UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172018
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 000-30351
DEEP DOWN, INC.
(Exact name of registrant as specified in its charter)
Nevada | 75-2263732 | |
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |
8827 W. Sam Houston Pkwy N., Suite 100 Houston, Texas | 77040 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code:(281) 517-5000
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. þYes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þNo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ | Accelerated filer ¨ | |
Non-accelerated filer¨ | Smaller reporting companyþ | |
Emerging growth company¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes. Yes ¨ No þ
At November 14, 2017,6, 2018, there were 13,436,24313,736,243 shares outstanding of Common Stock, par value $0.001 per share.share.
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Unless otherwise indicated, references to “we,” “us,” and “our” in this Quarterly Report on Form 10-Q (“Report”) refer collectively to Deep Down, Inc., a Nevada corporation (“Deep Down”), and its directly and indirectly wholly-owned subsidiaries.
Deep Down is the parent company to the following directly and indirectly wholly-owned subsidiaries: Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”); Deep Down International Holdings, LLC, a Nevada limited liability company (“DDIH”);company; and Deep Down Brasil - Solucoes em Petroleo e Gas, Ltda, a Brazilian limited liability company (“Deep Down Brasil”).company.
Our current operations are primarily conducted under Deep Down Delaware. In addition to our strategy of continuing to grow and strengthen our operations, including by expanding our services and products in response to our customers’ demands, we intend to continue to seek strategic acquisitions of complementary service providers, product manufacturers and technologies that are focused primarily on supporting deepwater and ultra-deepwater offshore exploration, development and production of oil and gas reserves and other maritime operations.
Readers should consider the following information as they review this Report:
Forward-Looking Statements
The statements contained or incorporated by reference in this Report that are not historical facts are “forward-looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expect,” “may,” “will,” “should,” “intend,” “plan,” “could,” “estimate”“estimate,” or “anticipate,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.
Given the risks and uncertainties relating to forward-looking statements, investors should not place undue reliance on such statements. Forward-looking statements included in this Report speak only as of the date of this Report and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to be incorrect. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. The risks and uncertainties mentioned previously relate to, among other matters, the following:
• | Economic uncertainty and financial market conditions may impact our customer base, suppliers and backlog; | |
• | Our backlog is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future earnings; | |
• | Our | |
• | A portion of our contracts may contain terms with penalty provisions; | |
• | Fluctuations in the price and supply of raw materials used to manufacture our products may reduce our profits and could materially impact our ability to meet commitments to our customers; | |
• | Our operations could be adversely impacted by the continuing effects of government regulations; | |
• | International and political events may adversely affect our operations; | |
ii |
• | Our operating results may vary significantly from quarter to quarter; | |
• | We may be unsuccessful at generating profitable internal growth; | |
• | The departure of key personnel could disrupt our business; | |
• | Our business requires skilled labor, and we may be unable to attract and retain qualified |
• | Unfavorable legal outcomes could have a negative impact on our business; and | |
• | Our previously announced plans to explore and evaluate strategic alternatives to maximize stockholder value. |
Document Summaries
Descriptions of documents and agreements contained in this Report are provided in summary form only, and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to our Annual Report on Form 10-K for the year ended December 31, 2016,2017, other periodic and current reports we have filed with the SEC or this Report.
Access to Filings
Access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments thereto, filed with or furnished to the SEC pursuant to Section 13(a) of the Exchange Act, as well as reports filed electronically pursuant to Section 16(a) of the Exchange Act, may be obtained through our website (http://www.deepdowncinc.com)www.deepdowninc.com) as soon as reasonably practicable after we have filed or furnished such material with the SEC. The contents of our website are not, and shall not be deemed to be, incorporated into this Report.
iii |
iv |
DEEP DOWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and par value amounts)
(In thousands, except share and par value amounts) | ||||||||||||||||
September 30, 2017 | December 31, 2016 | |||||||||||||||
Unaudited | September 30, 2018 | December 31, 2017 | ||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 5,693 | $ | 8,203 | ||||||||||||
Cash and cash equivalents | $ | 3,697 | $ | 3,939 | ||||||||||||
Short term investment (certificate of deposit) | 1,015 | 1,005 | 1,032 | 1,017 | ||||||||||||
Accounts receivable, net of allowance of $10 | 3,647 | 5,945 | 3,001 | 4,142 | ||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 298 | 1,077 | ||||||||||||||
Contract assets | 1,174 | 925 | ||||||||||||||
Prepaid expenses and other current assets | 909 | 864 | 122 | 302 | ||||||||||||
Total current assets | 11,562 | 17,094 | 9,026 | 10,325 | ||||||||||||
Property, plant and equipment, net | 8,737 | 7,938 | 12,235 | 12,352 | ||||||||||||
Intangibles, net | 64 | 69 | 58 | 63 | ||||||||||||
Long term asset - Carousel | 3,117 | 3,117 | ||||||||||||||
Other assets | 326 | 211 | 1,116 | 1,230 | ||||||||||||
Total assets | $ | 23,806 | $ | 28,429 | $ | 22,435 | $ | 23,970 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 1,466 | $ | 1,778 | $ | 1,212 | $ | 1,511 | ||||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 604 | 3,349 | ||||||||||||||
Contract liabilities | 508 | 612 | ||||||||||||||
Current portion of long-term debt | 9 | – | ||||||||||||||
Total current liabilities | 2,070 | 5,127 | 1,729 | 2,123 | ||||||||||||
Long-term debt | 51 | – | ||||||||||||||
Total liabilities | 2,070 | 5,127 | 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 | – | – | ||||||||||||||
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, 2,002,417 and 587,847 shares at cost, respectively | (2,041 | ) | (567 | ) | ||||||||||||
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 | 73,213 | 73,112 | 73,261 | 73,246 | ||||||||||||
Accumulated deficit | (49,451 | ) | (49,258 | ) | (50,581 | ) | (49,374 | ) | ||||||||
Total stockholders' equity | 21,736 | 23,302 | 20,655 | 21,847 | ||||||||||||
Total liabilities and stockholders' equity | $ | 23,806 | $ | 28,429 | $ | 22,435 | $ | 23,970 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
1 |
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) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Unaudited | ||||||||||||||||
Revenues | $ | 3,470 | $ | 9,165 | $ | 14,458 | $ | 19,489 | ||||||||
Cost of sales: | ||||||||||||||||
Cost of sales | 2,103 | 5,498 | 7,151 | 11,835 | ||||||||||||
Depreciation expense | 333 | 370 | 966 | 982 | ||||||||||||
Total cost of sales | 2,436 | 5,868 | 8,117 | 12,817 | ||||||||||||
Gross profit | 1,034 | 3,297 | 6,341 | 6,672 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 2,264 | 2,210 | 6,995 | 7,376 | ||||||||||||
Depreciation and amortization | 79 | 113 | 238 | 313 | ||||||||||||
Total operating expenses | 2,343 | 2,323 | 7,233 | 7,689 | ||||||||||||
Operating income (loss) | (1,309 | ) | 974 | (892 | ) | (1,017 | ) | |||||||||
Other income (expense): | ||||||||||||||||
Interest income (expense), net | 21 | 10 | 46 | (51 | ) | |||||||||||
Equity in net income of joint venture | – | – | 94 | – | ||||||||||||
Gain on sale of assets | 559 | – | 574 | 1,070 | ||||||||||||
Total other income (expense) | 580 | 10 | 714 | 1,019 | ||||||||||||
Income (loss) before income taxes | (729 | ) | 984 | (178 | ) | 2 | ||||||||||
Income tax expense | (5 | ) | (5 | ) | (15 | ) | (16 | ) | ||||||||
Net income (loss) | $ | (734 | ) | $ | 979 | $ | (193 | ) | $ | (14 | ) | |||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | (0.05 | ) | $ | 0.06 | $ | (0.01 | ) | $ | – | ||||||
Fully diluted | $ | (0.05 | ) | $ | 0.06 | $ | (0.01 | ) | $ | – | ||||||
Weighted-average shares outstanding: | ||||||||||||||||
Basic | 14,695 | 15,493 | 15,074 | 15,534 | ||||||||||||
Fully diluted | 14,695 | 15,493 | 15,074 | 15,534 |
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.
2 |
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
(In thousands) | 2017 | 2016 | ||||||
Unaudited | ||||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (193 | ) | $ | (14 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Share-based compensation | 101 | 309 | ||||||
Depreciation and amortization | 1,204 | 1,295 | ||||||
Gain on sale of assets | (574 | ) | (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 | 2,298 | 551 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 779 | (848 | ) | |||||
Prepaid expenses and other current assets | (45 | ) | (56 | ) | ||||
Other assets | (161 | ) | 37 | |||||
Accounts payable and accrued liabilities | (362 | ) | 217 | |||||
Billings in excess of costs and estimated earnings on uncompleted contracts | (2,745 | ) | 2,209 | |||||
Net cash provided by operating activities | 208 | 2,653 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (2,306 | ) | (1,105 | ) | ||||
Proceeds from sale of assets (net of $60 cash paid for costs to sell) | 958 | 3,800 | ||||||
Repayments received on employee receivable | 20 | 11 | ||||||
Other investing activity | (10 | ) | – | |||||
Cash distribution received from joint venture | 94 | 161 | ||||||
Net cash provided by (used in) investing activities | (1,244 | ) | 2,867 | |||||
Cash flows from financing activities: | ||||||||
Cash paid for purchase of our common stock | (1,474 | ) | (305 | ) | ||||
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 | (1,474 | ) | 833 | |||||
Change in cash | (2,510 | ) | 6,353 | |||||
Cash, beginning of period | 8,203 | 374 | ||||||
Cash, end of period | $ | 5,693 | $ | 6,727 |
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.
3 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
NOTE 1: | BASIS OF PRESENTATION |
Basis of Presentation
The accompanying unauditedcondensedconsolidated 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 footnotesnotes 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, 2016,2017, filed on March 31, 201728, 2018 with the Commission.
Preparation of financial statements in conformity withUS GAAPrequires 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. andits directly and indirectly wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.
Segments
For the quartersnine months ended September 30, 20172018 and 2016,2017, we had one operating and reporting segment, Deep Down Delaware.
Recently Issued Accounting Standards Not Yet Adopted
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardStandards 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 howeveror 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.position or results of operations.
4 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
NOTE 2: | REVENUES: ADOPTION OF ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS” |
In October 2016,On January 1, 2018, we adopted ASC Topic 606 (“ASC 606”) using the FASB issued ASU No. 2016-16, “Intra-Entity Transfersmodified retrospective method applied to those contracts which were not completed as 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. WeResults for reporting periods beginning after January 1, 2018 are currently evaluating the impact of this ASU onpresented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our consolidated financial statements.historic accounting under Revenue Recognition ASC Topic 605.
InThere 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 2017,1, 2018 because the FASB issued ASU No. 2017-01, “Business Combinations.” ThisCompany’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 ASU clarifiedstandard.
Revenues are recognized when control of the definition of a business withpromised goods or services is transferred to our customers, in an amount that reflects the objective of adding guidanceconsideration we expect to assist entities with evaluatingbe entitled to in exchange for those goods or services. To determine the proper revenue recognition method for our customer contracts, we evaluate whether transactionstwo 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 acquisitions (or disposals)more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of assetscontracts or businesses. The new standard is effective for us January 1, 2018separate the combined or single contract into multiple performance obligations could change the amount of revenue and will be applied prospectively. We are currently evaluating the impactprofit recorded in a given period. For most of our pending adoptionfixed 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 new standard, but do not expect it to have a material impact on our consolidated financial position or resultsdelivery of operations.
In February 2017,multiple units). Hence, 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 beentire contract is accounted for as a modification. An entity shouldone performance obligation.
We account for a contract when it has approval and commitment from both parties, the effects of a modification unless the fair value, vesting conditions and classification, as an entity instrument or a liability instrument,rights of the modified awardparties are identified, payment terms are identified, the same beforecontract has commercial substance and after a change to the terms or conditionscollectability of the share-based payment award. The new standardconsideration 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.
The components of billings, costs and estimated earnings on uncompleted contracts are summarized below:probable.
September 30, 2017 | December 31, 2016 | |||||||
Costs incurred on uncompleted contracts | $ | 8,525 | $ | 8,858 | ||||
Estimated earnings on uncompleted contracts | 9,266 | 6,777 | ||||||
17,791 | 15,635 | |||||||
Less: Billings to date on uncompleted contracts | (18,097 | ) | (17,907 | ) | ||||
$ | (306 | ) | $ | (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 | $ | 298 | $ | 1,077 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts | (604 | ) | (3,349 | ) | ||||
$ | (306 | ) | $ | (2,272 | ) |
The balance in costs and estimated earnings in excessDisaggregation of billings on uncompleted contracts at September 30, 2017 and December 31, 2016 consisted primarily of earned but unbilled revenues related to fixed-price projects.Revenue
The balance in billings in excessfollowing table presents our revenues disaggregated by revenue sources of costsfixed price and estimated earnings on uncompleted contracts atservice 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 December 31, 2016 consisted primarilytake control of unearned billings relatedany 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 fixed-price projects.
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.
5 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)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.
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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.
7 |
NOTE 3: | PROPERTY, PLANT AND EQUIPMENT |
The components of net property, plant and equipment, net are summarized below:
September 30, 2017 | December 31, 2016 | Range of Asset Lives | ||||||||||
Buildings and improvements | 285 | 5 | 7 - 36 years | |||||||||
Leasehold improvements | 908 | 908 | 2 - 5 years | |||||||||
Equipment | 15,372 | 16,360 | 2 - 30 years | |||||||||
Furniture, computers and office equipment | 1,245 | 1,274 | 2 - 8 years | |||||||||
Construction in progress | 1,938 | 586 | – | |||||||||
Total property, plant and equipment | 19,748 | 19,133 | ||||||||||
Less: Accumulated depreciation and amortization | (11,011 | ) | (11,195 | ) | ||||||||
Property, plant and equipment, net | $ | 8,737 | $ | 7,938 |
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 |
NOTE 4: | LONG-TERM DEBT |
From 2008 through June 30, 2016,In January 2018, we maintainedfinanced a credit facility (the “Facility”)new Company vehicle. The financed amount was $67 and is for a term of six years with Whitney Bank. In March 2016, we paidan interest rate of 0.9%, with monthly payments of $1. The financing company will hold a lien on the vehicle until 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 longerpayments have any credit facilities available to us.been made.
NOTE 5: | SHARE-BASED COMPENSATION |
Share-based Compensation Plan
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,July 27, 2018, we granted 30300 shares of restricted stock to an independent director.our Chief Financial Officer (“CFO”). These shares have a fair value grant price of $1.15$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 grantanniversary date anniversary,of his appointment to the role, subject to continued service onas our Board of Directors.CFO. We are amortizing the related share-based compensation of $33$237 over the three-year requisite service period.
For the ninethree months endedSeptember 30,, 2018 and 2017, and 2016, we recognized a total of $101$5 and $309,$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 $73$247 atSeptember 30,, 2017. 2018. These costs are expected to be recognized as expense over a weighted-average period of 0.302.53 years.
NOTE 6: | TREASURY STOCK |
On May 23, 2016, ourMarch 26, 2018, the Board of Directors authorized athe repurchase program (the “Repurchase Program”) under which we were originally authorized to repurchaseof up to $1,000 of ourthe Company’s 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 could 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.common stock (the “Repurchase Program”). The Repurchase Program waswill 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, 2017, we2018, no stock repurchases had exhaustedbeen made under the Repurchase Program. As of the date of this report no decisions have been made on any further stock repurchases. The average price per share of treasury stock throughSeptember 30, 2017 was $1.02. Treasury shares are accounted for using the cost method.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
NOTE 7: | INCOME TAXES |
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, atAt September 30,, 2017 2018 and December 31, 20162017 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,September 30, 2018, we were notare involved in anyone material legal proceedings.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, 20172018 and 2016,2017, there were no potentially dilutive securities outstanding, but they were not taken into consideration in calculating diluted EPS because there were losses, so including them would have been anti-dilutive.
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, 2016,2017, filed with the Securities and Exchange Commission (“SEC”) on March 31, 201728, 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.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.
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
Three years into the downturn inWith oil prices continuing to hold firm above $60 per barrel, the industry has largely come to terms with the lower prices, and adjusted accordingly. So much so, that the recent slight uptick in prices is giving rise to optimism about the future. However, even without increases in prices, oil companies have modified their strategies to manage their operations with the lower prices, with projects being executed at breakeven prices as low as $50 a barrel.
One key strategy being employed acrossgeneral consensus within the industry is that the increased useworst of strategic partnerships. Whether betweenthe downturn is now behind us. However, given the severity and duration of the downturn, major oil and gas operators and their suppliers, or between suppliers who serve different steps alongcompanies are still hesitant to fully embrace the value chain, these partnerships are realizing increased value duehigher oil prices. This cautious outlook continues to the alignment of incentives, while spreadinggive rise to slower decision making, resulting in further delays in project risks.greenlighting.
While we are disheartened by delayswere able to realize higher revenues and reduce our net loss in some keythe 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 working on, and the resulting disappointing results, we are cautiously optimistic that partnerships we are pursuing will provide material benefitshigher, due to expanding scopes of work for us in 2018 and beyond, even as we continue to engage with our existing and new customers on their projects. We are especially looking to take advantage of such partnerships to pursue opportunities in international markets, where there is an increase in the focus on local content regulations, in order to enhance local capacity.us.
We are continuing to engage in more discussions with different customers on what is commonly referred to as brownfield work, which is where operators seek to derive further benefit from their existing infrastructure, rather than develop new fields. We continue to view this as a growth opportunity for us, especially as a mitigation for continued delays in new projects, and are making concerted efforts to enhance our market position in this area.
Our balance sheet continues to be strong, we continue to evaluate opportunities to optimize our cost structure, andAdditionally, 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 they make planswe 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 their projects in 2018completion of the process, and beyond. Through these effortsdo 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 strongly committedconfident in our ability to creatingcontinue to serve as a preferred solutions provider for the mostoil and gas industry, buoyed by our dedicated employees and our supportive customers and suppliers, as we continue to ensure we maximize value for our customers, shareholders and employees.shareholders.
Results of Operations
Three Months EndedSeptember30, 20172018 Compared to Three Months EndedSeptember30, 20162017
Revenues. Revenues for the three months ended September 30, 20172018 were $3,470$3,912 compared to revenues of $9,165$3,470 for the three months ended September 30, 2016.2017. The $5,695,$442, or 6213 percent, decreaseincrease was primarily the result of delays in the commencement of certain customer projects, and fewermore projects in process in 2017, coupled with the commencement of procurement and manufacturing activities on certain customer orders that resulted in higher than normal revenues induring the three month periodmonths ended September 30, 2016.2018, compared to the three months ended September 30, 2017.
Gross profit. Gross profit for the three months ended September 30, 20172018 was $1,034,$1,548, or 3040 percent of revenues, compared to $3,297,$1,034, or 3630 percent of revenues, for the three months ended September 30, 2016.2017. The $2,263 decrease$514 increase in gross profit, or 610 percent decreaseincrease in gross profit percentage, respectively, was due to lowerincreased revenues inon higher margin service projects during the three months ended September 30, 2018, compared to the three months ended September 30, 2017.
10 |
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 compared to $2,210, or 242017. 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 for the three months ended September 30, 2016. The $54 increase in 2017 resulted primarily from labor costs directed to SG&A activitieswas due to higher revenues and lower manufacturing and/or service activities.
Other income (expense). During the three months ended September 30, 2017, we recognized a gain on the sale of property, plant and equipment of $559 related to the sale of one of our ROVs.There was no gain or loss on the sale of property, plant and equipmentSG&A expenses during the three months ended September 30, 2016.2018 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 expense,income, 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); and 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)loss to Modified EBITDA (EBITDA loss)loss for the three months ended September 30, 20172018 and 2016:2017:
Three Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Net (loss) income | $ | (734 | ) | $ | 979 | |||
Less gain on sale of assets | (559 | ) | – | |||||
Deduct interest income, net | (21 | ) | (10 | ) | ||||
Add back depreciation and amortization | 412 | 483 | ||||||
Add back income tax expense | 5 | 5 | ||||||
Add back share-based compensation | 34 | 35 | ||||||
Modified ( EBITDA loss) EBITDA | $ | (863 | ) | $ | 1,492 |
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 ($863)$317 for the three months ended September 30, 20172018 compared to Modified EBITDA loss of $1,492$863 for the three months ended September 30, 2016.2017. The $2,355$546 decrease in Modified EBITDA loss was due primarily to the decreaseincrease in net income, which was driven by the previously discussed decreased revenues, as well as the gain on sale of assetsgross profit during the 2017 period.three months ended September 30, 2018 as compared to the three months ended September 30, 2017.
Nine Months EndedSeptember30, 20172018 Compared to Nine Months Ended September 30, 20162017
Revenues. Revenues for the nine months ended September 30, 20172018 were $14,458$11,722 compared to revenues of $19,489$14,458 for the nine months ended September 30, 2016.2017. The $5,031,$2,736, or 2619 percent, decrease was primarily athe result of project delays and fewer projects with more limited scopes of work in process2018, compared to projects executed in 2017, coupled with the previously discussed above average activity levels in the same period in 2016.2017.
Gross Profit.profit. Gross profit for the nine months ended September 30, 20172018 was $6,341,$4,333, or 4437 percent of revenues, compared to gross profit of $6,672,$6,341, or 3444 percent of revenues, for the nine months ended September 30, 2016. Though we had a slight2017. The $2,008 decrease of $331 in gross profit, we maintained higher margins as aor 7 percent decrease in gross profit percentage, of revenues,respectively, was due to a larger proportion of higher margin service work, as well aslower revenues in the resolution of an outstanding customer issue, duringnine months ended September 30, 2018, compared to the nine months ended September 30, 2017.
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Selling, general and administrative expenses.SG&A expenses for the nine months ended September 30, 2017 were $6,995,$5,804, or 48 percent of revenues, compared to $7,376, or 3850 percent of revenues, for the nine months ended September 30, 2016. The $381 decrease in 2017 resulted primarily due2018 compared 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, as well as a decrease in our legal expenses.
Equity in net income$6,995, or 48 percent of joint venture. Duringrevenues, for the nine months ended September 30, 2017, we recorded $942017. The $1,191 decrease in 2018 resulted primarily from an $801 decrease in SG&A labor, as a result of equitypersonnel reductions, and a $401 decrease in net incomeother SG&A expenses. The increase in SG&A as a percent of joint venture, relatedrevenues was due to net income, forlower revenues during the year ended December 31, 2016, of Cuming Flotation Technologies, LLC, in which we previously owned a 20 percent interest.
Other income (expense). During thefirst nine months ended September 30, 2017, we recognized a gain on the sale of property, plant and equipment of $574 primarily related2018, compared to the sale of one of our ROVs, while during thefirst nine months ended September 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.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, 20172018 and 2016:2017:
Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Net loss | $ | (193 | ) | $ | (14 | ) | ||
Less gain on sale of assets | (574 | ) | (1,070 | ) | ||||
(Deduct) add back interest (income) expense, net | (46 | ) | 51 | |||||
Add back depreciation and amortization | 1,204 | 1,295 | ||||||
Add back income tax expense | 15 | 16 | ||||||
Add back share-based compensation | 101 | 309 | ||||||
Modified EBITDA | $ | 507 | $ | 587 |
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, 2017 was $5072018 compared to Modified EBITDA of $587$507 for the nine months ended September 30, 2016.2017. The $80 decrease was primarily due to the$1,092 decrease in gain on sale of assets, the decrease in share-based compensation, andModified EBITDA was due primarily to the increase in net loss, which was driven by the previously discussed decrease in 2017 as compared to 2016.gross profit offset by the decrease in our SG&A expense during the nine months ended September 30, 2018.
Liquidity and Capital Resources
Overview
Historically,During the nine months ended September 30, 2018 and September 30, 2017, we have supplemented the financing ofprimarily financed our operating and capital needs through debtcash on hand and equity financings.cash generated from operations.
From 2008 through JuneDuring the nine months ended September 30, 2016, we maintained a credit facility (the “Facility”) with Whitney Bank. In March 2016, we paid all borrowings under2018, 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 Facility with proceeds received from the sale of our Channelview location.Following the expiration of the Facility on Junenine months ended September 30, 2016, we no longer have any credit facilities available to us.2018.
AsThrough a resultcombination of cash we expect to generategenerated 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 requirementsrequirements. 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 the foreseeable future.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.
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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 completionpercentage-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 2.7. “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, 20162017 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, ourMarch 26, 2018, the Board of Directors authorized athe repurchase program (the “Repurchase Program”) under which we may repurchaseof up to $1,000 of ourthe Company’s 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.common stock (the “Repurchase Program”). The Repurchase Program waswill 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, 2017, we2018, no stock repurchases had exhaustedbeen made under the Repurchase Program. As
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 date of this Report no decisionsCompany. We have been made on any further stock repurchases.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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance.assurance.
The Company’s management, with the participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2017,2018, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017.2018.
Management’s Report on Internal Control Over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Although the internal controls over financial reporting were not audited, the Company’s management, including the principal executive and principal financial officer, assessed the effectiveness of internal controls over financial reporting as ofSeptember 30,, 2017, 2018, based on criteria issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled“Internal Control-Integrated Framework.” Upon evaluation, the Company’s management has concluded that the Company’s internal controls over financial reporting were effective as ofSeptember 30,, 2017. 2018.
Changes in Internal Control Over Financial Reporting. The Company’s management, with the participation of the principal executive and principal financial officer, have concluded there were no changes in internal control during the fiscal quarter ended September 30, 2017.
2018.
From time to time we are involved in legal proceedings arising from the normal course of business. As of the date of this Report,September 30, 2018, we were notare involved in anyone material legal proceedings.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 approximately $2.63 million. 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS1A. RISK FACTORS
In July 2018, we announced that the Board of Directors is conducting a process to explore and evaluate strategic alternatives to maximize stockholder value. The table below summarizes information aboutBoard has not made any decisions related to any strategic alternatives at this time. No assurances can be made with regard to the timeline for completion of the strategic review, or whether the review will result in any particular outcome. This process may divert the attention of management and cause us to incur various expenses, whether or not any particular outcome is achieved. This process could also negatively impact our purchases of common stock, based on trade date, during the quarter ended September 30, 2017:relationships with our customers and employees.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares Purchased | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs (2) | |||||||||||||
July 1 - July 31 | 79,380 | $ | 1.0439 | 79,380 | $ | 783,002 | ||||||||||
August 1 - August 31 | 328,300 | 1.0068 | 328,300 | 454,702 | ||||||||||||
September 1 - September 30 | 509,982 | (3) | 0.9602 | 454,702 | – | |||||||||||
Total activity for the three months ended September 30, 2017 | 917,662 | $ | 0.9841 | 862,382 | $ | – |
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DEEP DOWN, INC. | ||
(Registrant) | ||
Date: November | ||
By: | /s/ Ronald E. Smith | |
Ronald E. Smith | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ Charles K. Njuguna | |
Charles K. Njuguna | ||
Chief Financial Officer | ||
(Principal Financial Officer) | ||
By: | /s/ Matthew A. Auger | |
Matthew A. Auger | ||
Controller | ||
(Principal Accounting Officer) |
31.1* | Certification of Ronald E. Smith, President and Chief Executive Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
31.2* | Certification of Charles K. Njuguna, Chief Financial Officer, furnished pursuant to Rules 13a-14 and 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
101.INS* | XBRL Instance Document |
101.SCH* | XBRL Schema Document |
101.CAL* | XBRL Calculation Linkbase Document |
101.DEF* | XBRL Definition Linkbase Document |
101.LAB* | XBRL Label Linkbase Document |
101.PRE* | XBRL Presentation Linkbase Document |
* Filed or furnished herewith.