PINX:DPDW Deep Down Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 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.  þ 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  þ 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 R  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No  þ

 

At August 8, 2012, there were 10,165,916 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; Flotation Technologies, Inc., a Maine corporation (“Flotation”), since its acquisition effective May 1, 2008; 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 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).

 

Our current operations include Deep Down Delaware and Mako.  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.

 

ii
 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 

 

    Page No.
     
Item 1. Financial Statements  
     
  Unaudited Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2011 1
     
 

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended

June 30, 2012 and 2011

2
     
 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended

June 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:  June 30, 2012   December 31, 2011 
Cash and cash equivalents  $4,105   $4,979 
Accounts receivable, net of allowance of $48 and $27, respectively   6,153    5,854 
Inventory   254    232 
Costs and estimated earnings in excess of billings on uncompleted contracts   327    84 
Prepaid expenses and other current assets   63    262 
Total current assets   10,902    11,411 
Property, plant and equipment, net   13,754    12,036 
Investment in joint venture   1,023    1,163 
Intangibles, net   2,327    2,502 
Goodwill   4,916    4,916 
Other assets   418    416 
Total assets  $33,340   $32,444 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities  $3,458   $2,566 
Billings in excess of costs and estimated earnings on uncompleted contracts   1,437    1,767 
Deferred revenues       260 
Current portion of long-term debt   2,763    2,893 
Total current liabilities   7,658    7,486 
Long-term debt, net   270    173 
Total liabilities   7,928    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, 10,166  and 10,244 shares, respectively, issued and outstanding   10    10 
Additional paid-in capital   63,792    63,504 
Accumulated deficit   (38,390)   (38,729)
Total stockholders' equity   25,412    24,785 
Total liabilities and stockholders' equity  $33,340   $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
June 30,
   For the Six Months Ended
June 30,
 
(In thousands, except per share amounts)   2012   2011   2012   2011 
                
Revenues  $7,904   $7,094   $12,777   $13,378 
Cost of sales:                    
Cost of sales   4,714    4,927    7,336    9,743 
Depreciation expense   319    310    635    591 
Total cost of sales   5,033    5,237    7,971    10,334 
Gross profit   2,871    1,857    4,806    3,044 
Operating expenses:                    
Selling, general and administrative   2,013    1,433    3,982    4,005 
Depreciation and amortization   143    201    292    367 
Total operating expenses   2,156    1,634    4,274    4,372 
Operating income (loss)   715    223    532    (1,328)
Other income (expense):                    
Interest expense, net   (34)   (58)   (86)   (148)
Equity in net loss of joint venture   (32)   (202)   (140)   (316)
Other, net   5    6    52    16 
Total other income (expense)   (61)   (254)   (174)   (448)
Income (loss) before income taxes   654    (31)   358    (1,776)
Income tax expense   (15)   (15)   (19)   (30)
Net income (loss)  $639   $(46)  $339   $(1,806)
                     
Net income (loss) per share, basic and diluted  $0.06   $(0.00)  $0.03   $(0.17)
Weighted-average common shares outstanding, basic and diluted   10,197    10,320    10,214    10,326 

 

 

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 Six Months Ended 
   June 30, 
(In thousands)  2012   2011 
Cash flows from operating activities:          
Net income (loss)  $339   $(1,806)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Equity in net loss of joint venture   140    316 
Share-based compensation   377    159 
Debt forgiveness   (10)    
Bad debt expense (credit)   92    (225)
Depreciation and amortization   927    958 
Gain on sale of property, plant and equipment   (52)   (16)
Changes in assets and liabilities:          
Accounts receivable   (432)   1,351 
Inventory   (22)   56 
Costs and estimated earnings in excess of billings on uncompleted contracts   (243)   (27)
Prepaid expenses and other current assets   199    45 
Other assets   73    (5)
Accounts payable and accrued liabilities   892    (2,327)
Deferred revenues   (260)   5 
Billings in excess of costs and estimated earnings on uncompleted contracts   (330)   275 
Net cash provided by (used in) operating activities   1,690    (1,241)
           
Cash flows from investing activities:          
Purchases of property, plant and equipment   (1,250)   (1,093)
Proceeds from sale of property, plant and equipment   72    33 
Cash paid for patents   (40)   (17)
Cash paid for exclusive product rights   (125)    
Cash paid for capitalized software       (35)
Repayments on (cash paid for) notes receivable   50    9 
Net cash used in investing activities   (1,293)   (1,103)
           
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   (1,223)   (605)
Net cash (used in) provided by financing activities   (1,271)   (623)
Change in cash and equivalents   (874)   (2,967)
Cash and cash equivalents, beginning of period   4,979    3,730 
Cash and cash equivalents, end of period  $4,105   $763 
           
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

 

For the six months ended June 30, 2012 and 2011, our operating segments, Deep Down Delaware and Mako, have been aggregated into a single reporting segment. While the operating segments have different product lines, they are similar. They are both service-based operations revolving around our personnel’s expertise in the deepwater and ultra-deepwater industry, and any equipment is 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 have similar customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages. Our operations are located in the United States, although we occasionally generate sales to international customers.

 

Subsequent Events

 

We have evaluated subsequent events from July 1, 2012 through the date of this Report. See Note 13, “Subsequent Events”, for a discussion of our reverse stock split (the “Reverse Stock Split”), which occurred July 18, 2012. As a result, the share and per share amounts in this Quarterly Report on Form 10-Q have been retroactively restated.

 

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.

 

4
 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

 

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 June 30, 2012, we had working capital (excluding the current portion of long-term debt) of $6,007, including cash and cash equivalents of $4,105. Our total long-term debt at June 30, 2012 was $3,033.

 

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: BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND DEFERRED REVENUES

 

The components of billings in excess of costs and estimated earnings on uncompleted contracts are summarized below:

 

   June 30, 2012   December 31, 2011 
Costs incurred on uncompleted contracts  $728   $473 
Estimated earnings on uncompleted contracts   489    179 
    1,217    652 
Less: Billings to date on uncompleted contracts   (2,327)   (2,335)
   $(1,110)  $(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  $327   $84 
Billings in excess of costs and estimated earnings on uncompleted contracts   (1,437)   (1,767)
   $(1,110)  $(1,683)

 

The balance in billings in excess of costs and estimated earnings on uncompleted contracts at June 30, 2012 and December 31, 2011 consisted primarily of unearned milestone billings on fixed-price contracts.

 

5
 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

 

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 a joint venture entity named Cuming Flotation Technologies, LLC, in return for a 20 percent common unit ownership interest.

 

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 six months ended June 30, 2012   (140)
Investment in joint venture, June 30, 2012  $1,023 

 

Summary joint venture financial data is as follows:

 

   For the Three Months Ended
June 30,
   For the Six Months Ended
June 30,
 
   2012   2011   2012   2011 
Revenues  $1,257   $25,995   $2,601   $57,523 
                     
Gross profit  $526   $6,829   $661   $14,029 
                     
Net loss  $159   $996   $699   $1,580 

 

NOTE 6: PROPERTY, PLANT AND EQUIPMENT

 

The components of net property, plant and equipment are summarized below:

 

   June 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   13,467    12,113    2 - 30 years 
Furniture, computers and office equipment   1,235    1,101    2 - 8 years 
Construction in progress   1,234    440     
Total property, plant and equipment   19,294    16,907      
Less: Accumulated depreciation   (5,540)   (4,871)     
Property, plant and equipment, net  $13,754   $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:

 

   June 30, 2012   December 31, 2011 
Secured credit agreement - Whitney Bank  $1,884   $2,342 
6% Subordinated debenture       210 
Capital lease obligations   1,149    514 
Total debt   3,033    3,066 
Less: Current portion of long-term debt   (2,763)   (2,893)
Long-term debt, net of current portion  $270   $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 June 30, 2012, the outstanding indebtedness to Whitney under the Fourth Amended Credit Agreement consisted of $85 for a term loan, which was paid in full on August 1, 2012, and $1,799 for a real estate loan related to our Channelview, Texas facility land and buildings. There was no indebtedness related to the Revolving Loan at June 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 June 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 six months ended June 30, 2012 and 2011, we recognized a total of $172 and $45, 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. There was no unamortized estimated fair value of non-vested stock awards at June 30, 2012.

 

Summary of Stock Options

 

For the six months ended June 30, 2012 and 2011, we recognized a total of $205 and $114, respectively, of share-based compensation expense related to restricted 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 $239 at June 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 June 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 June 30, 2012 and December 31, 2011.

 

8
 

 

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 June 30, 2012 and 2011, there were outstanding warrants convertible to 22 shares of common stock. At June 30, 2012 and 2011, there were outstanding stock options convertible to 609 and 287 shares of common stock, respectively. For the six months ended June 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)
Balance, June 30, 2012   10,166 

 

NOTE 13: SUBSEQUENT EVENTS

 

On July 17, 2012, we filed a Certificate of Change with the Nevada Secretary of State for the purposes of reducing the number of authorized and outstanding shares of the Company’s common stock, on a basis of one share of common stock for each twenty shares of common stock outstanding. The change was effective as of July 18, 2012.

 

Immediately before the Reverse Stock Split, the Company had 490,000 shares of common stock authorized, of which 203,318 shares of common stock were outstanding. As a result of the Reverse Stock Split, the Company now has 24,500 authorized shares of common stock, of which 10,166 shares were outstanding as of June 30, 2012.

 

The share and per share amounts in this Quarterly Report on Form 10-Q have been retroactively restated to reflect the effect of the Reverse Stock Split.

 

9
 

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 June 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 and beyond, as evidenced by the addition of more than $6,300 to backlog since our last Report, bringing our total backlog to approximately $17,700 as of the date of this Report.

 

During the three months ended June 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 and beyond.

 

The deepwater and ultra-deepwater industry remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates. 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 sector of the industry worldwide.

 

Our focus remains on successful execution of our projects, obtaining new project awards and effective cash management.

 

Recent Events

 

On July 18, 2012, we completed a one-for-twenty reverse stock split of our authorized and outstanding common stock (the “Reverse Stock Split”). Immediately before the Reverse Stock Split, the Company had 490,000 shares of common stock authorized, of which 203,318 shares were outstanding. As a result of the Reverse Stock Split, the Company has 24,500 authorized shares of common stock, of which 10,166 shares are outstanding. The purpose of the Reverse Stock Split was to increase the per share trading price of common stock in an effort to attract a larger pool of investors.

 

On July 20, 2012, we announced that we received multiple contracts from an international operator and a major international controls manufacturer for the manufacture of flying leads and associated services for which we expect to charge in excess of $2,300.

 

The first contract is for additional flying leads, equipment and services in support of a project located offshore Ghana, West Africa with delivery scheduled in the third quarter of 2012. The second contract, which is also scheduled for delivery in the third quarter of 2012, is for installation on a project in the U.S. Gulf of Mexico. The third contract is for a project on the Northwest Coast of Australia, with delivery scheduled in the first quarter of 2013.

 

10
 

 

 

On August 8, 2012, we announced that we were successful in our proposal to a major international umbilical manufacturer for the manufacture, installation and commissioning of a portable umbilical carousel. The project is expected to generate approximately $4,000 in revenue and is scheduled for delivery in the second quarter of 2013.

 

Results of Operations 

 

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

 

Revenues. Revenues for the three months ended June 30, 2012 were $7,904. Revenues for the three months ended June 30, 2011 were $7,094. The $810 increase in revenues in the 2012 period was due to an increase of $2,319 in our subsea solutions operating segment due to continued strong demand for our technologically innovative solutions, offset by a decrease of $1,509 in our ROV and topside equipment rental services due to decreased demand. During the three months ended June 30, 2011, we were still renting equipment and performing services related to the Macondo well spill cleanup activities.

 

Gross Profit. Gross profit for the three months ended June 30, 2012 was $2,871, or 36 percent of revenues. Gross profit for the three months ended June 30, 2011 was $1,857, or 26 percent of revenues. The $1,014, or 10 percentage-point, increase in gross profit in the 2012 period compared to the same period in 2011, was due primarily to a $1,863 increase related to our subsea solutions operating segment, due to 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 $2,519 of work on a major fabrication contract to CFT, on which we realized no gross profit. This increase was offset by an $849 decrease related to our ROV and topside equipment rental services due, as previously mentioned, to much 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 June 30, 2012 were $2,013. SG&A for the three months ended June 30, 2011 was $1,433. The $580 increase in SG&A in the 2012 period compared to the 2011 period was due primarily to a $271 increase in bad debt expense, and a $218 increase in share-based compensation expense. We also had no reimbursements from CFT (our joint venture) for management services in the 2012 period, compared to $169 in the 2011 period. Partially offsetting these increases was a $144 decrease in professional services fees primarily as a result of a reduction in accounting and auditing fees.

 

Depreciation and amortization expense. Depreciation and amortization expense (“D&A”) for the three months ended June 30, 2012 was $143, consisting of amortization expense of $107, and non-cost of sales depreciation expense of $36. D&A for the three months ended June 30, 2011 was $201, consisting of amortization expense of $103, and non-cost of sales depreciation expense of $98. The amortization relates to our intangible assets and the depreciation relates to property, plant and equipment not used in the generation of revenue. The $62 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 June 30, 2012. Interest expense, net was $58 for the three months ended June 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 $24 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 June 30, 2012 was $32.  At June 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 June 30, 2011 was $202. 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.

 

11
 

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 three months ended June 30, 2012 and 2011:

 

   For the Three Months Ended
June 30,
 
   2012   2011 
Net income (loss)  $639   $(46)
Add back interest expense, net of interest income   34    58 
Add back depreciation and amortization   462    511 
Add back income tax expense   15    15 
Add back share-based compensation   246    28 
Add back equity in net loss of joint venture   32    202 
Modified EBITDA  $1,428   $768 

 

Modified EBITDA for the three months ended June 30, 2012 was $1,428. Modified EBITDA for the three months ended June 30, 2011 was $768. Modified EBITDA increased $660 from the 2011 period to the 2012 period primarily due to increased gross profit before depreciation expense of $1,023, partially offset by increased SG&A before share-based compensation expense of $362.

 

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

 

Revenues. Revenues for the six months ended June 30, 2012 were $12,777. Revenues for the six months ended June 30, 2011 were $13,378. The decrease of $601 is due primarily to a reduction of $2,434 as a result of decreased demand for our ROV and topside equipment rental services in the first half of 2012 compared to the same period in 2011. During the six months ended June 30, 2011 we were still renting equipment and performing services related to the Macondo well spill cleanup activities. The reduction is partially offset by an increase of $1,833 in our subsea solutions operating segment, due to continued strong demand for our technologically innovative solutions.

 

Gross Profit. Gross profit for the six months ended June 30, 2012 was $ 4,806, or 38 percent of revenues. Gross profit for the six months ended June 30, 2011 was $3,044 or 23 percent of revenues. The $1,762, or 15 percentage-point, increase in gross profit in the 2012 period compared to the same period in 2011, was due primarily to a $3,295 increase related to our subsea solutions operating segment, due to 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 $4,691 of work on a major fabrication contract to CFT, on which we realized no gross profit. This increase was offset by a $1,533 decrease related to our ROV and topside equipment rental services due, as previously mentioned, to much 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 six months ended June 30, 2012 were $3,982. SG&A for the six months ended June 30, 2011 was $4,005. The $23 decrease was driven primarily by an $810 reduction in professional fees primarily due to decreased accounting and auditing fees, and $137 in savings associated with our cost containment program. These decreases were offset by a $389 reduction in management services reimbursements from CFT; a $317 increase in bad debt expense; and a $218 increase in share-based compensation expense.

 

12
 

 

Depreciation and amortization expense. Depreciation and amortization expense (“D&A”) for the six months ended June 30, 2012 was $292, consisting of amortization expense of $215, and non-cost of sales depreciation expense of $77. D&A for the six months ended June 30, 2011 was $367, consisting of amortization expense of $207, and non-cost of sales depreciation expense of $160. The $83 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 six months ended June 30, 2012 was $86. Interest expense, net for the six months ended June 30, 2011 was $148. 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 $62 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 six months ended June 30, 2012 was $140.  At June 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 six months ended June 30, 2011 was $316. 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 six months ended June 30, 2012 and 2011:

 

   For the Six Months Ended
June 30,
 
   2012   2011 
Net income (loss)  $339   $(1,806)
Add back interest expense, net of interest income   86    148 
Add back depreciation and amortization   927    958 
Add back income tax expense   19    30 
Add back share-based compensation   377    159 
Add back equity in net loss of joint venture   140    316 
Modified EBITDA  $1,888   $(195)

 

Modified EBITDA for the six months ended June 30, 2012 was $1,888. Modified EBITDA for the six months ended June 30, 2011 was $(195). Modified EBITDA increased $2,083 from the 2011 period to the 2012 period primarily due to increased gross profit before depreciation expense of $1,806 and reduced SG&A before share-based compensation expense of $241.

 

13
 

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 June 30, 2012: 0.38 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 June 30, 2012: 3.00 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 June 30, 2012: $18,439.

As of June 30, 2012, we were in compliance with all of the aforementioned financial covenants.

 

At June 30, 2012, we had working capital (excluding the current portion of long-term debt) of $6,007, including cash and cash equivalents of $4,105. Our total long-term debt at June 30, 2012 was $3,033.

 

14
 

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 June 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 June 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 June 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 June 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 June 30, 2012.

 

15
 

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.

** Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q within the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing date of this Form 10-Q.

 

16
 

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:  August 9, 2012     
  By: /s/ Eugene L. Butler
   

Executive Chairman and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

     

 

 

 

 

 

 

17
 

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.

** Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q within the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing date of this Form 10-Q.

 

 

18

 

 

PINX:DPDW Deep Down Inc Quarterly Report 10-Q Filling

Deep Down Inc PINX:DPDW Stock - Get Quarterly Report SEC Filing of Deep Down Inc PINX:DPDW stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

PINX:DPDW Deep Down Inc Quarterly Report 10-Q Filing - 6/30/2012
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