long-term debt
|
|
|
9
|
|
|
|
–
|
|
Total current liabilities
|
|
|
1,729
|
|
|
|
2,123
|
|
Long-term debt
|
|
|
51
|
|
|
|
–
|
|
Total liabilities
|
|
|
1,780
|
|
|
|
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, 15,738,660 shares issued
|
|
|
15
|
|
|
|
15
|
|
Treasury stock
|
|
|
(2,040
|
)
|
|
|
(2,040
|
)
|
Additional paid-in capital
|
|
|
73,261
|
|
|
|
73,246
|
|
Accumulated deficit
|
|
|
(50,581
|
)
|
|
|
(49,374
|
)
|
Total stockholders' equity
|
|
|
20,655
|
|
|
|
21,847
|
|
Total liabilities and stockholders' equity
|
|
$
|
22,435
|
|
|
$
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
3,912
|
|
|
$
|
3,470
|
|
|
$
|
11,722
|
|
|
$
|
14,458
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,089
|
|
|
|
2,103
|
|
|
|
6,518
|
|
|
|
7,151
|
|
Depreciation expense
|
|
|
275
|
|
|
|
333
|
|
|
|
871
|
|
|
|
966
|
|
Total cost of sales
|
|
|
2,364
|
|
|
|
2,436
|
|
|
|
7,389
|
|
|
|
8,117
|
|
Gross profit
|
|
|
1,548
|
|
|
|
1,034
|
|
|
|
4,333
|
|
|
|
6,341
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,145
|
|
|
|
2,264
|
|
|
|
5,804
|
|
|
|
6,995
|
|
Depreciation and amortization
|
|
|
57
|
|
|
|
79
|
|
|
|
188
|
|
|
|
238
|
|
Total operating expenses
|
|
|
2,202
|
|
|
|
2,343
|
|
|
|
5,992
|
|
|
|
7,233
|
|
Operating loss
|
|
|
(654
|
)
|
|
|
(1,309
|
)
|
|
|
(1,659
|
)
|
|
|
(892
|
)
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
10
|
|
|
|
21
|
|
|
|
28
|
|
|
|
46
|
|
Equity in net income of joint venture
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
94
|
|
Gain on sale of assets
|
|
|
–
|
|
|
|
559
|
|
|
|
439
|
|
|
|
574
|
|
Total other income
|
|
|
10
|
|
|
|
580
|
|
|
|
467
|
|
|
|
714
|
|
Loss before income taxes
|
|
|
(644
|
)
|
|
|
(729
|
)
|
|
|
(1,192
|
)
|
|
|
(178
|
)
|
Income tax expense
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(15
|
)
|
|
|
(15
|
)
|
Net loss
|
|
$
|
(649
|
)
|
|
$
|
(734
|
)
|
|
$
|
(1,207
|
)
|
|
$
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.01
|
)
|
Fully diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,648
|
|
|
|
14,695
|
|
|
|
13,507
|
|
|
|
15,074
|
|
Fully diluted
|
|
|
13,648
|
|
|
|
14,695
|
|
|
|
13,507
|
|
|
|
15,074
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,207
|
)
|
|
$
|
(193
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
15
|
|
|
|
101
|
|
Depreciation and amortization
|
|
|
1,059
|
|
|
|
1,204
|
|
Gain on sale of assets
|
|
|
(439
|
)
|
|
|
(574
|
)
|
Equity in net income of joint venture
|
|
|
–
|
|
|
|
(94
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance
|
|
|
931
|
|
|
|
2,298
|
|
Contract Assets
|
|
|
(249
|
)
|
|
|
779
|
|
Prepaid expenses and other current assets
|
|
|
180
|
|
|
|
(45
|
)
|
Other assets
|
|
|
102
|
|
|
|
(161
|
)
|
Accounts payable and accrued liabilities
|
|
|
(299
|
)
|
|
|
(362
|
)
|
Contract liabilities
|
|
|
(104
|
)
|
|
|
(2,745
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(11
|
)
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(759
|
)
|
|
|
(2,306
|
)
|
Proceeds from sale of assets
|
|
|
538
|
|
|
|
958
|
|
Repayments on notes receivable
|
|
|
12
|
|
|
|
20
|
|
Short term investment-certificate of deposit
|
|
|
(15
|
)
|
|
|
(10
|
)
|
Cash distribution received from joint venture
|
|
|
–
|
|
|
|
94
|
|
Net cash used in investing activities
|
|
|
(224
|
)
|
|
|
(1,244
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payment on long-term debt
|
|
|
(7
|
)
|
|
|
–
|
|
Cash paid for repurchase of our common stock
|
|
|
–
|
|
|
|
(1,474
|
)
|
Net cash used in financing activities
|
|
|
(7
|
)
|
|
|
(1,474
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(242
|
)
|
|
|
(2,510
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
3,939
|
|
|
|
8,203
|
|
Cash and cash equivalents, end of period
|
|
$
|
3,697
|
|
|
$
|
5,693
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of investing and financing activities:
|
|
|
|
|
|
|
|
|
Addition of property, plant and equipment (non-cash)
|
|
$
|
277
|
|
|
$
|
–
|
|
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 notes 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 and cash equivalents as of September 30, 2018 and December 31, 2017 was $3,697
and $3,939, respectively.
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 and pursuing 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 nine months ended September 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.
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 on the
Company’s results of operations or financial position 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 September 30, 2018
Compared to Three Months Ended September 30, 2017
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Fixed Price Contracts
|
|
$
|
2,115
|
|
|
$
|
315
|
|
Service Contracts
|
|
|
1,797
|
|
|
|
3,155
|
|
Total
|
|
$
|
3,912
|
|
|
$
|
3,470
|
|
Nine Months Ended September 30, 2018
Compared to Nine Months Ended September 30, 2017
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Fixed Price Contracts
|
|
$
|
5,048
|
|
|
$
|
2,742
|
|
Service Contracts
|
|
|
6,674
|
|
|
|
11,716
|
|
Total
|
|
$
|
11,722
|
|
|
$
|
14,458
|
|
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 company-wide standard and disciplined
quarterly estimate at completion 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.
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 September 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”.
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Costs incurred on uncompleted contracts
|
|
$
|
8,625
|
|
|
$
|
9,564
|
|
Estimated earnings on uncompleted contracts
|
|
|
8,841
|
|
|
|
10,741
|
|
|
|
|
17,466
|
|
|
|
20,305
|
|
Less: Billings to date on uncompleted contracts
|
|
|
(16,800
|
)
|
|
|
(19,992
|
)
|
|
|
$
|
666
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
|
|
Included in the accompanying unaudited condensed consolidated balance sheets under the following captions:
|
|
|
|
|
|
|
|
|
Contract Assets
|
|
$
|
1,174
|
|
|
$
|
925
|
|
Contract Liabilities
|
|
|
(508
|
)
|
|
|
(612
|
)
|
|
|
$
|
666
|
|
|
$
|
313
|
|
The balance in contract liabilities at
September 30, 2018 and December 31, 2017 consisted primarily of unearned billings related to fixed-price contracts.
The balance in contract assets at September
30, 2018 and December 31, 2017 consisted primarily of earned but unbilled revenues 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 September 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.
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:
|
|
September 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
|
|
|
1,320
|
|
|
|
1,245
|
|
|
2 - 8 years
|
Construction in progress
|
|
|
3,066
|
|
|
|
2,127
|
|
|
-
|
Total property, plant and equipment
|
|
|
22,922
|
|
|
|
23,498
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(10,687
|
)
|
|
|
(11,146
|
)
|
|
|
Property, plant and equipment, net
|
|
$
|
12,235
|
|
|
$
|
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 July 27, 2018, we granted 300 shares
of restricted stock to our Chief Financial Officer (“CFO”). These shares have a fair value grant price of $0.79 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
anniversary date of his appointment to the role, subject to continued service as our CFO. We are amortizing the related share-based
compensation of $237 over the three-year requisite service period.
For the three months ended September 30,
2018 and 2017, we recognized a total of $5 and $34 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. For the nine months ended September 30, 2018 and 2017, we recognized a total of $15 and $101, 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 $247 at September 30, 2018. These costs are expected to be recognized as expense
over a weighted-average period of 2.53 years.
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 September 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 September 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 September 30, 2018, 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. Mediation is currently scheduled to take place on Wednesday November 28, 2018. The total amount in dispute is $2,630. At this point in the legal process, we believe that 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 September 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. Dollar amounts are in thousands,
except backlog amount and commodity prices.
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
With oil prices continuing to hold firm
above $60 per barrel, the general consensus within the industry is that the worst of the downturn is now behind us. However, given
the severity and duration of the downturn, major oil companies are still hesitant to fully embrace the higher oil prices. This
cautious outlook continues to give rise to slower decision making, resulting in further delays in project greenlighting.
While we were able to realize higher revenues
and reduce our net loss in the third quarter of 2018, compared to the same period in 2017, projects we are involved in have continued
to advance at a slower pace than projected, resulting in revenues being pushed to future periods. Nevertheless, we expect these
future revenues to be higher, due to expanding scopes of work for us.
Additionally, we are continuing to engage
with our customers that operate in emerging markets, and expect to be fully operational in at least one international location
sometime in 2019. Our likely first effort will be to support a long-standing key customer, which has significant project needs
that require work to be performed in compliance with local content requirements in a rapidly growing oil and gas region. We will
provide further details as we move further along in the process.
Back in July, 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. The review is ongoing, though at this point 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.
With a solid balance sheet and a backlog
of more than $16 million, we remain confident in our ability to continue to serve as a preferred solutions provider for the oil and
gas industry, buoyed by our dedicated employees and our supportive customers and suppliers, as we continue to ensure we maximize
value for our shareholders.
Results of Operations
Three Months Ended
September
30,
2018 Compared to Three Months Ended
September
30, 2017
Revenues.
Revenues for the three
months ended September 30, 2018 were $3,912 compared to revenues of $3,470 for the three months ended September 30, 2017. The $442,
or 13 percent, increase was primarily the result of more projects in process during the three months ended September 30, 2018,
compared to the three months ended September 30, 2017.
Gross profit.
Gross profit for the
three months ended September 30, 2018 was $1,548, or 40 percent of revenues, compared to $1,034, or 30 percent of revenues, for
the three months ended September 30, 2017. The $514 increase in gross profit, or 10 percent increase in gross profit percentage,
respectively, was due to increased revenues on higher margin service projects during the three months ended September 30, 2018,
compared to the three months ended September 30, 2017.
Selling, general and administrative
expenses.
Selling, general and administrative (“SG&A”) expenses were $2,145, or 55 percent of revenues, for
the three months ended September 30, 2018 compared to $2,264, or 65 percent of revenues, for the three months ended September 30,
2017. The $119 decrease in 2018 resulted primarily from a decrease in SG&A labor as a result of personnel reductions. The decrease
in SG&A expense as a percent of revenues was due to higher revenues and lower SG&A expenses during the three months ended
September 30, 2018 as compared to the three months ended September 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); and 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
loss to Modified EBITDA loss for the three months ended September 30, 2018 and 2017:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(649
|
)
|
|
$
|
(734
|
)
|
Deduct gain on sale of assets
|
|
|
–
|
|
|
|
(559
|
)
|
Deduct interest income, net
|
|
|
(10
|
)
|
|
|
(21
|
)
|
Add depreciation and amortization
|
|
|
332
|
|
|
|
412
|
|
Add income tax expense
|
|
|
5
|
|
|
|
5
|
|
Add share-based compensation
|
|
|
5
|
|
|
|
34
|
|
Modified EBITDA loss
|
|
$
|
(317
|
)
|
|
$
|
(863
|
)
|
Modified EBITDA loss was $317 for the three
months ended September 30, 2018 compared to Modified EBITDA loss of $863 for the three months ended September 30, 2017. The $546
decrease in Modified EBITDA loss was due primarily to the increase in gross profit during the three months ended September 30,
2018 as compared to the three months ended September 30, 2017.
Nine Months Ended
September
30,
2018 Compared to Nine Months Ended September 30, 2017
Revenues.
Revenues for the nine
months ended September 30, 2018 were $11,722 compared to revenues of $14,458 for the nine months ended September 30, 2017. The
$2,736, or 19 percent, decrease was primarily the result of projects with more limited scopes of work in 2018, compared to projects
executed in 2017.
Gross profit.
Gross profit for the
nine months ended September 30, 2018 was $4,333, or 37 percent of revenues, compared to $6,341, or 44 percent of revenues, for
the nine months ended September 30, 2017. The $2,008 decrease in gross profit, or 7 percent decrease in gross profit percentage,
respectively, was due to lower revenues in the nine months ended September 30, 2018, compared to the nine months ended September
30, 2017.
Selling, general and administrative
expenses.
SG&A expenses were $5,804, or 50 percent of revenues, for the nine months ended September 30, 2018 compared to
$6,995, or 48 percent of revenues, for the nine months ended September 30, 2017. The $1,191 decrease in 2018 resulted primarily
from an $801 decrease in SG&A labor, as a result of personnel reductions, and a $401 decrease in other SG&A expenses. The
increase in SG&A as a percent of revenues was due to lower revenues during the first nine months of 2018, compared to the first
nine 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 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 condensed consolidated statements of operations.
The following is a reconciliation of net
loss to Modified EBITDA loss for the nine months ended September 30, 2018 and 2017:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(1,207
|
)
|
|
$
|
(193
|
)
|
Deduct gain on sale of assets
|
|
|
(439
|
)
|
|
|
(574
|
)
|
Deduct interest income, net
|
|
|
(28
|
)
|
|
|
(46
|
)
|
Add depreciation and amortization
|
|
|
1,059
|
|
|
|
1,204
|
|
Add income tax expense
|
|
|
15
|
|
|
|
15
|
|
Add share-based compensation
|
|
|
15
|
|
|
|
101
|
|
Modified (EBITDA loss) EBITDA
|
|
$
|
(585
|
)
|
|
$
|
507
|
|
Modified EBITDA loss was ($585) for the
nine months ended September 30, 2018 compared to Modified EBITDA of $507 for the nine months ended September 30, 2017. The $1,092
decrease in Modified EBITDA was due primarily to the increase in net loss, which was driven by the previously discussed decrease
in gross profit offset by the decrease in our SG&A expense during the nine months ended September 30, 2018.
Liquidity and Capital Resources
During the nine months ended September
30, 2018 and September 30, 2017, we primarily financed our operating and capital needs through cash on hand and cash generated
from operations.
During the nine months ended September
30, 2018, our trade accounts receivable decreased by $1,141, helping our cash position which declined by $242. The increase in
cash from collections was offset by our net loss for the nine months ended September 30, 2018.
Through a combination of cash generated
from operations, opportunistic sales of non-core equipment, and reductions in our administrative costs and capital investments,
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, pursuing 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 US 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 September 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.