Koil Energy Solutions, Inc. - Quarter Report: 2012 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
S | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
OR
£ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 0-30351
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 Office) | (Zip Code) |
Registrant’s telephone number, including area code: (281) 517-5000
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. S Yes ¨ 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 S No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company S |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No S
At November 9, 2012, there were 10,151,529 shares of common stock outstanding, par value $0.001 per 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 refer collectively to Deep Down, Inc., a Nevada corporation (“Deep Down”), and its wholly-owned subsidiaries.
Deep Down is the parent company to the following wholly-owned subsidiaries: Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”); Mako Technologies, LLC, a Nevada limited liability company (“Mako”), since its acquisition effective December 1, 2007; and Deep Down International Holdings, LLC, a Nevada limited liability company (“DDIH”), since its formation in February 2009.
Effective December 31, 2010, we engaged in a transaction in which all of the operating assets and substantially all of the liabilities of Flotation Technologies, Inc. (“Flotation”), our wholly-owned subsidiary which was dissolved effective April 20, 2012, were contributed, along with other contributions we made, to a joint venture entity named Cuming Flotation Technologies, LLC (“CFT”), in return for a 20 percent common unit ownership interest in CFT. For a more detailed explanation of this transaction, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC” or the “Commission”) on April 15, 2011 and to our Current Report on Form 8-K, filed with the SEC on October 14, 2011. This transaction impacts the presentation of our financial condition and results of operations because it means that the operations of Flotation are no longer included in such presentation for periods beginning January 1, 2011, except on the basis of our 20 percent common unit ownership interest in CFT. However, the operations of Flotation will continue to be fully included in our presentation of historical information for periods ended December 31, 2010 and prior (since the acquisition of Flotation in 2008).
On August 27, 2012, we announced that we had consolidated the operations of our Mako operating segment into our other operating segment, Deep Down Delaware. Therefore, our current operations include only Deep Down Delaware. In addition to our strategy of continuing to grow and strengthen our operations, including by expanding our services and products in accordance with 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 Quarterly Report on Form 10-Q:
Forward-Looking Statements
The statements contained or incorporated by reference in this Quarterly Report on Form 10-Q 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,” 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 Quarterly Report on Form 10-Q (“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.
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, 2011, other periodic and current reports we file 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.deepdowncorp.com) as soon as reasonably practicable after we have electronically 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.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page No. | ||
Item 1. | Financial Statements | |
Unaudited Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011 | 1 | |
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 |
2 | |
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 |
3 | |
Notes to Unaudited Condensed Consolidated Financial Statements | 4 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 |
Item 4. | Controls and Procedures | 15 |
PART II. OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 16 |
Item 6. | Exhibits | 16 |
Signatures | 17 | |
Exhibit Index | 18 |
iii |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEEP DOWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value amounts) | ||||||||
ASSETS | ||||||||
Current assets: | September 30, 2012 | December 31, 2011 | ||||||
Cash and cash equivalents | $ | 2,198 | $ | 4,979 | ||||
Accounts receivable, net of allowance of $48 and $27, respectively | 7,018 | 5,854 | ||||||
Inventory | 235 | 232 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 1,726 | 84 | ||||||
Prepaid expenses and other current assets | 322 | 262 | ||||||
Total current assets | 11,499 | 11,411 | ||||||
Property, plant and equipment, net | 13,638 | 12,036 | ||||||
Investment in joint venture | 984 | 1,163 | ||||||
Intangibles, net | 2,223 | 2,502 | ||||||
Goodwill | 4,916 | 4,916 | ||||||
Other assets | 388 | 416 | ||||||
Total assets | $ | 33,648 | $ | 32,444 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 4,153 | $ | 2,566 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 268 | 1,767 | ||||||
Deferred revenues | – | 260 | ||||||
Current portion of long-term debt | 2,579 | 2,893 | ||||||
Total current liabilities | 7,000 | 7,486 | ||||||
Long-term debt, net | 125 | 173 | ||||||
Total liabilities | 7,125 | 7,659 | ||||||
Commitments and contingencies (Note 10) | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $0.001 par value, 10,000 shares authorized, 0 shares issued and outstanding, respectively | – | – | ||||||
Common stock, $0.001 par value, 24,500 shares authorized, 10,152 and 10,244 shares, respectively, issued and outstanding | 10 | 10 | ||||||
Additional paid-in capital | 63,933 | 63,504 | ||||||
Accumulated deficit | (37,420 | ) | (38,729 | ) | ||||
Total stockholders' equity | 26,523 | 24,785 | ||||||
Total liabilities and stockholders' equity | $ | 33,648 | $ | 32,444 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
1 |
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands, except per share amounts) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Revenues | $ | 9,391 | $ | 8,568 | $ | 22,168 | $ | 21,946 | ||||||||
Cost of sales: | ||||||||||||||||
Cost of sales | 5,894 | 5,574 | 13,230 | 15,316 | ||||||||||||
Depreciation expense | 334 | 305 | 969 | 896 | ||||||||||||
Total cost of sales | 6,228 | 5,879 | 14,199 | 16,212 | ||||||||||||
Gross profit | 3,163 | 2,689 | 7,969 | 5,734 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 1,966 | 1,969 | 5,948 | 5,974 | ||||||||||||
Depreciation and amortization | 140 | 155 | 432 | 522 | ||||||||||||
Total operating expenses | 2,106 | 2,124 | 6,380 | 6,496 | ||||||||||||
Operating income (loss) | 1,057 | 565 | 1,589 | (762 | ) | |||||||||||
Other income (expense): | ||||||||||||||||
Interest expense, net | (34 | ) | (84 | ) | (120 | ) | (232 | ) | ||||||||
Equity in net loss of joint venture | (39 | ) | (124 | ) | (179 | ) | (440 | ) | ||||||||
Other, net | 60 | 150 | 112 | 166 | ||||||||||||
Total other income (expense) | (13 | ) | (58 | ) | (187 | ) | (506 | ) | ||||||||
Income (loss) before income taxes | 1,044 | 507 | 1,402 | (1,268 | ) | |||||||||||
Income tax (expense) benefit | (74 | ) | 99 | (93 | ) | 69 | ||||||||||
Net income (loss) | $ | 970 | $ | 606 | $ | 1,309 | $ | (1,199 | ) | |||||||
Net income (loss) per share, basic and diluted | $ | 0.10 | $ | 0.06 | $ | 0.13 | $ | (0.12 | ) | |||||||
Weighted-average common shares outstanding, basic and diluted | 10,161 | 10,302 | 10,196 | 10,318 |
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)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
(In thousands) | 2012 | 2011 | ||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 1,309 | $ | (1,199 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Equity in net loss of joint venture | 179 | 440 | ||||||
Share-based compensation | 519 | 358 | ||||||
Debt forgiveness | (10 | ) | – | |||||
Bad debt expense (credit) | 92 | (230 | ) | |||||
Depreciation and amortization | 1,401 | 1,418 | ||||||
Gain on sale of property, plant and equipment | (112 | ) | (38 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (1,297 | ) | 594 | |||||
Inventory | (3 | ) | (44 | ) | ||||
Costs and estimated earnings in excess of billings on uncompleted contracts | (1,642 | ) | (158 | ) | ||||
Prepaid expenses and other current assets | (60 | ) | 183 | |||||
Other assets | 103 | 1 | ||||||
Accounts payable and accrued liabilities | 1,587 | (567 | ) | |||||
Deferred revenues | (260 | ) | (35 | ) | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts | (1,499 | ) | 1,133 | |||||
Net cash provided by operating activities | 307 | 1,856 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (1,520 | ) | (1,772 | ) | ||||
Proceeds from sale of property, plant and equipment | 150 | 55 | ||||||
Cash paid for patents | (43 | ) | (18 | ) | ||||
Cash paid for exclusive product rights | (125 | ) | – | |||||
Cash paid for capitalized software | – | (65 | ) | |||||
Cash received on notes receivable | 50 | 14 | ||||||
Net cash used in investing activities | (1,488 | ) | (1,786 | ) | ||||
Cash flows from financing activities: | ||||||||
Funds used for purchase of our common stock | (48 | ) | (818 | ) | ||||
Proceeds from bank term loan | – | 800 | ||||||
Repayments of long-term debt | (1,552 | ) | (1,201 | ) | ||||
Net cash used in financing activities | (1,600 | ) | (1,219 | ) | ||||
Change in cash and equivalents | (2,781 | ) | (1,149 | ) | ||||
Cash and cash equivalents, beginning of period | 4,979 | 3,730 | ||||||
Cash and cash equivalents, end of period | $ | 2,198 | $ | 2,581 | ||||
Supplemental schedule of significant noncash transactions: | ||||||||
Property, plant and equipment acquired via capital lease | $ | 1,200 | $ | – | ||||
Shares of common stock surrendered by employees related to payroll taxes on vested restricted stock awards | $ | 41 | $ | 2 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
NOTE 1: BASIS OF PRESENTATION
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Deep Down, Inc. and its wholly-owned subsidiaries (“Deep Down,” “we,” “us” or the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q. As permitted under those rules, certain footnotes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 29, 2012 with the Commission.
Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosed amounts of contingent assets and liabilities and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts realized may differ from those included in the accompanying 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. Certain prior period amounts have been reclassified to conform to current period presentation.
Principles of Consolidation
The unaudited condensed consolidated financial statements presented herein include the accounts of Deep Down, Inc. and its wholly-owned subsidiaries. Our investment in a joint venture is accounted for using the equity method. All material intercompany accounts and transactions have been eliminated in consolidation.
Segments
Our operations are located in the United States, although we occasionally generate sales to international customers.
On August 27, 2012, we announced that we had consolidated the operations of our Mako operating segment in Morgan City, Louisiana into the operations of our Deep Down Delaware operating segment in Channelview, Texas. This consolidation did not affect our financial reporting because these two operating segments were previously aggregated into a single reporting segment.
While the operating segments had different product lines, they were similar, and we aggregated their results for internal analysis purposes. They were both service-based operations revolving around our personnel’s expertise in the deepwater and ultra-deepwater industry, and equipment was produced to a customer’s specified design and engineered using Deep Down personnel’s expertise, with installation and project management as part of our service revenue to the customer. Additionally, the operating segments had similar customers and distribution methods, and their economic characteristics were similar with regard to their gross margin percentages.
NOTE 2: LIQUIDITY AND FINANCIAL CONDITION
On October 12, 2011, we received a cash distribution of $6,375 from Cuming Flotation Technologies, LLC, a Delaware limited liability company (“CFT”) in which we own a 20 percent common unit ownership interest. We believe the receipt of this cash distribution, in addition to cash we have generated and expect to generate from operations, should ensure that we will have adequate liquidity to meet our future operating requirements.
Historically, we have supplemented the financing of our capital requirements through a combination of debt and equity transactions. Most significant in this regard has been the credit facility we have maintained with Whitney Bank (“Whitney”). Our loan outstanding under our existing credit agreement with Whitney becomes due April 15, 2013. We believe we will have sufficient liquidity to be able to repay this loan, plus accrued interest thereon, monthly as scheduled through April 15, 2013, including a balloon principal payment of $1,708 due on that date if no extension is negotiated. We fully expect, however, that we will be able to negotiate an extension of the due date of this loan.
At September 30, 2012, we had working capital of $4,499.
4 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We utilize a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Our financial instruments consist primarily of cash and cash equivalents, trade receivables and payables and debt instruments. The carrying values approximate their fair values due to the short-term maturities of these instruments.
NOTE 4: COSTS, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts are summarized below:
September 30, 2012 | December 31, 2011 | |||||||
Costs incurred on uncompleted contracts | $ | 5,200 | $ | 473 | ||||
Estimated earnings on uncompleted contracts | 3,381 | 179 | ||||||
8,581 | 652 | |||||||
Less: Billings on uncompleted contracts | (7,123 | ) | (2,335 | ) | ||||
$ | 1,458 | $ | (1,683 | ) | ||||
Included in the accompanying condensed consolidated balance sheets under the following captions: | ||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | $ | 1,726 | $ | 84 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts | (268 | ) | (1,767 | ) | ||||
$ | 1,458 | $ | (1,683 | ) |
The balance in costs and estimated earnings in excess of billings on uncompleted contracts at September 30, 2012 consisted primarily of accrued revenues on fixed-price contracts.
The balance in billings in excess of costs and estimated earnings on uncompleted contracts at December 31, 2011 consisted primarily of unearned milestone billings on fixed-price contracts.
NOTE 5: INVESTMENT IN JOINT VENTURE
Effective December 31, 2010, we engaged in a transaction in which all of the operating assets and substantially all of the liabilities of Flotation were contributed, along with other contributions we made, to the CFT joint venture in return for a 20 percent common unit ownership interest.
5 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
On October 7, 2011, CFT consummated a transaction pursuant to that certain Stock Purchase Agreement (the “Purchase Agreement”), by and between CFT and a Houston-based company (“Buyer”) pursuant to which Buyer purchased from CFT (i) all of the issued and outstanding shares of capital stock of Cuming Corporation (“Cuming”), the principal operating subsidiary of CFT, (ii) the shares of 230 Bodwell Corporation, a Massachusetts corporation and subsidiary of Cuming, and (iii) certain assets that, immediately prior to closing, were acquired by Cuming, for a purchase price of $60,000 (less certain debt and subject to purchase price adjustment for working capital and potential earn-out payments).
We are entitled to 20 percent of future earn-out proceeds from the sale. The amount of earn-out earned by CFT for the period October 7, 2011 through December 31, 2012 will not be known until March 31, 2013. As a result, the results of CFT presented below do not include any accrual of potential earn-out proceeds.
The components of our Investment in joint venture are summarized below:
Investment in joint venture, December 31, 2011 | $ | 1,163 | ||
Equity in net loss of joint venture for the nine months ended September 30, 2012 | (179 | ) | ||
Investment in joint venture, September 30, 2012 | $ | 984 |
Summary joint venture financial data is as follows:
For The Three Months Ended | For The Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues | $ | 131 | $ | 27,108 | $ | 2,732 | $ | 84,631 | ||||||||
Gross profit | $ | 58 | $ | 3,794 | $ | 719 | $ | 17,823 | ||||||||
Net loss | $ | (196 | ) | $ | (621 | ) | $ | (895 | ) | $ | (2,201 | ) |
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
The components of net property, plant and equipment are summarized below:
September 30, 2012 | December 31, 2011 | Range of Asset Lives | ||||||||||
Land | $ | 1,582 | $ | 1,492 | – | |||||||
Buildings and improvements | 1,555 | 1,540 | 7 - 36 years | |||||||||
Leasehold improvements | 221 | 221 | 2 - 5 years | |||||||||
Equipment | 13,403 | 12,113 | 2 - 30 years | |||||||||
Furniture, computers and office equipment | 1,228 | 1,101 | 2 - 8 years | |||||||||
Construction in progress | 1,520 | 440 | – | |||||||||
Total property, plant and equipment | 19,509 | 16,907 | ||||||||||
Less: Accumulated depreciation | (5,871 | ) | (4,871 | ) | ||||||||
Property, plant and equipment, net | $ | 13,638 | $ | 12,036 |
6 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
NOTE 7: LONG-TERM DEBT
The components of long-term debt are summarized below:
September 30, 2012 | December 31, 2011 | |||||||
Secured credit agreement - Whitney Bank | $ | 1,769 | $ | 2,342 | ||||
6% Subordinated debenture | – | 210 | ||||||
Capital lease obligations | 935 | 514 | ||||||
Total debt | 2,704 | 3,066 | ||||||
Less: Current portion of long-term debt | (2,579 | ) | (2,893 | ) | ||||
Long-term debt, net of current portion | $ | 125 | $ | 173 |
Whitney Credit Agreement
We originally entered into our credit agreement with Whitney in November 2008 to provide us with revolving and letter of credit facilities for our operations. Our credit facility has been amended and/or restated four times, most recently on May 14, 2012, when we entered into the Fourth Amendment to the Amended and Restated Credit Agreement (“Fourth Amended Credit Agreement”) with Whitney effective as of April 15, 2012. The Fourth Amended Credit Agreement (i) converted our original $1,150 term loan to a revolving loan amount of $2,000 (“Revolving Loan”), (ii) extended the maturity date of existing indebtedness to April 15, 2013, (iii) and lowered the interest rate of all loans from 6.5 percent fixed annual rate to a 4.0 percent fixed annual rate.
As of September 30, 2012, the outstanding indebtedness to Whitney under the Fourth Amended Credit Agreement consisted of $1,769 for a real estate loan related to our Channelview, Texas facility land and buildings. There was no indebtedness related to the Revolving Loan at September 30, 2012.
The Fourth Amended Credit Agreement obligates us to comply with the following financial covenants:
· | Leverage Ratio - The ratio of total debt to consolidated EBITDA must be less than 3.0 to 1.0. |
· | Fixed Charge Coverage Ratio - The ratio of consolidated EBITDA to consolidated net interest expense, plus principal payments on total debt, must be greater than 1.5 to 1.0. |
· | Tangible Net Worth - Our consolidated net worth, after deducting other assets as are properly classified as “intangible assets,” plus 50 percent of net income, after provision for taxes, must be in excess of $13,000. |
· | Moreover, we continue to have obligations for other covenants, including, among others, limitations on issuance of common stock, liens, transactions with affiliates, additional indebtedness and permitted investments. |
As of September 30, 2012, we were in compliance with all of the aforementioned financial covenants.
Other Debt
We had a subordinated debenture in the original outstanding principal amount of $500 that originated from the exchange of preferred stock in a prior year. The subordinated debenture had a fixed annual interest rate of 6.0 percent per annum, and interest was required to be paid annually on March 31st. The subordinated debenture matured on March 31, 2011 and we made the payment of accrued interest as required. However, we agreed to terms for an extension of the maturity of the subordinated debenture to May 2012. On February 8, 2012, we settled the remaining $160 balance of the subordinated debenture for a cash payment of $150. The holder of the subordinated debenture forgave the remaining $10 principal balance.
7 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
NOTE 8: SHARE-BASED COMPENSATION
We have a share-based compensation plan, the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”). Awards of stock options and stock granted under the Plan have vesting periods of three years. Some awards of stock have performance criteria as an additional condition of vesting. Once vested, stock options may be exercised for up to five years. Share-based compensation expense related to awards is based on the fair value at the date of grant, and is recognized over the vesting periods, net of estimated forfeitures. The value of performance-based awards is recognized as expense only when it is considered probable that the performance criteria will be met.
Summary of Shares of Restricted Stock
For the nine months ended September 30, 2012 and 2011, we recognized a total of $203 and $83, respectively, of share-based compensation expense related to restricted stock awards, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. The unamortized estimated fair value of non-vested stock awards was $90 at September 30, 2012.
Summary of Stock Options
For the nine months ended September 30, 2012 and 2011, we recognized a total of $316 and $275, respectively, of share-based compensation expense related to outstanding stock option awards, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. The unamortized portion of the estimated fair value of non-vested stock options was $186 at September 30, 2012.
NOTE 9: 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 tax difference items relative to our net income, as well as by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized. Although our future projections indicate that we may be able to realize some of these deferred tax assets, due to the degree of uncertainty of these projections, at September 30, 2012 management has recorded a full deferred tax asset valuation allowance.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, we are involved in legal proceedings arising in the normal course of business. As of the date of this Report, we are not currently involved in any material actual or pending legal proceedings.
Operating Leases
We lease certain offices, facilities, equipment and vehicles under non-cancellable operating and capital leases expiring at various dates through 2016.
Letters of Credit
Certain of our customers could require us to issue standby letters of credit (“LC”) in the ordinary course of business to ensure performance under terms of a contract or as a form of product warranty. We are able to do this through our facility with Whitney. The beneficiary could demand payment from Whitney for the amount of the outstanding LC. There was $470 in performance-related LC’s outstanding and $592 in warranty-related LC’s outstanding at both September 30, 2012 and December 31, 2011. On October 18, 2012, the $470 performance-related LC was re-characterized to warranty-related and reduced to $235.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
NOTE 11: 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 plus dilutive common stock equivalents (warrants and stock options) outstanding during the period. Diluted EPS reflects the potential dilution that could occur if warrants and options to purchase common stock were exercised.
At September 30, 2012 and December 31, 2011, there were outstanding warrants convertible to 6 and 22 shares of common stock, respectively. At September 30, 2012 and December 31, 2011, there were outstanding stock options convertible to 1,045 and 1,063 shares of common stock, respectively. For the nine months ended September 30, 2012 and 2011, there were no potentially dilutive common stock equivalents that were included in the computation of diluted earnings per share because the exercise price for the outstanding warrants and options exceeded the average market price for our common stock.
NOTE 12: STOCKHOLDERS’ EQUITY
Common Stock
The number of shares of common stock outstanding is as follows:
Balance, December 31, 2011 | 10,244 | |||
Shares purchased and retired, March 2, 2012 | (40 | ) | ||
Shares surrendered for payroll taxes and retired, June 13, 2012 | (38 | ) | ||
Shares issued for rounding associated with reverse stock split, July 18, 2012 | 2 | |||
Shares cancelled and retired, August 30, 2012 | (16 | ) | ||
Balance, September 30, 2012 | 10,152 |
NOTE 13: SUBSEQUENT EVENT
We have a small fabrication facility located in Cleveland, Texas on property currently owned by one of our employees (and who is not one of our “named executive officers”). In October 2012, we reached an understanding with the owner of the property to purchase the property for aggregate consideration of $500. We have paid a $100 down-payment and we intend, as part of such purchase, to pay pursuant to a term note, the remaining $400 in installments over a following one-year period. The property includes 15 acres of land, and currently contains residential buildings, recreational facilities and livestock. We plan to expand the fabrication facility in order to increase our production capacity at such location, use the residential buildings at such location to house employees and contractors for projects being conducted at the site, and otherwise use the facilities at the site for general corporate purposes (including the entertainment of clients).
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of our results of operations and financial condition. This information should be read in conjunction with our audited historical consolidated financial statements, which are included in our Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission on March 29, 2012, and our unaudited condensed consolidated financial statements and notes thereto included with this Quarterly Report on Form 10-Q in Part I. Item 1 “Financial Statements.”
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. Our primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies used between the platform and the wellhead.
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 unless otherwise indicated.
Industry and Executive Outlook
During the three months ended September 30, 2012, our subsea solutions services performed robustly due to continued strong demand for our technologically innovative solutions. We expect this strong demand to continue during the remainder of 2012, as evidenced by the addition of approximately $4,600 to backlog since our last Report, bringing our total backlog to approximately $16,300 as of the date of this Report.
During the three months ended September 30, 2012, our ROV and topside equipment rental services were adversely affected by decreased demand caused by the slow permitting process impacting offshore installation and construction activities in the Gulf of Mexico. We believe the permitting process is improving, which we anticipate will benefit our operating results for the remainder of 2012. See “Recent Events” below for a discussion of the consolidation of our operations.
We believe the deepwater and ultra-deepwater industry is one of the best frontiers for adding large hydrocarbon reserves with high production flow rates. We also believe we are well positioned to supply services and products required to support safe offshore and deepwater projects of our customers. We anticipate demand for our deepwater and ultra-deepwater services and products will continue to grow and we will continue to focus on this industry worldwide.
Our focus remains on successful execution of our projects, obtaining new project awards and effective cash management.
Recent Events
On August 27, 2012, we announced that we had consolidated the operations of our ROV and topside equipment rental services as part of our ongoing cost containment program. All of the assets and operations previously located in Morgan City, Louisiana are now operating out of our Channelview, Texas facility. During the three months ended September 30, 2012, we incurred approximately $200 in non-recurring expenses associated with this operational consolidation.
Results of Operations
Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
Revenues. Revenues for the three months ended September 30, 2012 were $9,391. Revenues for the three months ended September 30, 2011 were $8,568. The $823 increase in revenues in the 2012 period was due to an increase of $2,344 in our subsea solutions services due to continued strong demand for our technologically innovative solutions, offset by a decrease of $1,521 in our ROV and topside equipment rental services due to decreased demand.
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Gross Profit. Gross profit for the three months ended September 30, 2012 was $3,163, or 34 percent of revenues. Gross profit for the three months ended September 30, 2011 was $2,689, or 31 percent of revenues. The $474, or 3 percentage-point, increase in gross profit in the 2012 period compared to the same period in 2011, was due to a $1,258 increase related to our subsea solutions services due to increased revenues as a result of strong demand for our services. In addition, under a previously existing intercompany agreement which was contributed by Flotation to CFT on December 31, 2010, in the 2011 period, we sub-contracted $960 of work on a major fabrication contract to CFT, on which we realized no gross profit. This increase was offset by a $784 decrease related to our ROV and topside equipment rental services due to weaker demand in the 2012 period than in the 2011 period.
Selling, general and administrative expenses. Selling, general and administrative expenses (“SG&A”) for the three months ended September 30, 2012 were $1,966. SG&A for the three months ended September 30, 2011 was $1,969. The $3 decrease in SG&A in the 2012 period compared to the 2011 period was primarily due to a $59 decrease in professional services fees as a result of a reduction in accounting and auditing fees, and a $56 decrease in share-based compensation expense. Partially offsetting these decreases was a $108 reduction in reimbursements from CFT for management services due to the termination of our management services agreement.
Depreciation and amortization expense. Depreciation and amortization expense (“D&A”) for the three months ended September 30, 2012 was $140, consisting of amortization expense of $107, and non-cost of sales depreciation expense of $33. D&A for the three months ended September 30, 2011 was $155, consisting of amortization expense of $103, and non-cost of sales depreciation expense of $52. The amortization relates to our intangible assets and the depreciation relates to property, plant and equipment not used in the generation of revenue. The $19 reduction in non-cost of sales depreciation expense is the result of many of our non-revenue generating assets becoming fully depreciated.
Interest expense, net. Interest expense, net was $34 for the three months ended September 30, 2012. Interest expense, net was $84 for the three months ended September 30, 2011. Net interest expense for each period was generated by outstanding bank debt and capital lease obligations, offset by interest income earned on cash and short-term investments. The $50 decrease in the 2012 period compared to the 2011 period is due primarily to the company having lower average interest-bearing obligations in the 2012 period than in the 2011 period.
Equity in net loss of joint venture. Equity in net loss of joint venture for the three months ended September 30, 2012 was $39. At September 30, 2012, no accrual for potential earn-out proceeds has been recorded because the amount will not be known until March 31, 2013. Equity in net loss of joint venture for the three months ended September 30, 2011 was $124. The joint venture sold its primary operating subsidiary on October 7, 2011, thereby causing the joint venture to have minimal activity subsequent to that date.
Modified EBITDA. Our management evaluates our performance based on a non-GAAP measure, which consists of earnings (net income or loss) available to common shareholders before net interest expense, income taxes, non-cash share-based compensation expense, equity in net income or loss of joint venture, non-cash impairments, depreciation and amortization, other non-cash items and one-time charges (“Modified EBITDA”). This measure may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with US GAAP. The measure should not be considered in isolation or as a substitute for operating income, 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 consolidated statements of operations.
We believe Modified EBITDA is useful to investors in evaluating our operating performance because it is widely used to measure a company’s operating performance, which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired. It helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest); asset base (primarily depreciation and amortization); actions that do not affect liquidity (share-based compensation expense, equity in net income or loss of joint venture) from our operating results; and it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase or acquisition in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.
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The following is a reconciliation of net income to Modified EBITDA for the three months ended September 30, 2012 and 2011:
For the Three Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Net income | $ | 970 | $ | 606 | ||||
Add back interest expense, net | 34 | 84 | ||||||
Add back depreciation and amortization | 474 | 460 | ||||||
Add back (deduct) income tax expense (benefit) | 74 | (99 | ) | |||||
Add back share-based compensation | 142 | 198 | ||||||
Add back non-recurring operational consolidation expense | 200 | – | ||||||
Add back equity in net loss of joint venture | 39 | 124 | ||||||
Modified EBITDA | $ | 1,933 | $ | 1,373 |
Modified EBITDA for the three months ended September 30, 2012 was $1,933. Modified EBITDA for the three months ended September 30, 2011 was $1,373. Modified EBITDA increased $560 from the 2011 period to the 2012 period primarily due to increased gross profit before depreciation and non-recurring operational consolidation expense of $603, and decreased SG&A before share-based compensation and non-recurring operational consolidation expense of $47. These increases were partially offset by a reduction in other income of $90.
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
Revenues. Revenues for the nine months ended September 30, 2012 were $22,168. Revenues for the nine months ended September 30, 2011 were $21,946. The $222 increase in revenues in the 2012 period was due to an increase of $4,177 in our subsea solutions services due to continued strong demand for our technologically innovative solutions, offset by a decrease of $3,955 in our ROV and topside equipment rental services due to decreased demand.
Gross Profit. Gross profit for the nine months ended September 30, 2012 was $7,969, or 36 percent of revenues. Gross profit for the nine months ended September 30, 2011 was $5,734 or 26 percent of revenues. The $2,235, or 10 percentage-point, increase in gross profit in the 2012 period compared to the same period in 2011, was due primarily to a $4,552 increase related to our subsea solutions services due to increased revenues as a result of strong demand for our services. In addition, under a previously existing intercompany agreement which was contributed by Flotation to CFT on December 31, 2010, in the 2011 period, we sub-contracted $5,651 of work on a major fabrication contract to CFT, on which we realized no gross profit. This increase was offset by a $2,317 decrease related to our ROV and topside equipment rental services due to weaker demand in the 2012 period than in the 2011 period.
Selling, general and administrative expenses. Selling, general and administrative expenses (“SG&A”) for the nine months ended September 30, 2012 were $5,948. SG&A for the nine months ended September 30, 2011 was $5,974. The $26 decrease was driven primarily by an $870 reduction in professional fees due primarily to decreased accounting and auditing fees and approximately $136 in cost containment program savings. These decreases were partially offset by a $497 reduction in management services reimbursements from CFT for management services due to the termination of our management services agreement, a $322 increase in bad debt expense, and a $161 increase in share-based compensation expense.
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Depreciation and amortization expense. Depreciation and amortization expense (“D&A”) for the nine months ended September 30, 2012 was $432, consisting of amortization expense of $322, and non-cost of sales depreciation expense of $110. D&A for the nine months ended September 30, 2011 was $522, consisting of amortization expense of $310, and non-cost of sales depreciation expense of $212. The $102 reduction in non-cost of sales depreciation expense is the result of many of our non-revenue generating assets becoming fully depreciated.
Interest expense, net. Interest expense, net for the nine months ended September 30, 2012 was $120. Interest expense, net for the nine months ended September 30, 2011 was $232. Net interest expense for each period was generated by outstanding bank debt and capital lease obligations, offset by interest income earned on cash and short-term investments. The $112 decrease in the 2012 period compared to the 2011 period is due primarily to the company having lower average interest-bearing obligations in the 2012 period than in the 2011 period.
Equity in net loss of joint venture. Equity in net loss of joint venture for the nine months ended September 30, 2012 was $179. At September 30, 2012, no accrual for potential earn-out proceeds has been recorded because the amount will not be known until March 31, 2013. Equity in net loss of joint venture for the nine months ended September 30, 2011 was $440. The joint venture sold its primary operating subsidiary on October 7, 2011, thereby causing the joint venture to have minimal activity subsequent to that date.
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, 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 consolidated statements of operations.
We believe Modified EBITDA is useful to investors in evaluating our operating performance because it is widely used to measure a company’s operating performance, which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired. It helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest); asset base (primarily depreciation and amortization); actions that do not affect liquidity (share-based compensation expense, equity in net income or loss of joint venture) from our operating results; and it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase or acquisition in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.
The following is a reconciliation of net income (loss) to Modified EBITDA for the nine months ended September 30, 2012 and 2011:
For the Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Net income (loss) | $ | 1,309 | $ | (1,199 | ) | |||
Add back interest expense, net | 120 | 232 | ||||||
Add back depreciation and amortization | 1,401 | 1,418 | ||||||
Add back (deduct) income tax expense (benefit) | 93 | (69 | ) | |||||
Add back share-based compensation | 519 | 358 | ||||||
Add back non-recurring operational consolidation expense | 200 | – | ||||||
Add back equity in net loss of joint venture | 179 | 440 | ||||||
Modified EBITDA | $ | 3,821 | $ | 1,180 |
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Modified EBITDA for the nine months ended September 30, 2012 was $3,821. Modified EBITDA for the nine months ended September 30, 2011 was $1,180. Modified EBITDA increased $2,641 from the 2011 period to the 2012 period primarily due to increased gross profit before depreciation and non-recurring operational consolidation expense of $2,408, and decreased SG&A before share-based compensation and non-recurring operational consolidation expense of $287. These increases were partially offset by a reduction in other income of $54.
Liquidity and Capital Resources
Overview
As a deepwater service provider, our revenue, profitability, cash flows, and future rate of growth are substantially dependent on the condition of the oil and gas industry generally, and our customers’ ability to invest capital for offshore exploration, drilling and production, and to maintain or increase levels of expenditures for maintenance of offshore drilling and production facilities. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. We enter into large, fixed-price contracts which may require significant lead time and investment. A decline in offshore drilling and production activity could result in lower contract volume or delays in significant contracts which could negatively impact our earnings and cash flows. Our earnings and cash flows could also be negatively affected by delays in payment by a significant customer or delays in completion of our contracts for any reason. While our objective is to enter into contracts with our customers that are cash flow positive, we may not always be able to achieve this objective.
On October 12, 2011, we received a cash distribution of $6,375 from Cuming Flotation Technologies, LLC, a Delaware limited liability company (“CFT”) in which we own a 20 percent common unit ownership interest. We believe the receipt of this cash distribution, in addition to cash we have generated and expect to generate from operations, should ensure that we will have adequate liquidity to meet our future operating requirements.
Historically, we have supplemented the financing of our capital requirements through a combination of debt and equity transactions. Most significant in this regard has been the credit facility we have maintained with Whitney Bank (“Whitney”). Our loan outstanding under our existing credit agreement with Whitney becomes due April 15, 2013. We believe we will have sufficient liquidity to be able to repay this loan, plus accrued interest thereon, monthly as scheduled through April 15, 2013, including a balloon principal payment of $1,708 due on that date if no extension is negotiated. We fully expect, however, that we will be able to negotiate an extension of the due date of this loan.
Our credit agreement with Whitney obligates us to comply with the following financial covenants:
· | Leverage Ratio - The ratio of total debt to consolidated EBITDA must be less than 3.0 to 1.0; actual Leverage Ratio at September 30, 2012: 0.32 to 1.0. | |
· | Fixed Charge Coverage Ratio - The ratio of consolidated EBITDA to consolidated net interest expense, plus principal payments on total debt, must be greater than 1.5 to 1.0; actual Fixed Charge Coverage Ratio as of September 30, 2012: 3.58 to 1.0. | |
· | Tangible Net Worth - Our consolidated net worth, after deducting other assets as are properly classified as “intangible assets,” plus 50 percent of net income, after provision for taxes, must be in excess of $13,000; actual Tangible Net Worth as of September 30, 2012: $19,384. |
As of September 30, 2012, we were in compliance with all of the aforementioned financial covenants.
At September 30, 2012, we had working capital of $4,499.
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Critical Accounting Policy Updates
The discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and related allowances, costs and estimated earnings incurred in excess of billings on uncompleted contracts, impairments of long-lived assets, including intangibles and goodwill, income taxes including the valuation allowance for deferred tax assets, billings in excess of costs and estimated earnings on uncompleted contracts, contingencies and litigation, and share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Refer to Part II. Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of our Critical Accounting Policies.
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 is material to investors.
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.
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, 2012, 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, 2012.
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 September 30, 2012, based on criteria issued 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 September 30, 2012.
Changes in Internal Control Over Financial Reporting. The Company’s management,
with the participation of the principal executive and principal financial officer, has concluded that there were no changes in
internal control over financial reporting during the fiscal quarter ended September 30, 2012.
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PART II. – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings arising in the normal course of business. As of the date of this Quarterly Report on Form 10-Q, we are currently not involved in any pending, material legal proceedings.
ITEM 6. EXHIBITS
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index of Exhibits of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
3.1 | Articles of Incorporation of Deep Down, Inc. (conformed to include the amendment of the Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008) (incorporated by reference from Exhibit A to our Schedule 14C filed on August 15, 2008). |
3.2 | Certificate of Change filed the Secretary of State of the State of Nevada on July 17, 2012 (incorporated by reference from Form 8-K filed on July 19, 2012). |
3.3 | Amended and Restated ByLaws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008). |
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 Eugene L. Butler, Chief Financial Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
32.1* | Section 1350 Certification of the President and Chief Executive Officer of Deep Down, Inc. |
32* | Statement of Ronald E. Smith, President and Chief Executive Officer and Eugene L. Butler, Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 13, 2012 | By: | /s/ Eugene L. Butler | |
Eugene L. Butler | |||
Executive Chairman and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
|||
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INDEX TO EXHIBITS
3.1 | Articles of Incorporation of Deep Down, Inc. (conformed to include the amendment of the Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008) (incorporated by reference from Exhibit A to our Schedule 14C filed on August 15, 2008). |
3.2 | Certificate of Change filed the Secretary of State of the State of Nevada on July 17, 2012 (incorporated by reference from Form 8-K filed on July 19, 2012). |
3.3 | Amended and Restated ByLaws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008). |
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 Eugene L. Butler, Chief Financial Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
32.1* | Section 1350 Certification of the President and Chief Executive Officer of Deep Down, Inc. |
32* | Statement of Ronald E. Smith, President and Chief Executive Officer and Eugene L. Butler, Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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.
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