The components of our lease expense were as follows:

As of June 30, 2019, we do not have any finance lease assets or liabilities, nor do we have any subleases.Lease term and discount rate:

During the second quarter weended March 31, 2020, the Company did not have any sale/leaseback transactions.

Present value of lease liabilities:

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. 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 performed) do not materially change by the adoption of the new standard.NOTE 3: REVENUE FROM CONTRACTS WITH CUSTOMERS

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 ourthe Company’s revenues disaggregated by revenue sources of fixed price and service contracts. Sales taxes are excluded from revenues.

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

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 otherIn our fixed price contracts, the customer typicallyeither controls the work in process as evidenced either by contractual termination clauses or by ourwe deliver products with no alternative use to the Company and have rights to payment for work performed to date plus a reasonable profit in connection with delivery of products or services that do not have an alternative use to the Company.as evidenced by contractual termination clauses.

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 are generally required to be paid on a monthly basis. Payment terms for services are usually 30 days from invoice receipt, but during the recent downturn in the industry, some of our customers have begun instituting new payment terms of up to 60 days from invoice receipt.

Contract balances

Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded based on a percentage-of-completion basisthe extent of progress towards completion 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. At June 30, 2019March 31, 2020 and December 31, 2018, we had2019, there were no contracts whose termwith terms that 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.”contracts”.

The contract asset and liability balances at March 31, 2020 and December 31, 2019 consisted primarily of revenue related to fixed-price projects.

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.

At June 30, 2019 and December 31, 2018, all of our fixed price 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.

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.

The components of property,Property, plant and equipment net are summarized below:consisted of the following:

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.

On May 2, 2017, the Company granted 30 shares of restricted stock to the current Chairman of the Board (“Chairman”). These shares have a fair value grant price of $1.15 per share, based on the closing price of our common stock on that day. These shares vest over three years in equal tranches on the anniversary date of the grant subject to continued service to the Company. The related share-based compensation of $35 is being amortized over the three-year requisite service period, and the Company recognized $3 in compensation expense for the quarter ended March 31, 2020.

On July 27, 2018, wethe Company granted 300 shares of restricted stock to ourthe current Chief Executive Officer (“CEO”) and 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,as CFO, subject to continued service as our CFO. We are amortizingto the Company. The related share-based compensation of $237 is being amortized over the three-year requisite service period.period, and the Company recognized $20 in compensation expense for the quarter ended March 31, 2020.

On June 24, 2019, ourthe three independentnon-employee members of the Board of Directors (the “Board”) were each granted an option to purchase 50 shareshares of our common stock at a price of $0.75 per share. Fair value of these stock options was $0.44 per share at the date of grant. The options will vestvested 25% on each of the following dates: August 31, 2019, 25% on November 30, 2019, 25% on February 29, 2020, and the remainder is scheduled to vest on May 31, 2020.2020, subject to the recipient’s continued service on the Board. Once vested, the options are exercisable until June 24, 2024. The related share-based compensation of $66 is being amortized over the requisite service period, and the Company recognized $16 in compensation expense for the quarter ended March 31, 2020.

On September 23, 2019, the Company granted 200 shares of restricted stock to the former Chief Operating Officer (“COO”). These shares have a fair value grant price of $0.65 per share, based on the closing price of our common stock on that day. One fourth of the shares vested immediately, but the remaining shares will not vest as the position of COO was eliminated by the Company following March 31, 2020. The Company recognized $11 in compensation expense for the quarter ended March 31, 2020.

On September 24, 2019, the Company granted an option to purchase 150 shares of our common stock to the CEO at a price of $0.65 per share. Fair value of these stock options was $0.39 per share at the date of grant. The options are scheduled to vest in two equal tranches on the first and second anniversaries of the grant subject to his continued service as CEO. The related share-based compensation of $59 will be amortized over the two-year requisite service period as the shares vest, and the compensation expense for the quarter ended March 31, 2020 was immaterial.

On January 20, 2020, the Company granted an option to purchase 50 shares of our common stock to the VP of Finance at a price of $0.76 per share. Fair value of these stock options was $0.31 per share at the date of grant. The options are scheduled to vest in two equal tranches on the first and second anniversaries of the grant subject to his continued service to the Company. The related share-based compensation of $16 will be amortized over the two-year requisite service period as the shares vest, and the compensation expense for the quarter ended March 31, 2020 was immaterial.

Summary of Shares of Restricted Stock and Stock Options

For the three months ended June 30,March 31, 2020 and 2019, and 2018, we recognized a total of $24$50 and $5 respectively, of share based compensation related to restricted stock awards. For the six months ended June 30, 2019 and 2018, we recognized a total of $128 and $10$104, respectively, of share-based compensation expense related to restricted stock awards and stock options, which is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. 

The number of unvested shares of restricted stock was 210 and 360 at March 31, 2020 and December 31, 2019, respectively. The unamortized estimated fair value of unvested shares of restricted stock was $94$101 and $134 at June 30, 2019March 31, 2020 and $222 at December 31, 2018.2019, respectively. These costs are expected to be recognized as expense over a weighted-average period of 1.801.81 years.

SummaryThe number of Stock Options

For the threeunvested of stock options was 238 and six months ended June 30,225 at March 31, 2020 and December 31, 2019, and 2018, no share-based compensation expense related to outstanding stock option awards was recognized.respectively. The share-based compensation expense will be recognized over the vesting period and will be included in selling, general and administrative expenses in the condensed consolidated statements of operations. Theunamortized estimated fair value of non-vestedunvested stock options was $66$107 and $91 at June 30, 2019. This cost is expected to be recognized as an expense over the period ending MayMarch 31, 2020.2020 and December 31, 2019, respectively.

On March 26, 2018,December 23, 2019, the Board of Directors (the “Board”) authorized the repurchase of up to $1,000500 shares of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Program was funded from cash on hand.hand and cash provided by operating activities. The Board separately authorized the repurchase of additional shares during the quarter ended March 31, 2020, in a privately negotiated transaction. During the sixthree months ended June 30, 2019, 228March 31, 2020, 744 shares of our outstanding common stock were purchased under the Repurchase Program. The Repurchase Program expired onfor an aggregate amount of $524. As of March 31, 2019. On May 2, 2019,2020, the Company repurchased 60repurchase program has been exhausted.

Treasury shares from Mr. Randy Warner, who resigned as a member ofare accounted for using the Board. The shares were repurchased at the price of $0.80 per share, which was the average closing price for the ten trading days prior to the date of repurchase.cost method.

Income tax expense during interim periods is based on applying the estimated annual effective income tax rate to interim period operations. The estimated annual effective income tax rate may vary from the statutory rate due to the impact of permanent items relative to our pre-tax income, as well as by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized. At June 30, 2019March 31, 2020 and December 31, 20182019, management has recorded a full deferred tax asset valuation allowance.

Employment Agreements

The Company’s CEO and COO (the “Executives”) are employed under employment agreements containing severance provisions. In the event of termination of the Executives’ employment for any reason, the Executive will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which the Executives are entitled or vested under the terms of all employee benefit and compensation plans, agreements and arrangements in which the Executives are participants as of the date of termination.

In addition, subject to executing a general release in favor of the Company, the Executive will be entitled to receive certain severance payments in the event of termination of the Executive’s employment by the Company “other than for cause” or by the Executive with “good reason.” These severance payments include: (i) a lump sum in cash equal to one to two times the Executive’s annual base salary; (ii) a lump sum in cash equal to one to two times the average annual bonus paid to the Executive for the prior two full fiscal years preceding the date of termination; (iii) a lump sum in cash equal to a pro rata portion of the annual bonus payable for the period in which the date of termination occurs based on the actual performance under the Company’s annual incentive bonus arrangement, but no less than fifty percent of Executive’s annual base salary; and (iv) if the Executive’s termination occurs prior to the date that is twelve months following a change of control, then each and every share option, restricted share award and other equity-based award that is outstanding and held by the Executive shall immediately vest and become exercisable.

Subsequent to March 31, 2020, the Company eliminated the position of COO and relieved the COO of his duties pursuant to the terms of his employment agreement, and placed him on garden leave for the remainder of his employment through May 31, 2020. In addition to payment of accrued and unpaid salary, vacation time, and other benefits referred to above, and subject to execution of a release of claims by the COO, the Company is required to pay him one time his current annual base salary of $245,000, payable over 12 months.

Litigation

From time to time, we are involved inthe Company is party to various legal proceedings arising fromin the normalordinary course of business. We expenseThe Company expenses or accrueaccrues legal costs as we incur them.incurred. A summary of ourthe Company’s material legal proceedings is as follows:

On August 6, 2018, GE Oil and Gas UK LtdLtd. (“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR.ADR (“ICC”). The dispute involvesinvolved alleged delays and defects in products manufactured by the Company for GE dating back to 2013. The Company disputed GE’s allegations and vigorously defended itself against these allegations. Mediation took place on November 28, 2018 but no resolution was reached.not resolved. On February 22, 2019, GE initiated arbitration proceedings with the ICC. The originaltotal amount in dispute was originally $2,630 but as of GE’s latest filing with the ICC, the amount in dispute has beenwas later reduced to $2,252. TheOn February 26, 2020, the parties agreed in principle to settle the dispute, and the parties are inworking toward finalizing the processterms of filing preliminary submissions, and the arbitration is currently set for April 2020.a definitive settlement agreement. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. At this point in the legal process, we do not believe a loss to us is probable, therefore we have not recordedaccrued a liability related to this matter.matter in the amount of $750 for the year ended December 31, 2019.

In November 2011, the Company delivered equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270 alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required. The Company repeatedly attempted to collect on the receivable, and ultimately filed suit on November 16, 2012, in the Harris County District Court. Aker subsequently filed a counter-claimcounterclaim on March 20, 2013 in the aggregate amount of $1,000 for reimbursement of insurance payments allegedly made for repairs. Trial is scheduled for November 2019.The parties have not reached a resolution on this matter. At this point, init is not clear as to whether an unfavorable outcome is either probable or remote, and the legal process, we do not believe aCompany is unable to determine the likelihood of an unfavorable outcome or the amount or range of potential loss to us is probable, therefore we have not recorded a liability related to this matter.if the outcome should be unfavorable.

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 March 31, 2020 and 2019, all such securities were anti-dilutive.

For the three and six months ended June 30, 2019 and 2018 there were no potentially dilutive securities that were included in the computation of diluted earnings per share because either there were no stock options outstanding or their effect would be anti-dilutive.

On August 15, 2019, Mr. Ronald E. Smith, the Company's Founder, resigned as Chief Executive Officer and as a member of the Board, effective as of August 31, 2019. In connection with Mr. Smith's resignation, the Company and Mr. Smith entered into a Transition Agreement, effective as of September 1, 2019 (the “Transition Agreement”). The Transition Agreement provides for Mr. Smith to serve as an independent consultant to the Company from September 1, 2019 through December 31, 2021. The Company agreed to pay Mr. Smith $15 per month, from January 1, 2020 through December 31, 2021, in exchange for his future services. The Company therefore recorded consulting expenses related to the Transition Agreement totaling $45 for the quarter ended March 31, 2020.

In addition to the other payments provided for under the Transition Agreement, the Company also agreed to pay Mr. Smith 1.5% of the net sale or lease value of two carousels owned by Company, if such sale or lease occurs prior to December 31, 2021, unless those assets are sold or leased in conjunction with a sale of all or substantially all of the assets or stock of Deep Down, in which case no commission is due.

As part of the Transition Agreement, Mr. Smith is bound by certain non-disclosure and confidentiality provisions, and a non-compete and non-hire agreement.

We have evaluated subsequent events through the date the condensed consolidated financial statements included in this Report were filed with the Securities and Exchange Commission.

As a result of the abrupt decline in oil prices and global economic activity caused by COVID-19, the Company applied for a loan under the Small Business Administration’s Paycheck Protection Program, and on April 29, 2020, the Company received a loan in the amount of $1,111, which will be used to finance payroll, rent, and utilities over the balance of the second quarter of 2020. The loan principal and related interest accrued may be forgivable, partially or in full, if certain conditions are met.

Also, on April 6, 2020, the Company signed a Letter of Understanding for Landlord to Temporarily and Partially Abate Rent (the “Abatement Letter”) provided by the Company’s landlord of our corporate office and facility. According to the Abatement Letter, our landlord agreed to reduce rent payments over a four-month period beginning with the April 2020 payment. Over this four-month period, the Company’s rent will be lowered by a total of $253. In exchange for the rent abatement, the Company agreed to extend the lease by two months.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis providesprovide 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, 2018,2019, 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.

General

We areDeep Down is an oilfield product and services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services servingand subsea distribution products used between the worldwide offshore explorationproduction facility and production industry.the wellhead. Our core 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. Werelated services.  Additionally, our highly experienced, specialized service teams can support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions.located anywhere in the world.  

Industry and Executive Outlook

We are pleased withThe dual challenges of the increase inglobal coronavirus pandemic and the oil price crash continue to impact our business and that of our customers. Our service business is particularly dependent on our personnel being able to travel domestically and internationally, and travel restrictions imposed by various governments partially contributed to reduced revenues and operating profitabilityduring the first quarter of 2020.

While revenues of $3,605 for the quarter ended March 31, 2020 declined by $2,695 compared to the quarter ended March 31, 2019, revenues for the first halfquarter of 2019,2020 increased by $651 compared to the same periodquarter ended December 31, 2019. The year-over-year decline in 2018.revenues was primarily driven by a lower proportion of fixed-price contract activity during the first quarter of 2020.

We could potentially experience additional headwinds as our customers continue to adjust their operations based on the current oil price environment. This is despiteincludes customers delaying new purchase orders, extending timelines for existing purchase orders, and delaying the payment of outstanding invoices. To help navigate these headwinds, the Company applied for a loan under the Small Business Administration’s Paycheck Protection Program, and on April 29, 2020, the Company received a loan in the amount of $1,111, which will be used to finance payroll, rent, and utilities over the balance of the second quarter of 2020. The loan principal and related interest accrued may be forgivable, partially or in full, if certain conditions are met.

In August of 2019, we announced a change in leadership and subsequently made some additions to our management team to focus on growth. However, considering recent developments in the oil and gas operators continuingindustry, the Company adjusted its strategy to focus on reduced project execution costs. While we do face some pricing pressure from service providers willingprepare for a longer cycle of lower oil prices while maintaining adequate support for existing projects. This strategy includes maintaining a disciplined capital structure, workforce reductions, wage reductions, rent abatement, and limiting capital expenditures and R&D efforts to offer solutions at significantly reduced prices, we view the focus on streamlined project execution as an opportunity for us.only critical items. The Company continues to seek further cost reduction opportunities to preserve liquidity.

Oil and gas operators are increasingly choosingAs we look to invest in subsea tieback projects, which are projects where new developments are connectedthe future, we currently project the service side of our business to existing infrastructure, rather than on projects with entirely new subsea infrastructure. Given our experience working with equipment manufactured by different companies,recover first as we enableexpect our customers to evaluate different alternatives for their expansions, in some cases providing hybrid solutions using equipment from different manufacturers.

Our international expansion efforts continuebe focused on extending the life of existing assets, rather than sanctioning new projects. Therefore, we are determined to bear fruit. We recently announced our first contract with Shell in Trinidad and Tobago, and are involved in ongoing discussions on further opportunities inposition ourselves as the region. We continue to pursue opportunities in West Africa, South East Asia and other emerging markets, and are encouraged by their local content requirements.

In July 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. During the review process, we engaged with a wide range of different parties, and received valuable feedback. As a result of the feedback we received, it was determined that it was in our best interest to reconstitute our Board of Directors, conclude the process, and renew our focus on our core business and on improving our profitability.

With a committed backlog of $10 million, a strong balance sheet, and the dedication of our employees, we remain confident in our ability to continue being aservice provider of choice forin such an environment. We expect to execute this strategy while remaining laser-focused on managing our customers, as we continue to seek to maximizecash flows and maximizing value for our shareholders.

Results of Operations

Three Months Ended June 30, 2019March 31, 2020 Compared to Three Months EndedJune30, 2018 March 31, 2019

Revenues. Revenues for the three months ended June 30, 2019March 31, 2020 were $5,269$3,605 compared to revenues of $4,104$6,300 for the three months ended JuneMarch 30, 2018.2019. The $1,165,$2,695, or 2843 percent, increasedecrease from the same period in 2019 was primarily the result of moreless fixed-price projects in process, duringCOVID-19 related travel restrictions, and the three months ended June 30, 2019, compared torecent developments in the three months ended June 30, 2018.global oil markets.

Gross profit.Cost of Sales. Gross profitCost of sales decreased by $1,560, or 39 percent, to $2,482 for the three months ended June 30, 2019March 31, 2020 from $4,042 for the same period in 2019. The decrease in cost of sales was $1,965, or 37 percentprimarily driven by the decrease in revenues. Our cost of sales as a percentage of revenues compared to $1,651, or 40 percent of revenues, for the three months ended June 30, 2018. The $314, or 20%, increase in gross profit wasincreased primarily due primarily to increased revenues during the three months ended June 30, 2019, compared to the three months ended June 30, 2018. However, despite the increased gross profit, there was a decrease in gross profit percentage due to a higher proportionlower absorption of service projects in the 2018 period, compared to the 2019 period.fixed costs reported under cost of sales.

Selling, general and administrative expenses.Selling, general and administrative (“SG&A”) expenses were $2,007,$1,693, or 3847 percent of revenues, for the three months ended June 30, 2019March 31, 2020 compared to $1,745,$1,995, or 4332 percent of revenues, for the three months ended June 30, 2018.March 31, 2019. The $302, or 15 percent, decrease in SG&A is a result of cost reduction initiatives implemented by the Company as a result of a renewed focus on the Company’s core business. The increase in SG&A expense as a percentpercentage of revenues was due primarily to higherlower revenues during the three months ended June 30, 2019March 31, 2020 as compared to the three months ended June 30, 2018. The $262 increase in SG&A was primarily due to the $194 increase in legal expenses related to current litigation matters and increased SG&A labor for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018.

March 31, 2019.

Modified EBITDA. Our management evaluates our performance based on a non-US GAAP measure which consists of earnings (net income or loss) available to common shareholders before net interest income, income taxes, depreciation and amortization, non-cash share-based compensation expense, non-cash impairments, depreciation and amortization,non-cash gains or losses on the sale of PP&E, 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);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) income to Modified EBITDA for the three months ended June 30, 2019 and 2018:

The $111 increase in Modified EBITDA was due primarily to the increase in revenues and the resulting increase in gross profit during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018.

Six Months Ended June 30, 2019 Compared to Six Months EndedJune30, 2018

Revenues. Revenues for the six months ended June 30, 2019 were $11,568 compared to revenues of $7,810 for the six months ended June 30, 2018. The $3,758, or 48 percent, increase was primarily the result of more projects in process during the six months ended June 30, 2019, compared to the six months ended June 30, 2018.

Gross profit. Gross profit for the six months ended June 30, 2019 was $4,222, or 36 percent of revenues, compared to $2,785, or 36 percent of revenues, for the six months ended June 30, 2018. The $1,437, or 52%, increase in gross profit was primarily due to increased revenues due to a larger number of projects during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

Selling, general and administrative expenses.Selling, general and administrative (“SG&A”) expenses were $4,001, or 35 percent of revenues, for the six months ended June 30, 2019 compared to $3,662 or 47 percent of revenues, for the six months ended June 30, 2018. The decrease in SG&A expense as a percent of revenues was due to higher revenues during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The $339 increase in SG&A expense was primarily due to a $256 increase in legal expenses related to current litigation matters and increased SG&A labor for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

Modified EBITDA. Our management evaluates our performance based on a non-US 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 income (loss) to Modified EBITDA (EBITDA loss)(loss) for the sixthree months ended June 30, 2019March 31, 2020 and 2018:2019:

The $1,179 increase$923 decrease in Modified EBITDA was due primarily to the increasedecrease in revenues and the resulting increasedecrease in gross profit during the sixthree months ended June 30, 2019March 31, 2020 as compared to the sixthree months ended June 30, 2018.March 31, 2019.

Liquidity and Capital Resources

The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of cash on hand, cash expected to be generated from operations, working capital of $3,965 as of March 31, 2020, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital investments.

Given the abrupt decline in oil prices and global economic activity caused by COVID-19, the Company cannot predict with certainty the overall impact on the Company’s operations and cash flows. The Company has taken steps to mitigate the challenges presented by the current macro environment, including workforce reductions, wage reductions, rent abatement, and limiting capital expenditures and R&D efforts to only critical items. The Company continues to seek further cost reduction opportunities to preserve liquidity.

Additionally, the Company applied for a loan under the Small Business Administration’s Paycheck Protection Program, and on April 29, 2020, the Company received a loan in the amount of $1,111, which will be used to finance payroll, rent, and utilities over the balance of the second quarter of 2020. The loan principal and related interest accrued may be forgivable, partially or in full, if certain conditions are met. The Company also continues to engage in discussions with several financial institutions if a credit facility is needed to further support operations. There can be no assurance that the Company could obtain a credit facility, if needed.

During the three months ended March 31, 2020, the Company generated $91 in net cash provided by operating activities primarily due to improvements in cost containment measures. The Company used $57 of net cash provided by investing activities, which was primarily related to the purchase of PP&E. The Company also used $524 of net cash in financing activities for share repurchases, which resulted in a decrease of $490 in cash for the period.

During the three months ended March 31, 2019, the Company used $756 to fund its operating and financing activities. The Company used $583 of net cash in operating activities, which was primarily due to a $2,566 increase in accounts receivable, partially offset by net income and a decrease in contract assets. The Company generated $517 in net cash from investing activities, primarily due to receipt of $507 in repayments on a note receivable. The Company also used $173 of net cash in financing activities primarily for share repurchases.

LiquidityInflation and Capital ResourcesSeasonality

During the six months ended June 30, 2019 and June 30, 2018, we primarily financed our operating and capital needs through cash on hand.

During the six months ended June 30, 2019 we used $621 to fund our operating and financing activities. We used $397 in our operating activities, primarily due to a $495 decrease in account payable, and an increase of $760 in accounts receivable offset by our net income. We also used $224 in financing activities, primarily for repurchases of our outstanding stock. We generated $1,580 from our investing activities, primarily due to receipt of $510 in repayments on a note receivable, and maturity of our $1,035 certificate of deposit.

During the six months ended June 30, 2018, our trade accounts receivable increased by $842, impacting our cash position which declined by $1,516. This increase in trade accounts receivable reflected efforts by some of our larger customers to lengthen vendor payment terms. The decline in cash was also a result of a $667 decrease in our accounts payable and accrued liabilities.  

Through a combination of our current working capital of $6,549, cash expected to be generated from operations, potential opportunistic sales of property, plant and equipment in the future and reduction in our capital budget, we believe we will have adequate liquidity to meet our future operating requirements.

We also continue to engage in discussions with different financial institutions, in the event that we would need credit facilities to further supplement our operating requirements. There can be no assurance that we could obtain credit facilities, if needed.

Inflation and Seasonality

We doCompany does not believe that ourits operations are significantly impacted by inflation. Ourinflation, and its business is not significantly seasonal in nature.

Off-Balance Sheet Arrangements

We haveThe Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on ourits 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 ourthe financial statements relate to revenue recognition where we measurethe Company measures progress towards completion on a cost-to-cost basis on ourfor fixed-price contracts, the allowance for doubtful accounts, and the valuation allowance for deferred income tax assets. These estimates require judgments, which we baseare based 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, 20182019 for a discussion of our critical accounting policies and estimates.

Recently Issued Accounting Standards

Except as set forth inRefer to Note 1 toin Part II. Item 8. “Financial Statements and Supplemental Data,” in our unaudited condensed consolidated financial statements, management has not yet determined whetherAnnual Report on Form 10-K for the year ended December 31, 2019 for a discussion of recently issued accounting standards, which are not yet effective, will have a material impact on our condensed consolidated financial statements upon adoption.standards.

Share Repurchase Program

On March 26, 2018,December 23, 2019, the Board of Directors (the “Board”) authorized the repurchase of up to $1,000500 shares of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Programstock. This repurchase program was funded from cash on hand.hand and cash provided by operating activities. The Board separately authorized the repurchase of additional shares during the quarter ended March 31, 2020, in a privately negotiated transaction. During the three months ended March 31, 2019, 2282020, 744 shares of our outstanding common stock were purchased under the Repurchase Program. The Repurchase Program expired onfor an aggregate amount of $524. As of March 31, 2019. On May 2, 2019,2020, the Company repurchased 60 shares from Mr. Randy Warner, who resigned as a member of the Board. The shares were repurchased at the price of $0.80 per share, which was the average closing price for the ten trading days prior to the date of repurchase.repurchase program has been exhausted.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable

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 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.

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 June 30, 2019,March 31, 2020, 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 June 30, 2019.March 31, 2020.

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 of June 30, 2019,March 31, 2020, 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 of June 30, 2019.March 31, 2020.

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 over financial reporting during the fiscal quarter ended June 30, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, except controls and procedures associated with the adoption of the Financial Accounting Standards Board Topic 842, Leases.March 31, 2020. 

PART II. – OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

From time to time, we may be involved inthe Company is party to various legal proceedings arising in the normalordinary course of business. We expense or accrue legal costs as we incur them. A summary of ourthe Company’s material legal proceedings is as follows:

On August 6, 2018, GE Oil and Gas UK LtdLtd. (“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR.ADR (“ICC”). The dispute involvesinvolved alleged delays and defects in products manufactured by the Company for GE dating back to 2013. The Company disputed GE’s allegations and vigorously defended itself against these allegations. Mediation took place on November 28, 2018 but no resolution was reached.not resolved. On February 22, 2019, GE initiated arbitration proceedings with the ICC. The originaltotal amount in dispute was originally $2,630,000 but as of GE’s latest filing with the ICC, the amount in dispute has beenwas later reduced to $2,252,000. TheOn February 26, 2020, the parties agreed in principle to settle the dispute, and the parties are inworking toward finalizing the processterms of filing preliminary submissions, and the arbitration date is currently set for April 2020.a definitive settlement agreement. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. At this point in the legal process, we do not believe a loss to us is probable, therefore we have not recordedaccrued a liability related to this matter.matter in the amount of $750,000 for the year ended December 31, 2019.

In November 2011, the Company delivered equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270,000 alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required. The Company repeatedly attempted to collect on the receivable, and ultimately filed suit on November 16, 2012, in the Harris County District Court. Aker subsequently filed a counter-claimcounterclaim on March 20, 2013 in the aggregate amount of $1,000,000 for reimbursement of insurance payments allegedly made for repairs. Trial is scheduled for November 2019.The parties have not reached a resolution on this matter. At this point, init is not clear as to whether an unfavorable outcome is either probable or remote, and the legal process, we do not believe aCompany is unable to determine the likelihood of an unfavorable outcome or the amount or range of potential loss to us is probable, therefore we have not recorded a liability related to this matter.if the outcome should be unfavorable.

ITEM 1A. RISK FACTORS

Not applicable

In July 2018, we announced that our Board of Directors (the “Board”) had initiated a process to explore and evaluate strategic alternatives to maximize stockholder value. During the review process, it was determined that it was in the company’s best interest to reconstitute the Board, and renew our focus on our core business and on improving our profitability.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below summarizes information about our purchases of common stock, based on trade date, during the quarter ended March 31, 2020: