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EX-31.1 - EXHIBIT 31.1 - Integrated Drilling Equipment Holdings Corp | v384976_ex31x1.htm |
EX-31.2 - EXHIBIT 31.2 - Integrated Drilling Equipment Holdings Corp | v384976_ex31x2.htm |
EXCEL - IDEA: XBRL DOCUMENT - Integrated Drilling Equipment Holdings Corp | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - Integrated Drilling Equipment Holdings Corp | v384976_ex32x1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-54417
INTEGRATED DRILLING EQUIPMENT HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
Delaware | 27-5079295 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
25311 I-45 North Woodpark Business Center, Bldg 6 Spring, Texas 77380 |
77380 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (281) 465-9393
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date 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 o No x
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:
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
As of August 11, 2014, there were 8,809,917 shares of Companys common stock issued and outstanding.
TABLE OF CONTENTS
i
PART I.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, included or incorporated by reference in this Quarterly Report on Form 10-Q, including, but not limited to, those under Managements Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2, and Legal Proceedings in Part II, Item 1, are forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including the words believes, estimates, anticipates, expects, intends, plans, may, potential, projects, could, forecast, foresee, scheduled, predicts, continue, or should, or, in each case, their negative or other variations or comparable terminology. These statements are based on managements belief and assumptions using currently available information, and expectations, as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties (some of which are beyond our control). Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide assurance that our expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied, or forecasted in these statements. Any differences could be caused by a number of factors, including, but not limited to:
| Our limited operating history and ability to generate consistent cash flows. |
| Our ability to maintain existing customers and timely deliver our backlog. |
| Our ability to manage anticipated growth, develop new products and services and integrate future acquisitions and joint ventures. |
| Trends in the oil and gas industry, including changes in oil and natural gas prices and consolidation in this industry. |
| Intense competition and availability and cost of materials, equipment and supplies. |
| Our ability to retain and compete for the services of management and highly-trained technical or trade personnel. |
| Instability in international economic and political conditions and severe weather. |
| Complying with U.S. laws and regulations while competing with foreign companies not subject to such laws and regulations. |
| Losses on fixed-price contracts or loss of any of our major customers. |
| Our ability to service our debt and pay dividends. |
| The complexity of percentage-of-completion accounting and the fact that we may be required to recognize a charge against current earnings under these accounting rules. |
| Our officers, directors and principal stockholders, who hold a significant percentage of our stock, may have interests that are different or adverse to other stockholders. |
| Our ability to obtain additional financing and comply with restrictive covenants under our existing and future debt agreements. |
| That we may issue additional debt securities or otherwise incur substantial indebtedness. |
| Impact of litigation and the availability and cost of insurance. |
| Compliance with environmental laws and regulations. |
| Increased burdens of being a public company, including complying with the Sarbanes Oxley Act and the Dodd-Frank Act. |
| Lack of an active, liquid market for our common stock, which may impact our stock price. |
1
| Fluctuations in our quarterly operating reports. |
| Impact of qualifying as a controlled company and smaller reporting company. |
| Effect of anti-takeover provisions in our charter documents and Delaware law. |
| Our warrants may be amended or redeemed at a time that disadvantages warrant holders or our warrants may expire without any value. |
| Dilutive impact of registration rights granted to Empeiria Investors LLC, our sponsor, our officers and directors and other parties. |
These risks and others described under Risk Factors, in our most recent Annual Report on Form 10-K, and detailed from time-to-time in our filings with the Securities Exchange Commission may not be exhaustive.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q (this report). In addition, even if our results of operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.
These forward-looking statements are subject to numerous risks, uncertainties and assumptions. The forward-looking events described in this report speak only as of the date of such statement and might not occur in light of these risks, uncertainties and assumptions. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Unless otherwise provided in this report, references to the Company, we, us and our refer to Integrated Drilling Equipment Holdings Corp. and its subsidiaries.
2
ITEM 1. | FINANCIAL STATEMENTS |
Integrated Drilling Equipment Holdings Corp.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value) | June 30, 2014 |
December 31, 2013 | ||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents | $ | 3,467 | $ | 981 | ||||
Restricted cash | 7 | 83 | ||||||
Accounts receivable, net | 10,951 | 13,333 | ||||||
Inventories, net | 6,187 | 7,039 | ||||||
Deferred tax assets | 96 | 133 | ||||||
Prepaid expenses and other current assets | 403 | 782 | ||||||
Total current assets | 21,111 | 22,351 | ||||||
Intangibles, net | 2,315 | 2,798 | ||||||
Property, equipment and improvements, net | 2,433 | 2,686 | ||||||
Deferred financing costs, net | 728 | 1,517 | ||||||
Deposits | 91 | 91 | ||||||
Total assets | $ | 26,678 | $ | 29,443 | ||||
Liabilities and Stockholders Deficit |
||||||||
Current liabilities |
||||||||
Current maturities of long-term debt | $ | 32,163 | $ | 12,974 | ||||
Current portion of capital lease obligations | 79 | 64 | ||||||
Trade accounts and other payables | 14,335 | 14,482 | ||||||
Accrued liabilities | 7,485 | 8,654 | ||||||
Customer advanced billings and payments, and other | 4,616 | 5,148 | ||||||
Total current liabilities | 58,678 | 41,322 | ||||||
Long-term debt, less current maturities | 5,006 | 22,746 | ||||||
Capital lease obligations, net of current | 147 | 98 | ||||||
Deferred tax liability | 96 | 133 | ||||||
Total liabilities | 63,927 | 64,299 | ||||||
Commitments and contingencies (See Note 13) |
||||||||
Stockholders deficit |
||||||||
Common stock $0.0001 par value per share: |
||||||||
Authorized shares 100,000,000; |
||||||||
Issued shares 8,809,917 | 1 | 1 | ||||||
Accumulated deficit | (37,250 | ) | (34,857 | ) | ||||
Total stockholders deficit | (37,249 | ) | (34,856 | ) | ||||
Total liabilities and stockholders deficit | $ | 26,678 | $ | 29,443 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Integrated Drilling Equipment Holdings Corp.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||
(in thousands, except share and per share amounts) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||
Revenue |
||||||||||||||||||||
Products | $ | 11,872 | $ | 14,124 | $ | 25,247 | $ | 41,552 | ||||||||||||
Services | 7,258 | 9,555 | 15,205 | 22,018 | ||||||||||||||||
Total revenue | 19,130 | 23,679 | 40,452 | 63,570 | ||||||||||||||||
Cost of goods sold and services |
||||||||||||||||||||
Products | 9,143 | 9,876 | 19,013 | 31,925 | ||||||||||||||||
Services | 3,994 | 7,468 | 8,205 | 15,583 | ||||||||||||||||
Total cost of goods sold and services | 13,137 | 17,344 | 27,218 | 47,508 | ||||||||||||||||
Selling, general and administrative expense | 6,960 | 6,670 | 11,720 | 14,180 | ||||||||||||||||
Depreciation and amortization expense | 443 | 523 | 886 | 1,128 | ||||||||||||||||
Income (loss) from operations | (1,410 | ) | (858 | ) | 628 | 754 | ||||||||||||||
Other (income) expense |
||||||||||||||||||||
Interest expense | 1,399 | 1,143 | 3,098 | 2,292 | ||||||||||||||||
Other (income) | (225 | ) | (199 | ) | (165 | ) | (459 | ) | ||||||||||||
Income before income taxes | (2,584 | ) | (1,802 | ) | (2,305 | ) | (1,079 | ) | ||||||||||||
Income taxes (benefit) |
||||||||||||||||||||
Current | 21 | 106 | 88 | 192 | ||||||||||||||||
Deferred | | (528 | ) | | (249 | ) | ||||||||||||||
Total income taxes | 21 | (422 | ) | 88 | (57 | ) | ||||||||||||||
Net loss | $ | (2,605 | ) | $ | (1,380 | ) | $ | (2,393 | ) | $ | (1,022 | ) | ||||||||
Weighted average shares outstanding: |
||||||||||||||||||||
Basic | 8,809,917 | 8,685,700 | 8,809,917 | 8,673,849 | ||||||||||||||||
Diluted | 8,951,976 | 8,827,994 | 8,952,030 | 8,816,159 | ||||||||||||||||
Loss per share: |
||||||||||||||||||||
Basic | $ | (0.30 | ) | $ | (0.16 | ) | $ | (0.27 | ) | $ | (0.12 | ) | ||||||||
Diluted | $ | (0.30 | ) | $ | (0.16 | ) | $ | (0.27 | ) | $ | (0.12 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Integrated Drilling Equipment Holdings Corp.
Condensed Consolidated Statements of Changes in Stockholders Deficit
(unaudited)
Shares Issued | Stock | Accumulated Deficit | Total Stockholders Deficit | |||||||||||||||||||||
(in thousands, except share data) | Common | Preferred | Common | Preferred | ||||||||||||||||||||
Balances at December 31, 2012 | 8,646,700 | | $ | 1 | $ | | $ | (28,439 | ) | $ | (28,438 | ) | ||||||||||||
Net loss | | | | | (1,022 | ) | (1,022 | ) | ||||||||||||||||
Issuance of common shares in exchange for warrants | 39,000 | | | | | | ||||||||||||||||||
Balances at June 30, 2013 | 8,685,700 | | $ | 1 | $ | | $ | (29,461 | ) | $ | (29,460 | ) | ||||||||||||
Balances at December 31, 2013 | 8,809,917 | | 1 | | (34,857 | ) | (34,856 | ) | ||||||||||||||||
Net loss | | | | | (2,393 | ) | (2,393 | ) | ||||||||||||||||
Balances at June 30, 2014 | 8,809,917 | | $ | 1 | $ | | $ | (37,250 | ) | $ | (37,249 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Integrated Drilling Equipment Holdings Corp.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30, | ||||||||
(in thousands) | 2014 | 2013 | ||||||
Operating activities |
||||||||
Net loss | $ | (2,393 | ) | $ | (1,022 | ) | ||
Adjustments to reconcile net loss to cash provided by (used in) operating activities |
||||||||
Depreciation and amortization expense | 886 | 1,128 | ||||||
Deferred income tax | | (249 | ) | |||||
Increase (decrease) in bad debt provision | (258 | ) | 68 | |||||
Decrease in inventory obsolescence provision | (76 | ) | | |||||
Amortization of deferred financing costs | 789 | 280 | ||||||
Unrealized gain on warrant valuation | (157 | ) | (401 | ) | ||||
Paid-in-kind interest expense | 662 | 201 | ||||||
Compensation expense in form of note payable | 2,254 | | ||||||
Changes in operating assets and liabilities |
||||||||
Trade accounts receivable | 2,640 | 13,092 | ||||||
Inventories | 928 | 4,696 | ||||||
Other current assets | 378 | 482 | ||||||
Trade accounts and other payables | (77 | ) | (2,300 | ) | ||||
Accrued liabilities | (815 | ) | (855 | ) | ||||
Customer advanced billings and payments | (533 | ) | (11,037 | ) | ||||
Net cash provided by operating activities | 4,228 | 4,083 | ||||||
Investing activities |
||||||||
Capital expenditures for property, equipment and improvements | (50 | ) | (209 | ) | ||||
Decrease in restricted cash | 77 | 365 | ||||||
Net cash provided by (used in) investing activities | 27 | 156 | ||||||
Financing activities |
||||||||
Issuance of long-term debt | 39,169 | 62,625 | ||||||
Repayments of long-term debt | (40,901 | ) | (67,231 | ) | ||||
Payment of capital lease | (37 | ) | (23 | ) | ||||
Net cash used in financing activities | (1,769 | ) | (4,629 | ) | ||||
Increase (decrease) in cash and cash equivalents | 2,486 | (390 | ) | |||||
Cash and cash equivalents |
||||||||
Beginning of period | 981 | 1,602 | ||||||
End of period | $ | 3,467 | $ | 1,212 | ||||
Noncash activity |
||||||||
Property and equipment acquired through capital leases | $ | 126 | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Integrated Drilling Equipment Holdings Corp.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Business and Summary of Significant Accounting Policies
Integrated Drilling Equipment Holdings Corp. (the Company) provides products and services to customers in the oil and gas industry both domestically and internationally. The majority of the Companys business is conducted through two operating segments: (1) Electrical Products and Services (the electrical segment) and (2) Drilling Products and Services (the drilling segment). Unless otherwise provided, references to the Company, we, us and our refer to Integrated Drilling Equipment Holdings Corp. and its subsidiaries.
Our electrical segment designs, manufactures, installs and services rig electrical and control systems including SCR (silicon controlled rectifier) units and VFD (variable frequency drive) units, as well as electrical cabling, lighting systems, closed circuit video systems, gas and fire detection systems, and communication systems.
Our drilling segment is a full service provider of drilling rigs and their components. We design, manufacture, and service complete land-based drilling rigs, as well as rig subsystems and parts. We provide drilling rig services including: mechanical services, assembly testing (rig-up/final construction and commission), rig refurbishment and inspection, new rig fabrication and completion of land rig packages. Additionally, we fabricate mud tanks, masts and substructures, dog houses and other products.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The accompanying unaudited condensed consolidated financial statements and related footnotes have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim periods. In the opinion of management of the Company, these unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Companys financial position and operating results for the periods disclosed. All intercompany balances and transactions have been eliminated in consolidation. The accounting policies followed by the Company are set forth in Note 5 to the Companys audited consolidated financial statements for the year ended December 31, 2013 included in the Companys Annual Report on Form 10-K, and such accounting policies are supplemented by the notes to these unaudited condensed consolidated financial statements. There have been no significant changes to these policies and it is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the Companys audited consolidated financial statements for the year ended December 31, 2013.
These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchanges Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements and should be read in conjunction with the Companys audited consolidated financial statements for the year ended December 31, 2013 included in the Companys Annual Report on Form 10-K. While the year-end balance sheet data was derived from audited financial statements, this interim report does not include all disclosures required by GAAP for annual periods. These unaudited interim condensed consolidated financial statements reflect all of the adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. Interim results are not necessarily indicative of the results that may be expected for a full year.
The Companys condensed consolidated financial statements are expressed in U.S. dollars. In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we review our estimates, including those related to percentage of completion and related revenue recognition, deferred revenues, costs, estimated earnings and billings, allowance for doubtful accounts, intangible assets and inventory valuation and reserves. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.
7
Integrated Drilling Equipment Holdings Corp.
Notes to Condensed Consolidated Financial Statements
(unaudited)
2. Company Financing
On December 14, 2012, the Company, Integrated Drilling Equipment, LLC and Integrated Drilling Equipment Company Holdings, LLC (collectively with the Company, the Borrowers) entered into a term loan and security agreement with Elm Park Credit Opportunities Fund, L.P. and Elm Park Credit Opportunities Fund (Canada), L.P., as lenders, and Elm Park Capital Management, LLC, as administrative agent (the Term Loan Agreement). The Term Loan Agreement provides for a $20.0 million senior secured second-lien term loan facility (as amended, the Term Facility). On the same date, the Borrowers also entered into an amended and restated revolving credit and security agreement with PNC Bank, National Association, as administrative agent and the initial lender (the Revolving Credit Agreement). The Revolving Credit Agreement currently provides for a $15 million committed asset-based revolving credit facility, with a sublimit for letters of credit (as amended, the Revolving Facility and, together with the Term Facility, the Credit Facilities).
On March 31, 2014, the Borrowers entered into the Third Amendment to the Term Facility and the Third Amendment to the Revolving Facility to, among other things, (1) amend the maturity date of the Term Facility from September 30, 2014 to June 30, 2015 and the maturity date of the Revolving Facility from March 31, 2014 to December 31, 2014; (2) add a covenant regarding the fixed charge coverage ratio in the Credit Facilities; (3) amend (a) the minimum EBITDA financial covenant and (b) the capital expenditures financial covenant in the Credit Facilities; (4) amend the term loan repayment schedule in the Term Facility; (5) amend the PIK interest provision in the Term Facility to increase such interest from 2% to 4% (unless the Borrowers total leverage ratio is less than 3:50:1:00, in which case such interest shall accrue at a rate of 2%); and (6) amend the calculation of the amount of revolving advances lenders are required to make under the Revolving Facility.
As of June 30, 2014, we were not in compliance with the minimum fixed charge coverage ratio (FCCR) covenant in our Revolving Facility and Term Facility. The Company incurred a non-cash expense of $2.3 million related to the Settlement Agreement entered into with our former CEO in April 2014. As a result of this expense, we did not generate sufficient EBITDA to meet our FCCR covenant for the six months ended June 30, 2014 reporting period and therefore are in default of our debt facilities. This resulted in an event of default under such facilities, which, if not cured or waived, would give the lenders under such facilities the right to declare the debt immediately due and payable. In the event of an acceleration of amounts due under our debt facilities as a result of this default, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments, and the lenders could seek to enforce their security interest in the collateral securing such indebtedness, which would have a material adverse effect on our business, prospects and financial condition.
We are currently in discussions with the lenders under these facilities to amend the agreements to address these covenants. The Company believes it will be able to negotiate with the lenders to amend the Revolving Facility and the Term Facility. However, if the Company is unable to negotiate amendments, there can be no assurance that the Company would be able to find other lenders to refinance these agreements.
As of June 30, 2014, the Company had cash and cash equivalents of approximately $3.5 million. The Company believes its existing cash and cash equivalents, $1.4 million available from its revolving facility, expected revenues from its contractual backlog of $23.0 million, and future orders will enable it to meet its material liquidity needs for the next twelve months from the balance sheet date provided that we are successful in extending or refinancing our current debt maturities and/or are able to obtain additional working capital through credit arrangements, debt, or additional equity. There can be no assurance that we will be able to extend our debt maturity dates and/or whether additional financing sources will be available.
The Companys ability to obtain additional external debt financing will be limited by the amount and terms of its existing borrowing arrangements and the fact that substantially all of its assets have been pledged as collateral for these existing arrangements. In addition, a failure to comply with the covenants under its
8
Integrated Drilling Equipment Holdings Corp.
Notes to Condensed Consolidated Financial Statements
(unaudited)
2. Company Financing (continued)
existing debt instruments could result in an event of default. Furthermore, there are cross-default provisions in certain of the Companys existing debt instruments such that an event of default under one agreement or instrument could result in an event of default under another. If an event of default resulted in the acceleration of all of its payment obligations under its debt instruments as of June 30, 2014, it would be required to pay its lenders an aggregate of $30.7 million. In the event of an acceleration of amounts due under its debt instruments as a result of an event of default, the Company may not have sufficient funds or may be unable to arrange for additional financing to repay its indebtedness or to make any accelerated payments, and the lenders could seek to enforce their security interests in the collateral securing such indebtedness. The Companys failure to obtain additional external financing to fund its cash requirements would further cause noncompliance with its existing debt covenants which would have a material adverse effect on its business, operations and financial condition and raises substantial doubt about the Companys ability to continue as a going concern.
3. PEMEX Contract Termination
On August 9, 2013, the Company received notices from PEMEX Procurement International, Inc. (PII) (formerly Integrated Trade Systems, Inc.), an agent for PEMEX-Exploración y Producción (PEMEX) terminating four purchase agreements for modular drilling units. The collective value of the four agreements was approximately $354.0 million. The Company, through its subsidiaries Integrated Drilling Equipment LLC and IDE Perforación Mexico, S. de R.L. de C.V., entered into these four purchase agreements with PII, an agent for PEMEX, on March 22, 2013.
Pursuant to each purchase agreement, the Company was required to deliver to PII within 20 business days of signing the purchase agreement: (1) a stand-by letter of credit for 12% of the purchase price; and (2) a bond for 20% of the purchase price (together with the letter of credit, the guarantees).
The Company was unable to secure the necessary guarantee obligations within the time period contemplated by the purchase agreements. On June 14, 2013, PEMEX notified the Company that it was in default of its guarantee obligations under the contracts signed on March 22, 2013 because the Company had failed to provide the required letters of credit and performance bonds within the time period as required under Articles 21.1 and 21.2, respectively, under the contract. Subsequently, on August 9, 2013, PEMEX notified the Company that it terminated these purchase agreements due to the Companys default.
As a result of its decision to exercise its right to terminate the purchase agreements, under the terms of the agreements, PEMEX may seek liquidated damages from the Company in the amount of 12% of the purchase price of each of the modular drilling units. As of June 30, 2014, no provision has been made for any potential liability that could arise should PEMEX seek liquidating damages as a result of the terminated purchase agreements.
4. Accounts Receivable
Accounts Receivable consists of the following (in thousands):
June 30, 2014 |
December 31, 2013 |
|||||||
Trade Accounts Receivable | $ | 7,644 | $ | 10,081 | ||||
Unbilled revenue and other | 3,735 | 3,996 | ||||||
Less: Allowance for doubtful accounts | (428 | ) | (744 | ) | ||||
$ | 10,951 | $ | 13,333 |
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Integrated Drilling Equipment Holdings Corp.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5. Uncompleted Contracts
Costs, estimated earnings and billings on uncompleted contracts are summarized below (in thousands):
June 30, 2014 |
December 31, 2013 |
|||||||
Costs incurred on uncompleted contracts | $ | 40,173 | $ | 30,354 | ||||
Earned margin | 9,860 | 6,123 | ||||||
Earned revenue | 50,033 | 36,477 | ||||||
Less: Billings to date | 51,093 | 38,195 | ||||||
$ | (1,060 | ) | $ | (1,718 | ) | |||
Included in the accompanying balance sheets under the following captions: |
||||||||
Accounts receivable | $ | 3,359 | $ | 3,390 | ||||
Customer advanced billings and payments | (4,419 | ) | (5,108 | ) | ||||
$ | (1,060 | ) | $ | (1,718 | ) |
6. Inventories
Inventories consist of the following (in thousands):
June 30, 2014 |
December 31, 2013 | |||||||
Raw materials and finished goods | $ | 4,297 | $ | 5,193 | ||||
Work in process | 2,164 | 2,196 | ||||||
Reserve | (274 | ) | (350 | ) | ||||
$ | 6,187 | $ | 7,039 |
7. Intangibles
Intangibles consist of the following (in thousands):
June 30, 2014 |
December 31, 2013 | |||||||
Rig technology and product design | $ | 4,642 | $ | 4,642 | ||||
Less: Accumulated amortization | (2,327 | ) | (1,844 | ) | ||||
$ | 2,315 | $ | 2,798 |
Amortization expense for the six months ended June 30, 2014 and 2013 amounted to $483 thousand and $624 thousand, respectively.
8. Property, Equipment and Improvements
Property, Equipment and Improvements, including capital leases, consists of the following (in thousands):
June 30, 2014 |
December 31, 2013 | |||||||
Machinery and equipment | $ | 3,097 | $ | 3,142 | ||||
Leasehold improvements | 4,544 | 4,544 | ||||||
Assets under capital leases | 329 | 275 | ||||||
Less: Accumulated depreciation | (5,537 | ) | (5,275 | ) | ||||
$ | 2,433 | $ | 2,686 |
Depreciation expense relating to machinery and equipment and leasehold improvements for the six months ended June 30, 2014 and 2013 amounted to $366 thousand and $484 thousand, respectively.
10
Integrated Drilling Equipment Holdings Corp.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Property, Equipment and Improvements (continued)
Depreciation expense relating to capital leases for the six months ended June 30, 2014 and 2013 amounted to $37 thousand and $21 thousand, respectively.
9. Debt and Redeemable Preferred Stock
Debt and redeemable preferred stock consisted of the following (in thousands):
June 30, 2014 |
December 31, 2013 |
|||||||||||||||
Short-Term | Long-Term | Short-Term | Long-Term | |||||||||||||
$2.5 million redeemable preferred stock, Series A(1) | $ | | $ | 3,188 | $ | | $ | 2,949 | ||||||||
$0.5 million redeemable preferred stock, Series B(2) | | 563 | | 514 | ||||||||||||
$0.5 million redeemable preferred stock, Series C(3) | | 544 | | 509 | ||||||||||||
$15.0 million revolving credit facility(4) | 10,831 | | 11,774 | | ||||||||||||
$20.0 million credit agreement(5) | 19,822 | | 1,200 | 18,774 | ||||||||||||
$2.1 million promissory note(6) | 1,306 | 562 | | | ||||||||||||
$0.4 million promissory note(7) | 204 | 149 | | | ||||||||||||
$ | 32,163 | $ | 5,006 | $ | 12,974 | $ | 22,746 |
(1) | $2.5 million of redeemable preferred stock (25,000 shares of Series A preferred stock at $100 per share) is subject to mandatory redemption on the date which is 181 days following the date at which our Term Facility is repaid in full. The redemption price is equal to the purchase price, plus all accrued and unpaid dividends to the date of redemption, subject to compliance with any restrictions in our then-outstanding indebtedness. The preferred stock is not convertible into common stock and accrues cumulative dividends at a rate of 16% per year. The dividends are payable in additional shares of Series A preferred stock. |
(2) | $0.5 million of redeemable preferred stock (5,000 shares of Series B preferred stock at $100 per share) is subject to mandatory redemption on the date which is 181 days following the date at which our $2.5 million redeemable preferred stock, Series A, is repaid in full. The redemption price is equal to the purchase price, plus all accrued and unpaid dividends to the date of redemption, subject to compliance with any restrictions in our then-outstanding indebtedness. The preferred stock is not convertible into common stock and accrues cumulative dividends at a rate of 20% for the first year and 25% per year thereafter. The dividends are payable in additional shares of Series B preferred stock. |
(3) | $0.5 million of redeemable preferred stock (5,000 shares of Series C preferred stock at $100 per share) is subject to mandatory redemption on the date which is 181 days following the date at which our $2.5 million redeemable preferred stock, Series A, is repaid in full. The redemption price is equal to the purchase price, plus all accrued and unpaid dividends to the date of redemption, subject to compliance with any restrictions in our then-outstanding indebtedness. The preferred stock is not convertible into common stock and accrues cumulative dividends at a rate of 14% per year. The dividends are payable in additional shares of Series C preferred stock. |
(4) | $15.0 million revolving credit facility which expires on December 31, 2014, as amended on March 31, 2014 (see Note 2). Borrowings under this Revolving Facility bear interest at a rate determined by the lending institution, with a minimum rate of 1.5%. The interest rate at June 30, 2014 and 2013 was 7.75% and 4.75% respectively. Additionally, the lender assesses a Lenders fee of 0.375% on the unused portion of the Revolving Facility. The Company is jointly and severally liable for the obligations owing under the Revolving Facility and any future subsidiaries of the Company shall be required to guarantee the payment and performance of the obligations of the Company under the Revolving Facility. The Revolving Facility is secured, subject to certain permitted liens, on a first priority basis by a security interest in substantially all of the Companys tangible and intangible assets. |
(5) | $20.0 million credit agreement which matures on June 30, 2015, as amended on March 31, 2014 (see Note 2). Loans under this Term Facility bear interest, at the Borrowers option, at a rate equal to the adjusted LIBOR rate or an alternate base rate, in each case, subject to a floor and a spread. As of June 30, 2014 and 2013, the cash interest rate was 12%. In addition to the cash interest rate, all loans bear an additional paid-in-kind (PIK) interest at a rate of 4% per annum (unless the Borrowers total leverage ratio is less than |
11
Integrated Drilling Equipment Holdings Corp.
Notes to Condensed Consolidated Financial Statements
(unaudited)
9. Debt and Redeemable Preferred Stock (continued)
3:50:1:00, in which case such interest shall accrue at a rate of 2%). The Company is jointly and severally liable for the obligations under the Term Facility and any future subsidiaries of the Company will be required to guarantee the payment and performance of the obligations of the Company under the Term Facility. The Term Facility is secured, subject to certain permitted liens, on a second priority basis by a security interest in substantially all of the Companys tangible and intangible assets. |
(6) | $2.1 million promissory note issued to Stephen Cope, our former CEO, provides for bi-weekly installment payments of $40,614.44 until the note is paid in full. Interest accrues on the note at the rate of 9% per annum and interest on all past due amounts at the rate of 18% per annum. All interest shall accrue and be paid at maturity. Notwithstanding the foregoing, upon the earlier of (i) April 7, 2016 or (ii) the later to occur of (x) the date the Company determines that it would have had, after paying the note in full, liquidity of at least $5 million on each of two consecutive months end and (y) the date the Company has contracted backlog for drilling rigs and related equipment (1) of at least $75 million or (2) of $60 million (excluding the electrical segments contracted backlog), then the entire amount of such note shall become due and payable. In addition, a mandatory prepayment on the note in the amount of $250,000 shall be due on the date, after March 31, 2014, when the Company has received deposits of at least $5.0 million for contracted backlog for drilling related equipment. This note is prepayable at any time without payment of any premium or fee. |
(7) | $0.4 million promissory note issued to Stephen Cope, our former CEO, provides for bi-weekly installment payments of $7,849.40 until the note is paid in full. Notwithstanding the foregoing, on April 8, 2016, all unpaid principal shall be due and payable. The note does not accrue interest and is prepayable at any time without payment of any premium or fee. |
Compliance with Debt Covenants
As of June 30, 2014, we were not in compliance with the minimum fixed charge coverage ratio (FCCR) covenant in our Revolving Facility and Term Facility. The Company incurred a non-cash expense of $2.3 million related to the Settlement Agreement entered into with our former CEO in April 2014. As a result of this expense, we did not generate sufficient EBITDA to meet our FCCR covenant for the six months ended June 30, 2014 reporting period and therefore are in default of our debt facilities. This resulted in an event of default under such facilities, which, if not cured or waived, would give the lenders under such facilities the right to declare the debt immediately due and payable. In the event of an acceleration of amounts due under our debt facilities as a result of this default, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments, and the lenders could seek to enforce their security interest in the collateral securing such indebtedness, which would have a material adverse effect on our business, prospects and financial condition.
We are currently in discussions with the lenders under these facilities to amend the agreements to address these covenants. The Company believes it will be able to negotiate with the lenders to amend the Revolving Facility and the Term Facility. However, if the Company is unable to negotiate amendments, there can be no assurance that the Company would be able to find other lenders to refinance these agreements.
10. Defined Contribution Plans
The Company has a 401k plan for eligible employees; however, during the six months ended June 30, 2014 and 2013 we did not make any contributions to the plan.
11. Income Taxes
The effective tax rate for the six months ended June 30, 2014 and 2013 was 3.8% and 5.3%, respectively. The difference in the effective tax rates was primarily due to a valuation allowance recorded against deferred tax assets. During the third quarter 2013, the Company recorded a non-cash charge to establish a valuation allowance of $4.6 million against its deferred tax assets, mainly consisting of net operating loss carryforwards and deductible temporary differences in accordance with Accounting Standards Codification 740, Income Taxes (ASC 740-10-45-5). The valuation allowance will be reduced when and if the Company determines it is more likely than not that there is sufficient positive evidence that the related deferred income tax assets will be realized.
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Integrated Drilling Equipment Holdings Corp.
Notes to Condensed Consolidated Financial Statements
(unaudited)
12. Segment Information
We have two reportable operating segments: (1) Electrical Products and Services and (2) Drilling Products and Services. Our Electrical Products and Services segment designs, manufactures, installs and services rig electrical and control systems including SCRs and VFDs, as well as electrical cabling, lighting systems, closed circuit video systems, gas and fire detection systems, and communication systems. Our Drilling Products and Services segment designs, manufactures, and services complete land-based drilling rigs, as well as rig subsystems and parts.
The accounting policies of our reporting segments are the same as those used to prepare our consolidated financial statements as of December 31, 2013 and 2012 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenues |
||||||||||||||||
Electrical(1) | $ | 13,788 | $ | 13,121 | $ | 27,600 | $ | 31,898 | ||||||||
Drilling(2) | 5,847 | 11,596 | 14,526 | 36,311 | ||||||||||||
Intersegment eliminations | (505 | ) | (1,038 | ) | (1,674 | ) | 4,639 | |||||||||
Total revenues | 19,130 | 23,679 | 40,452 | 63,570 | ||||||||||||
Segment profit |
||||||||||||||||
Electrical | 3,739 | 2,426 | 7,130 | 6,200 | ||||||||||||
Drilling | (876 | ) | (100 | ) | (106 | ) | 917 | |||||||||
Total segment profit | 2,863 | 2,326 | 7,024 | 7,117 | ||||||||||||
Corporate expenses | 3,830 | 2,661 | 5,510 | 5,235 | ||||||||||||
Depreciation and amortization expense | 443 | 523 | 886 | 1,128 | ||||||||||||
Interest expense | 1,399 | 1,143 | 3,098 | 2,292 | ||||||||||||
Other | (225 | ) | (199 | ) | (165 | ) | (459 | ) | ||||||||
Loss before income taxes | $ | (2,584 | ) | $ | (1,802 | ) | $ | (2,305 | ) | $ | (1,079 | ) |
(1) | Includes $0.5 million and $0.9 million of intersegment transactions for the three months ended June 30, 2014 and 2013, respectively; and $1.7 million and $4.5 million of intersegment transactions for the six months ended June 30, 2014 and 2013, respectively. |
(2) | Includes $0.1 million of intersegment transactions for the three and six months ended June 30, 2013. There were no intersegment transactions in 2014. |
June 30, 2014 |
December 31, 2013 | |||||||
Assets |
||||||||
Electrical | $ | 16,913 | $ | 19,291 | ||||
Drilling | 7,402 | 6,168 | ||||||
Total segment assets | 24,315 | 25,459 | ||||||
Corporate assets | 2,363 | 3,984 | ||||||
Total assets | $ | 26,678 | $ | 29,443 | ||||
Capital expenditures |
||||||||
Electrical | $ | 128 | $ | 184 | ||||
Drilling | 48 | 117 | ||||||
Total segment capital expenditures | 176 | 301 | ||||||
Corporate capital expenditures | | 45 | ||||||
Total capital expenditures | $ | 176 | $ | 346 |
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Integrated Drilling Equipment Holdings Corp.
Notes to Condensed Consolidated Financial Statements
(unaudited)
13. Commitments and Contingencies
Self-Insured Health Program
The Company maintains a self-insured health benefits plan, which provides medical benefits to employees selecting coverage under the plan. The Company maintains a reserve for incurred but not reported medical claims. The reserve is an estimate based on historical experience, as well as the number of participants and other assumptions, some of which are subjective. As any of these factors change, the Company will adjust its self insurance medical benefits reserve accordingly. Effective May 1, 2014, we have stop loss insurance for claims in excess of $70 thousand per individual and claims in excess of $2.1 million aggregate group loss. For the period May 1, 2013 through April 30, 2014, we had stop loss coverage for claims in excess of $65 thousand per individual and claims in excess of $2.6 million aggregate group loss. The Company believes its insurance reserves are adequate.
Legal Proceedings
On May 6, 2013, Drillmec, Inc. filed a lawsuit in the 281st Judicial District Court in Harris County, Texas (Drillmec, Inc. v. Integrated Drilling Equipment Company, et. al.) against Integrated Drilling Equipment Company Holdings, Inc., Integrated Drilling Equipment Company Holdings, LLC, Integrated Drilling Equipment, LLC, Integrated Drilling Equipment Company, Stephen D. Cope and SDC Management Services, LLC. Drillmec alleges that the defendants acquired Drillmecs drawings and technical specifications through an unrelated bidding process for offshore drilling rigs. In the pleadings, Drillmec claims that the defendants used this proprietary information in connection with its successful bid for certain PEMEX contracts and asserts causes of action for misappropriation of trade secrets, conversion, interference with prospective relations, conspiracy, unjust enrichment and unfair competition. Drillmec is seeking damages in the form of the Companys actual profits from the PEMEX contracts and the development costs that Drillmec incurred in developing the proprietary information in question. We intend to defend this litigation vigorously.
The Company produced documents in response to discovery requests on September 30, 2013. This case is in the preliminary stages and it is too early to predict an outcome and therefore no provision has been recorded as of June 30, 2014, for any potential liability arising from this litigation.
On February 28, 2014, Sidewinder Drilling Inc. filed a lawsuit in the 269th Judicial District Court in Harris County, Texas, against the Company and others (Sidewinder Drilling Inc. v. Oil County Engineering Services, LTD., HYCO Canada U.L.C., and Integrated Drilling Equipment Company Holdings, Inc.). In the lawsuit, Sidewinder is seeking a judicial declaration that the Company is contractually responsible for all of the damages caused by the dropped mast on Rig 103 because Delivery of Rig 103 had not occurred at the time of the Rig 103 dropped mast incident. We intend to defend this litigation vigorously.
This case is in the preliminary stages and it is too early to predict an outcome and therefore no provision has been recorded as of June 30, 2014, for any potential liability arising from this litigation.
From time to time, the Company may be involved in other litigation matters arising in the ordinary course of business. Although the ultimate liability for these matters cannot be determined, based on the information currently available to us, we do not believe that the resolution of these other litigation matters to which we are currently a party would have a material adverse effect on our business, financial condition or results of operation. We maintain liability insurance against certain risks arising out of the normal course of our business, subject to certain self-insured retention limits. We have accruals for our self-insurance exposures.
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Integrated Drilling Equipment Holdings Corp.
Notes to Condensed Consolidated Financial Statements
(unaudited)
14. Earnings (loss) Per Share
The following tables (in thousands, except share and per share amounts) set forth the computation of basic and diluted earnings per share:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Basic: |
||||||||||||||||
Net income | $ | (2,605 | ) | $ | (1,380 | ) | $ | (2,393 | ) | $ | (1,022 | ) | ||||
Weighted average common shares | 8,809,917 | 8,685,700 | 8,809,917 | 8,673,849 | ||||||||||||
Basic income per share | $ | (0.30 | ) | $ | (0.16 | ) | $ | (0.27 | ) | $ | (0.12 | ) | ||||
Diluted: |
||||||||||||||||
Net income | $ | (2,605 | ) | $ | (1,380 | ) | $ | (2,393 | ) | $ | (1,022 | ) | ||||
Basic weighted average common shares | 8,809,917 | 8,685,700 | 8,809,917 | 8,673,849 | ||||||||||||
Potential common shares | 142,059 | 142,294 | 142,113 | 142,309 | ||||||||||||
Diluted weighted average common shares | 8,951,976 | 8,827,994 | 8,952,030 | 8,816,159 | ||||||||||||
Diluted income per share | $ | (0.30 | ) | $ | (0.16 | ) | $ | (0.27 | ) | $ | (0.12 | ) |
15. Subsequent Events
Appointment of Chief Executive Officer
On July 21, 2014, Jim Terry, was appointed chief executive officer CEOof the Company. Mr. Terry replaces the former CEO, Stephen Cope, who resigned in April of this year. Effective with his CEO appointment, Mr. Terry became a member of the Companys Board of Directors.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided to assist readers in understanding the Companys financial performance during the periods presented and significant trends which may impact the future performance of the Company. This discussion should be read in conjunction with the financial statements of the Company and the notes to those statements included in Part I, Item 1 of this report. MD&A contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements, see Risk Factors in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013.
Historical Background
Empeiria Acquisition Corp. (EAC) was incorporated in Delaware in January 2011, for the purpose of acquiring one or more operating businesses or assets. On June 21, 2011, EAC completed its initial public offering. On October 19, 2012, EAC entered into a merger agreement (the Merger Agreement) with Integrated Drilling Equipment Company Holdings Inc., a Delaware corporation (IDE), and Stephen Cope, in his capacity as representative of IDEs stockholders (the Representative). On December 14, 2012, EAC consummated the merger with IDE (the Merger).
The Merger was accounted for under the purchase method of accounting as a reverse acquisition. Under this method of accounting, for accounting and financial purposes, EAC was treated as the acquired company, and IDE was treated as the acquiring company. Accordingly, historical information, including historical financial information and the historical description of our business, for periods and dates prior to December 14, 2012, include information for IDE only.
On April 11, 2013, EAC changed its name to Integrated Drilling Equipment Holdings Corp.
Overview
We provide products and services to customers in the oil and gas industry both domestically and internationally. The majority of our business is conducted through two operating segments: (1) Electrical Products and Services (the electrical segment) and (2) Drilling Products and Services (the drilling segment).
Our electrical segment designs, manufactures, installs and services electrical and control systems for drilling rigs including SCR (silicon-controlled rectifier) units and VFD (variable frequency drive) units, as well as electrical cabling, lighting systems, closed circuit video systems, gas and fire detection systems, and communication systems.
Our drilling segment is a full service provider of drilling rigs and their components. We design, manufacture, and service complete land-based drilling rigs, as well as rig subsystems and parts. We also provide drilling rig services including mechanical services, assembly testing (rig-up/final construction and commission), rig refurbishment and inspection, new rig fabrication and completion of land rig packages. Additionally, we fabricate mud tanks, masts and substructures, dog houses and other drilling rig related products.
The increased use of horizontal drilling and hydraulic fracturing, or fracking, has increased the demand for drilling rigs capable of drilling under these conditions. Since fracking has become more widespread, we believe more than 1,000 rigs have been manufactured or refurbished for that purpose. By 2009, our rig electrical and control systems were gaining market acceptance and we had started installing our proprietary electrical systems in customers existing drilling rigs. Because these electrical systems are the key component that enable the rig to operate with greater efficiency in horizontal shale drilling situations versus other competitive electrical systems, management decided to offer customers a complete rig package, including our unique electrical and control systems. Later in 2009, we sold our first complete rig package.
We are currently finalizing new rig designs for offshore platforms that we expect will enable us to capture more bids for new drilling equipment on newly constructed platforms as well as replacing drilling equipment on existing shallow offshore platforms that may be 25 or more years old. On these older
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platforms, drilling operators are potentially looking to upgrade their platforms with newer equipment that encompasses the latest drilling techniques and efficiencies. We are currently using our new offshore platform rig designs for current bids with offshore drilling contractors. If we are successful in obtaining this additional offshore platform rig business, it will expand our current offerings beyond our existing land rig offerings. The size and scope of these projects will help to solidify our existing land rig backlog.
Management is currently focused on improving the marketing of our complete rig packages and control systems, including our automated control options. We also plan to leverage our electrical segments established customer base to expand the products and services we offer to our customers and are evaluating strategies to further serve offshore and international markets.
Consolidated Results of Operations
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||||||
Products | $ | 11,872 | 62.1 | % | $ | 14,124 | 59.6 | % | $ | 25,247 | 62.4 | % | $ | 41,552 | 65.4 | % | ||||||||||||||||
Services | 7,258 | 37.9 | % | 9,555 | 40.4 | % | 15,205 | 37.6 | % | 22,018 | 34.6 | % | ||||||||||||||||||||
Total revenue | 19,130 | 100.0 | % | 23,679 | 100.0 | % | 40,452 | 100.0 | % | 63,570 | 100.0 | % | ||||||||||||||||||||
Cost of goods sold and services: |
||||||||||||||||||||||||||||||||
Products | 9,143 | 77.0 | % | 9,876 | 69.9 | % | 19,013 | 75.3 | % | 31,925 | 76.8 | % | ||||||||||||||||||||
Services | 3,994 | 55.0 | % | 7,468 | 78.2 | % | 8,205 | 54.0 | % | 15,583 | 70.8 | % | ||||||||||||||||||||
Total cost of goods sold and services | 13,137 | 68.7 | % | 17,344 | 73.2 | % | 27,218 | 67.3 | % | 47,508 | 74.7 | % | ||||||||||||||||||||
Selling, general and administrative expense | 6,960 | 36.4 | % | 6,670 | 28.2 | % | 11,720 | 29.0 | % | 14,180 | 22.3 | % | ||||||||||||||||||||
Depreciation and amortization expense | 443 | 2.3 | % | 523 | 2.2 | % | 886 | 2.2 | % | 1,128 | 1.8 | % | ||||||||||||||||||||
Income from operations | (1,410 | ) | (7.4 | )% | (858 | ) | (3.6 | )% | 628 | 1.6 | % | 754 | 1.2 | % | ||||||||||||||||||
Other (income) expense: |
||||||||||||||||||||||||||||||||
Interest expense | 1,399 | 7.3 | % | 1,143 | 4.8 | % | 3,098 | 7.7 | % | 2,292 | 3.6 | % | ||||||||||||||||||||
Other (income) expense | (225 | ) | (1.2 | )% | (199 | ) | (0.8 | )% | (165 | ) | (0.4 | )% | (459 | ) | (0.7 | )% | ||||||||||||||||
Income (loss) before income taxes | (2,584 | ) | (13.5 | )% | (1,802 | ) | (7.6 | )% | (2,305 | ) | (5.7 | )% | (1,079 | ) | (1.7 | )% | ||||||||||||||||
Income taxes (benefit): |
||||||||||||||||||||||||||||||||
Current | 21 | 0.1 | % | 106 | 0.4 | % | 88 | 0.2 | % | 192 | 0.3 | % | ||||||||||||||||||||
Deferred | | 0.0 | % | (528 | ) | (2.2 | )% | | 0.0 | % | (249 | ) | (0.4 | )% | ||||||||||||||||||
Total income taxes (benefit) | 21 | 0.1 | % | (422 | ) | (1.8 | )% | 88 | 0.2 | % | (57 | ) | (0.1 | )% | ||||||||||||||||||
Net loss | $ | (2,605 | ) | (13.6 | )% | $ | (1,380 | ) | (5.8 | )% | $ | (2,393 | ) | (5.9 | )% | $ | (1,022 | ) | (1.6 | )% |
Except for the components of cost of goods sold and services, the percentages above represent line item values expressed as a percentage of total revenue. For the components of cost of goods sold and services, the percentages represent cost of goods sold and services related to products and services expressed as a percentage of revenue for products and services, respectively.
Quarter Ended June 30, 2014 Compared to Quarter Ended June 30, 2013
Revenues
Revenues were $19.1 million and $23.6 million for the second quarter of 2014 and 2013, respectively, a decrease of $4.5 million or 19%. This decrease was driven by a $2.3 million decrease in products revenue and a $2.3 million decrease in services revenue. This decrease in products revenue was primarily driven by a
17
$5.4 million decrease in complete rig product revenues, due to fewer contracts entered into in the second quarter of 2014 versus the comparable 2013 quarter. This decrease was partially offset by increases in revenues from power systems/electrical rig up ($0.6 million), hydraulics ($0.7 million), and fabrication sales ($1.7 million). The decrease in services revenue was primarily driven by $2.3 million reduced revenue in rig up and refurbishment services.
Cost of Sales
Cost of Sales were $13.1 million and $17.3 million for the second quarter of 2014 and 2013, respectively, a decrease of $4.2 million or 24%. This decrease was primarily driven by the $4.5 million decrease in revenues as noted above. As a percent of revenue, cost of sales were 68.7% of revenue in the second quarter of 2014 versus 73.2% of revenue in the comparable 2013 quarter. The decrease in cost of sales as a percentage of revenue was due to improved margins in service revenue, partially offset by decreased margins in products revenue. For the quarter ended June 30, 2014, products margins declined to 23.0% of revenue versus 30.1% of revenue in the comparable 2013 quarter. This reduction in product margin was primarily due to the significant reduction in complete rig package revenues. For the quarter ended June 30, 2014, services margins improved to 45.0% of revenue versus 21.8% of revenue in the comparable 2013 quarter. The improvement in service margin was due principally to improved margins in the automation business, in addition to reduced warranty reserves.
Selling, General and Administration Expenses
Selling, general and administration expenses were $7.0 million and $6.7 million for the second quarter of 2014 and 2013 respectively, an increase of $0.3 million or 4%. This increase was due to a $1.6 million increase in salary expenses primarily due to $2.3 million expense related to the Settlement Agreement entered into with our former CEO in April 2014, partially offset by $0.7 million in lower salary expense due to headcount reductions. This increase was partially offset by lower professional fees ($0.7 million), contract services ($0.2 million), rental expenses ($0.1 million) and a decrease in bad debt provision ($0.3 million).
Depreciation and Amortization Expense
Depreciation and amortization expense was $0.4 million and $0.5 million in the second quarter of 2014 and 2013, respectively, a decrease of $0.1 million or 15%.
Income (Loss) from Operations
Loss from operations was $1.4 million and $0.8 million in the second quarter of 2014 and 2013, respectively, an increase in loss from operations of $0.6 million or 64%. The decrease in income primarily resulted from $0.3 million loss of gross margin and $0.3 million of increased selling, general and administrative expenses. The decrease in gross margin was due to $1.5 million decrease in products gross margin, partially offset by a $1.2 million increase in services gross margin.
Other (Income) Expense and Income Taxes
Total other expense was $1.2 million and $0.9 million in the second quarter of 2014 and 2013, respectively an increase of $0.3 million, or 24%. Interest expense was $1.4 million and $1.1 million in the second quarter of 2014 and 2013 respectively, an increase of $0.3 million. The increase in interest expense was due to higher interest rates due to our lenders. Additionally, the Company had higher debt levels due to issuing $1.0 million of additional preferred stock (Series B and Series C) in November 2013, as well as $2.5 million in promissory notes issued to Stephen Cope in April 2014. Other income was $0.2 million in the second quarter 2014 and comparable quarter of 2013.
Income tax expense (credits) was $0.02 million and $(0.4) million in the second quarter of 2014 and 2013, respectively. After adjusting for temporary and permanent income tax items, the income tax expense represented effective tax rates on income before income taxes of 0.8% in 2014 and 23.4% in 2013.
Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013
Revenues
Revenues were $40.5 million and $63.6 million for the first six months of 2014 and 2013, respectively, a decrease of $23.1 million or 36%. This decrease was driven by a $16.3 million decrease in products revenue
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and a $6.8 million decrease in services revenue. The decrease in products revenue was primarily driven by a $20.6 million decrease in complete rig product revenues due to fewer contracts entered into in the first six months of 2014 versus in the comparable 2013 period. This decrease was partially offset by increases in revenues from fabrication ($2.6 million), power systems/electrical products ($1.0 million), hydraulic ($0.6 million) and part sales ($0.3 million). The decrease in services revenue was primarily driven by decreases in revenues from power systems and electrical services ($4.1 million) and rig up and refurbishment services ($3.8 million). These decreases were partially offset by an increase in revenue from automation services ($0.9 million).
Cost of Sales
Cost of Sales were $27.2 million and $47.5 million for the first six months of 2014 and 2013, respectively, a decrease of $20.3 million or 43%. This decrease was primarily driven by the $23.1 million decrease in revenues as noted above. As a percent of revenue, cost of sales were 67.3% of revenue in the first six months of 2014 versus 74.7% of revenue in the comparable period in 2013. The decrease in cost of sales as a percentage of revenue was due to improved margins in both revenue segments. For the six months ended June 30, 2014, products margins improved slightly to 24.7% of revenue versus 23.2% of revenue in the comparable 2013 six month period. For the six months ended June 30, 2014, services margins improved to 46.0% of revenue versus 29.2% of revenue in the comparable 2013 six month period. The improvement in service margin was due principally to improved margins in the automation business, in addition to reduced warranty reserves.
Selling, General and Administration Expenses
Selling, general and administration expenses were $11.7 million and $14.2 million for the first six months of 2014 and 2013, respectively, a decrease of $2.5 million or 17%. This decrease was due to lower professional fees ($0.8 million), contract services ($0.3 million), rental expenses ($0.9 million) and a decrease in bad debt provision ($0.3 million). Additionally, the Company had $2.3 million in expenses related to the Settlement Agreement entered into with our former CEO in April 2014, which was offset by $2.3 million in lower salary expense due to headcount reductions.
Depreciation and Amortization Expense
Depreciation and amortization expense was $0.9 million and $1.1 million in the first six months of 2014 and 2013, respectively, a decrease of $0.2 million or 21%.
Income from Operations
Income from operations was $0.6 million and $0.7 million in the first six months of 2014 and 2013, respectively, a decrease of $0.1 million or 17%. The decrease primarily resulted from $2.8 million loss of gross margin, partially offset by $2.5 million of decreased selling, general and administrative expenses and $0.2 million of decreased depreciation. The decrease in gross margin was due to $3.4 million decrease in products gross margin, partially offset by a $0.6 million increase in services gross margin.
Other (Income) Expense and Income Taxes
Total other expense was $2.9 million and $1.8 million in the first six months of 2014 and 2013, respectively an increase of $1.1 million or 60%. Interest expense was $3.1 million and $2.3 million in the first six months of 2014 and 2013 respectively, an increase of $0.8 million. The increase in interest expense was due to higher interest rates due to our lenders. Additionally, the Company had higher debt levels due to issuing $1.0 million of additional preferred stock (Series B and Series C) in November 2013, as well as $2.5 million in promissory notes issued to Stephen Cope in April 2014. Other income was $0.2 million and $0.5 million in the first six months 2014 and 2013.
Income tax expense (credits) was $0.09 million and $(0.06) million in the first six months of 2014 and 2013, respectively. After adjusting for temporary and permanent income tax items, the income tax expense represented effective tax rates on income before income taxes of 3.8% in 2014 and 5.3% in 2013.
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Segment Results of Operations
Quarter Ended June 30, 2014 Compared to Quarter Ended June 30, 2013
Electrical Products and Services segment
Electrical Products and Services segment revenues were $13.8 million and $13.1 million for the second quarter of 2014 and 2013, respectively, an increase of $0.7 million or 5%. This increase was primarily driven by higher automation sales. Electrical Products and Services segment profit was $3.7 million and $2.4 million for the second quarter of 2014 and 2013, respectively, an increase of $1.3 million or 54%. Segment profits were 27.1% of 2014 and 18.5% of 2013 second quarter respective segment revenues. The $1.3 million increase in segment profits was primarily driven by improved margins in the power systems and electrical rig up, hydraulics and automation product lines.
Drilling Products and Services segment
Drilling Products and Services segment revenue was $5.8 million and $11.5 million for the second quarter of 2014 and 2013, respectively, a decrease of $5.7 million, or 50%. This decrease was primarily driven by lower complete rig package sales. During the second quarter of 2014, we delivered one complete rig package, compared to delivering two complete rig packages in the second quarter of 2013. Drilling Products and Services segment loss was $0.9 million and $0.1 million for the second quarter of 2014 and 2013, respectively, an increase in loss of $0.8 million. Segment losses were 15.0% of 2014 and 0.9% of 2013 second quarter respective segment revenues. The decline of $0.9 million in segment profits was due to significantly lower revenues as noted above.
Six Months Ended June 30, 2014 versus Six Months Ended June 30, 2013
Electrical Products and Services segment
Electrical Products and Services segment revenues were $27.6 million and $31.9 million for the first six months of 2014 and 2013, respectively, a decrease of $4.3 million or 14%. This decrease was primarily driven by lower power systems and electrical rig up revenues and decreased inter-segment sales. Electrical Products and Services segment profit was $7.1 million and $6.2 million for the first six months of 2014 and 2013, respectively, an increase of $0.9 million or 15%. Segment profits were 25.8% of 2014 and 19.4% of 2013 first six months respective segment revenues. The $0.9 million increase in segment profits was primarily driven by improved margins in the power systems and electrical rig up, hydraulics and automation product lines.
Drilling Products and Services segment
Drilling Products and Services segment revenue was $14.5 million and $36.3 million for the first six months of 2014 and 2013, respectively, a decrease of $21.8 million, or 60%. This decrease was primarily driven by lower complete rig package sales. During the first six months of 2014, we delivered one complete rig package, compared to delivering four complete rig packages in the first six months of 2013. Drilling Products and Services segment loss was $0.1 million for the first six months of 2014, compared to segment profit of $0.9 million in 2013, resulting in a decrease of $1.0 million. Segment losses were 0.7% of 2014 and 2.5% of 2013 first six months respective segment revenues. The decline of $1.0 million in segment profits was due to significantly lower revenues as noted above.
Liquidity and Capital Resources
Our primary source of liquidity is cash generated from the sales of our products and services. Most of the Companys fixed-price contracts for electrical and control systems, as well as new land-based drilling rigs, provide for progress payments throughout the manufacturing process. Most of the Companys other revenue producing contracts are billed monthly to customers for actual costs plus an agreed margin. Assuming consistent volumes, these contracts typically do not require extensive working capital resources. Our primary use of cash is cost of sales, operating expenses, interest expense, working capital needs, purchases of intangibles, capital expenditures, and repayment of our debt obligations.
On March 31, 2014, the Company entered into amendments to both its Term Facility and its Revolving Facility (as described further below) which, among other things, extended the maturities of these facilities to June 30, 2015 and December 31, 2014, respectively.
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At June 30, 2014, we had a working capital deficit of $37.6 million, compared to $19.0 million at December 31, 2013. The increase in our working capital deficit as of June 30, 2014 is primarily due to the reclassification of long-term debt to current ($19.2 million). Total current and long-term debt was $37.2 million and $35.7 million as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014, the Company had cash and cash equivalents of approximately $3.5 million. The Company believes its existing cash and cash equivalents, $1.4 million available from its revolving facility, expected revenues from its contractual backlog of $23.0 million, and future orders will enable it to meet its material liquidity needs for the next twelve months from the balance sheet date provided that we are successful in extending or refinancing our current debt maturities and/or are able to obtain additional working capital through credit arrangements, debt, or additional equity. There can be no assurance that we will be able to extend our debt maturity dates and/or whether additional financing sources will be available.
Company Financing
On December 14, 2012, the Company, Integrated Drilling Equipment, LLC and Integrated Drilling Equipment Company Holdings, LLC (collectively with the Company, the Borrowers) entered into a term loan and security agreement with Elm Park Credit Opportunities Fund, L.P. and Elm Park Credit Opportunities Fund (Canada), L.P., as lenders, and Elm Park Capital Management, LLC, as administrative agent (the Term Loan Agreement). The Term Loan Agreement provided for a $20.0 million four year senior secured second-lien term loan facility (as amended, the Term Facility). On the same date, the Borrowers also entered into an amended and restated revolving credit and security agreement with PNC Bank, National Association, as administrative agent and the initial lender (the Revolving Credit Agreement). The Revolving Credit Agreement currently provides for a $15 million committed asset-based revolving credit facility, with a sublimit for letters of credit (as amended, the Revolving Facility and together with the Term Facility, the Credit Facilities).
On October 17, 2013, the Borrowers entered into the Second Amendment to the Term Facility and the Second Amendment to the Revolving Facility to, among other things, (1) amend the maturity date of the Term Facility from December 14, 2016 to September 30, 2014 and the maturity date of the Revolving Facility from June 30, 2016 to March 31, 2014, (2) delete (a) the net worth financial covenant, (b) the fixed charge coverage ratio, (c) the minimum liquidity test and (d) the total leverage ratio and (3) amend (a) the minimum EBITDA financial covenant and (b) the capital expenditures financial covenant.
In connection with the Second Amendments described above, the Borrowers were required to (1) implement and comply with a cost reduction plan and (2) obtain (a) purchase orders or contracts with a value of not less than $28.0 million for the design, manufacture or servicing of one or more drilling rigs by October 31, 2013 or (b) at least $1.0 million in proceeds from the issuance of preferred stock by November 14, 2013. An event of default would have occurred under both the Term Facility and Revolving Facility if the Borrowers were unable to satisfy one of these requirements. As of October 1, 2013, the Company had implemented and was in compliance with the cost reduction plan and as of November 14, 2013, the Company had received net cash proceeds from a preferred stock investment in an aggregate amount of $1.0 million. As a result of the foregoing events, the Company was in compliance with the terms of its credit agreements.
On March 31, 2014, the Borrowers entered into the Third Amendment to the Term Facility and the Third Amendment to the Revolving Facility to, among other things, (1) amend the maturity date of the Term Facility from September 30, 2014 to June 30, 2015 and the maturity date of the Revolving Facility from March 31, 2014 to December 31, 2014; (2) add a covenant regarding the fixed charge coverage ratio in the Credit Facilities; (3) amend (a) the minimum EBITDA financial covenant and (b) the capital expenditures financial covenant in the Credit Facilities; (4) amend the term loan repayment schedule in the Term Facility; (5) amend the PIK interest provision in the Term Facility to increase such interest from 2% to 4% (unless the Borrowers total leverage ratio is less than 3:50:1:00, in which case such interest shall accrue at a rate of 2%); and (6) amend the calculation of the amount of revolving advances lenders are required to make under the Revolving Facility.
As of June 30, 2014, we were not in compliance with the minimum fixed charge coverage ratio (FCCR) covenant in our Revolving Facility and Term Facility. The Company incurred a non-cash expense
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of $2.3 million related to the Settlement Agreement entered into with our former CEO in April 2014. As a result of this expense, we did not generate sufficient EBITDA to meet our FCCR covenant for the six months ended June 30, 2014 reporting period and therefore are in default of our debt facilities. This resulted in an event of default under such facilities, which, if not cured or waived, would give the lenders under such facilities the right to declare the debt immediately due and payable. In the event of an acceleration of amounts due under our debt facilities as a result of this default, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments, and the lenders could seek to enforce their security interest in the collateral securing such indebtedness, which would have a material adverse effect on our business, prospects and financial condition.
We are currently in discussions with the lenders under these facilities to amend the agreements to address these covenants. The Company believes it will be able to negotiate with the lenders to amend the Revolving Facility and the Term Facility. However, if the Company is unable to negotiate amendments, there can be no assurance that the Company would be able to find other lenders to refinance these agreements.
As of June 30, 2014, the Company had cash and cash equivalents of approximately $3.5 million. The Company believes its existing cash and cash equivalents, $1.4 million available from its revolving facility, expected revenues from its contractual backlog of $23.0 million, and future orders will enable it to meet its material liquidity needs for the next twelve months from the balance sheet date provided that we are successful in extending or refinancing our current debt maturities and/or are able to obtain additional working capital through credit arrangements, debt, or additional equity. There can be no assurance that we will be able to extend our debt maturity dates and/or whether additional financing sources will be available.
The Companys ability to obtain additional external debt financing will be limited by the amount and terms of its existing borrowing arrangements and the fact that substantially all of its assets have been pledged as collateral for these existing arrangements. In addition, a failure to comply with the covenants under its existing debt instruments could result in an event of default. Furthermore, there are cross-default provisions in certain of the Companys existing debt instruments such that an event of default under one agreement or instrument could result in an event of default under another. If an event of default resulted in the acceleration of all of its payment obligations under its debt instruments as of June 30, 2014, it would be required to pay its lenders an aggregate of $30.7 million. In the event of an acceleration of amounts due under its debt instruments as a result of an event of default, the Company may not have sufficient funds or may be unable to arrange for additional financing to repay its indebtedness or to make any accelerated payments, and the lenders could seek to enforce their security interests in the collateral securing such indebtedness. The Companys failure to obtain additional external financing to fund its cash requirements would further cause noncompliance with its existing debt covenants which would have a material adverse effect on its business, operations and financial condition and raises substantial doubt about the Companys ability to continue as a going concern.
Preferred Stock Purchase Agreements
On December 14, 2012, we entered into a stock purchase agreement with Empeiria Investors LLC (our Sponsor) pursuant to which our Sponsor purchased 25,000 shares of Series A Preferred Stock at a price per share of $100 for aggregate proceeds to the Company of $2.5 million.
On November 14, 2013, the Company entered into a Stock Purchase Agreement with our Sponsor, pursuant to which our Sponsor purchased 5,000 shares of Series B Preferred Stock at a price per share of $100 for aggregate proceeds to the Company of $0.5 million.
On November 14, 2013, the Company also entered into a Stock Purchase Agreement with Stephen D. Cope, who at the time was our Chief Executive Officer and a director, pursuant to which Mr. Cope purchased 5,000 shares of Series C Preferred Stock at a price per share of $100 for aggregate proceeds to the Company of $0.5 million. On April 7, 2014, Mr. Cope sold all of these shares to our Sponsor at a price per share of $100, plus accrued interest.
Cash Flows for the Six Months Ended June 30, 2014 and 2013
Net cash provided by operating activities was $4.2 million and $4.1 million in the first six months of 2014 and 2013, respectively, a decrease of $0.1 million. Net income (loss) adjusted for non-cash components
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was $1.7 million and $0.01 million in the first six months of 2014 and 2013, respectively. Additionally, changes in working capital items such as collection of receivables or advanced billings to customers can be a significant component of operating cash flows. Changes in working capital items provided $2.5 million and $4.1 million in operating cash flows for the first six months of 2014 and 2013, respectively.
Capital expenditures were approximately $0.05 million and $0.2 million in the first six months of 2014 and 2013, respectively.
The net cash used in financing activities, in the first six months of 2014, was $1.8 million as compared to $4.6 million in the first six months of 2013, a decrease in cash used in financing activities of $2.9 million. This decrease was attributable to $26.3 million less cash used for payments on long-term debt, partially offset by $23.5 million less cash received from borrowings under our Revolving Facility.
As a result of the foregoing activities, in the first six months of 2014, the Companys cash increased by $2.5 million as compared to a decrease of cash of $0.4 million in the first six months of 2013.
Future Cash Requirements
As of June 30, 2014, we had current maturities of long-term debt of $30.7 million, cash and cash equivalents of $3.5 million, and $1.4 million available under our amended and restated $15.0 million Revolving Facility.
The Company is in a net working capital deficit position as of June 30, 2014. Based on our cash on hand and cash flow from operations and exclusive of liabilities, if any, that may arise from PEMEXs termination of its four purchase agreements for modular drilling units, we believe as of August 14, 2014, that we will have the working capital resources necessary to meet our projected operational needs for fiscal year 2014 and beyond provided that we are successful in extending our current debt maturities and/or are able to obtain additional working capital through credit arrangements, debt, or additional equity. There can be no assurance that we will be able to extend our debt maturity dates and/or whether additional financing sources will be available.
Recent Accounting Pronouncements
In May 2014, the FASB issued an ASU relating to the revenue recognition from contracts with customers that creates a common revenue standard for GAAP and IFRS. The core principle will require recognition of revenue to represent the transfer of promised goods or services to customers in an amount that reflects the consideration, including costs incurred, to which the entity expects to be entitled in exchange for those goods or services. These changes are effective for interim and annual periods that begin after December 15, 2016. Early application is not permitted. We are currently evaluating the impact this will have on our consolidated financial statements.
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.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by the Securities Exchange Commission (the SEC) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Our disclosure controls and procedures were developed through a process in which our management applied its judgment in
23
assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and includes controls and procedures designed to ensure that the information we disclose in our reports is communicated to our management to allow timely decisions regarding required disclosure. The design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot provide assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Based on the evaluation referred to above, the Companys management, including the Principal Executive Officer and Principal Financial Officer, concluded that the design and operation of our disclosure controls and procedures were not effective as of June 30, 2014 due to the material weakness in our internal control over financial reporting described below.
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, our management, including our Principal Executive Officer and Principal Financial Officer, conducted an assessment of the effectiveness of our internal control over financial reporting and identified a material weakness in the design and operation of our internal controls over the recording and review of journal entries for validity, accuracy, and completeness for substantially all significant accounts. Specifically, certain accounting personnel have the ability to prepare and post journal entries without an independent review that is designed with sufficient rigor and precision to prevent or detect an error. While this control deficiency did not result in any audit adjustments for the year ended December 31, 2013, this control deficiency could result in a misstatement of substantially all financial statement accounts that would result in a material misstatement to the annual or interim consolidated financial statements and disclosures that would be not be prevented or detected.
During the third quarter of 2014, we implemented an internal control regarding an independent review of journal entries to remediate this deficiency. The deficiency has been disclosed to the Audit Committee of our Board of Directors and to our auditors.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II.
ITEM 1. | LEGAL PROCEEDINGS |
On May 6, 2013, Drillmec, Inc. filed a lawsuit in the 281st Judicial District Court in Harris County, Texas (Drillmec, Inc. v. Integrated Drilling Equipment Company, et. al.) against Integrated Drilling Equipment Company Holdings, Inc., Integrated Drilling Equipment Company Holdings, LLC, Integrated Drilling Equipment, LLC, Integrated Drilling Equipment Company, Stephen D. Cope and SDC Management Services, LLC. Drillmec alleges that the defendants acquired Drillmecs drawings and technical specifications through an unrelated bidding process for offshore drilling rigs. In the pleadings, Drillmec claims that the defendants used this proprietary information in connection with our successful bid for certain PEMEX-Exploración y Producción (PEMEX) contracts and asserts causes of action for misappropriation of trade secrets, conversion, interference with prospective relations, conspiracy, unjust enrichment and unfair competition. Drillmec is seeking damages in the form of the Companys actual profits from the PEMEX contracts and the development costs that Drillmec incurred in developing the proprietary information in question. We intend to defend this litigation vigorously.
We produced documents in response to discovery requests on September 30, 2013. This case is in the preliminary stages and it is too early to predict an outcome and therefore no provision has been recorded as of June 30, 2014, for any potential liability arising from this litigation.
On February 28, 2014, Sidewinder Drilling Inc. filed a lawsuit in the 269th Judicial District Court in Harris County, Texas, against the Company and others (Sidewinder Drilling Inc. v. Oil County Engineering Services, LTD., HYCO Canada U.L.C., and Integrated Drilling Equipment Company Holdings, Inc.). In the lawsuit, Sidewinder is seeking a judicial declaration that the Company is contractually responsible for all of the damages caused by the dropped mast on Rig 103 because Delivery of Rig 103 had not occurred at the time of the Rig 103 dropped mast incident. We intend to defend this litigation vigorously.
This case is in the preliminary stages and it is too early to predict an outcome and therefore no provision has been recorded as of June 30, 2014, for any potential liability arising from this litigation.
From time to time, we may be involved in other litigation matters arising in the ordinary course of our business. Although the ultimate liability for these matters cannot be determined, based on the information currently available to us, we do not believe that the resolution of these other litigation matters to which we are currently a party would have a material adverse effect on our business, financial condition or results of operation. We maintain liability insurance against certain risks arising out of the normal course of our business, subject to certain self-insured retention limits. We have accruals for our self-insurance exposures.
ITEM 1A. | RISK FACTORS |
The Company is in default under its credit agreements and may not be able to renegotiate the terms of these agreements.
As of June 30, 2014, we were not in compliance with the minimum fixed charge coverage ratio (FCCR) covenant in our Revolving Facility and Term Facility. The Company incurred a non-cash expense of $2.3 million related to the Settlement Agreement entered into with our former CEO in April 2014. As a result of this expense, we did not generate sufficient EBITDA to meet our FCCR covenant for the six months ended June 30, 2014 reporting period and therefore are in default of our debt facilities. This resulted in an event of default under such facilities, which, if not cured or waived, would give the lenders under such facilities the right to declare the debt immediately due and payable. In the event of an acceleration of amounts due under our debt facilities as a result of this default, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments, and the lenders could seek to enforce their security interest in the collateral securing such indebtedness, which would have a material adverse effect on our business, prospects and financial condition.
We are currently in discussions with the lenders under these facilities to amend the agreements to address these covenants. The Company believes it will be able to negotiate with the lenders to amend the Revolving Facility and the Term Facility. However, if the Company is unable to negotiate amendments, there can be no assurance that the Company would be able to find other lenders to refinance these agreements.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
As of June 30, 2014, the Company was not in compliance with the minimum fixed charge coverage ratio convenant in its Revolving Facility and Term Facility. For additional information see Note 2 to the Companys condensed consolidated financial statements which is incorporated herein by reference.
We have three classes of preferred stock outstanding, Series A preferred stock, Series B preferred stock and Series C preferred stock (collectively, the Preferred Stock). Each series of Preferred Stock accrues cumulative dividends which are paid in additional shares of such series of Preferred Stock. The Series A preferred stock accrues cumulative dividends at a rate of 16% per year, the Series B preferred stock accrues cumulative dividends at a rate of 20% for the first year and 25% per year thereafter, and the Series C preferred stock accrues cumulative dividends at a rate of 14% per year. All outstanding shares of Preferred Stock are held by Empeiria Investors LLC, our Sponsor.
We have been unable to issue additional preferred shares for the paid-in-kind dividends on each series of Preferred Stock as we do not have sufficient authorized shares of each series of Preferred Stock to make the issuance. As of August 14, 2014, the arrearage in the payment of dividends on each series of Preferred Stock is as follows:
| The holder of the Series A preferred stock is entitled to 6,875 shares of Series A preferred stock as accrued dividends on the Series A preferred stock. |
| The holder of the Series B preferred stock is entitled to 630 shares of Series B preferred stock as accrued dividends on the Series B preferred stock. |
| The holder of the Series C preferred stock is entitled to 443 shares of Series C preferred stock as accrued dividends on the Series C preferred stock. |
We intend to amend the Certificate of Designation of each series of Preferred Stock to increase the number of shares designated as Series A preferred stock, Series B preferred stock and Series C preferred stock, as applicable, such that we will have sufficient shares of each series of Preferred Stock to issue additional preferred shares for the accrued paid-in-kind dividends that are currently in arrears as well as future paid-in-kind dividends on each series of Preferred Stock.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
None.
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ITEM 6. | EXHIBITS |
Exhibit Number |
Description | |
3.1 | Third Amended and Restated Certificate of Incorporation of the Company, effective as of April14, 2014 (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K as filed with the SEC on April 15, 2014). | |
3.2 | Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the Companys Registration Statement on Form S-1 as filed with the SEC on May 2, 2011). | |
3.3 | Amendment to the Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the Companys Current Report Form 8-K as filed with the SEC on December 20, 2012). | |
3.4 | Second Amendment to the Bylaws of the Company, effective as of April 14, 2014 (incorporated by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K as filed with the SEC on April 15, 2014). | |
3.5 | Certificate of Designation of Series A Preferred Stock of the Company (incorporated by reference to Exhibit 4.6 to the Companys Current Report on Form 8-K as filed with the SEC on December 20, 2012). | |
3.6 | Certificate of Designation of Series B Preferred Stock of the Company (incorporated by reference to Exhibit 4.1 to the Companys Quarterly Report on Form 10-Q as filed with the SEC on November 14, 2013). | |
3.7 | Certificate of Designation of Series C Preferred Stock of the Company (incorporated by reference to Exhibit 4.2 to the Companys Quarterly Report on Form 10-Q as filed with the SEC on November 14, 2013). | |
4.1 | Warrant Agreement, dated as of June 15, 2011, by and between Empeiria Acquisition Corp. and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K as filed with the SEC on June 21, 2011). | |
4.2 | Form of Unit Purchase Option (incorporated by reference to Exhibit 4.5 to the Companys Registration Statement on Form S-1 as filed with the SEC on May 2, 2011). | |
4.3 | Specimen Warrant Certificate (incorporated by reference to Exhibit 4.4 to the Companys Current Report on Form 8-K as filed with the SEC on December 20, 2012). | |
4.4 | Common Stock Warrant Agreement, dated as of December 14, 2012, by and among Empeiria Acquisition Corp., Elm Park Credit Opportunities Fund, L.P. and Elm Park Credit Opportunities Fund (Canada), L.P. (incorporated by reference to Exhibit 4.4 to the Companys Current Report on Form 8-K as filed with the SEC on December 20, 2012). | |
4.5 | Specimen Series A Preferred Stock Certificate of the Company (incorporated by reference to Exhibit 4.5 to the Companys Current Report on Form 8-K as filed with the SEC on December 20, 2012). | |
10.1 | Amended and Restated Voting Agreement, dated as of April 7, 2014, by and among Integrated Drilling Equipment Holdings Corp., Empeiria Investors LLC, Stephen D. Cope, and certain former stockholders of Integrated Drilling Equipment Company Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with the SEC on April 15, 2014). | |
10.2 | Settlement Agreement and General Release, dated as of April 7, 2014, between Integrated Drilling Equipment Holdings Corp. and Stephen Cope (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K as filed with the SEC on April 15, 2014). | |
10.3 | Promissory Note of Integrated Drilling Equipment Holdings Corp., dated as of April 7, 2014, issued to Stephen D. Cope in the amount of $2,111,951.00 (incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K as filed with the SEC on April 15, 2014). |
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Exhibit Number |
Description | |
10.4 | Promissory Note of Integrated Drilling Equipment Holdings Corp., dated as of April 7, 2014, issued to Stephen D. Cope in the amount of $408,169.00 (incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K as filed with the SEC on April 15, 2014). | |
10.5# | Confidential Sales Representation and Non-Circumvention/Non-Disclosure Agreement, dated April 7, 2014, between Integrated Drilling Equipment Holdings Corp. and Stephen Cope (incorporated by reference to Exhibit 10.5 to the Companys Current Report on Form 8-K as filed with the SEC on April 15, 2014). | |
31.1* | Certification of the Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
31.2* | Certification of the Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
32.1** | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002). | |
101.INS*** | XBRL Instance Document. | |
101.SCH*** | XBRL Taxonomy Extension Schema Document. | |
101.CAL*** | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF*** | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB*** | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE*** | XBRL Taxonomy Extension Presentation Linkbase Document. |
# | Designates a compensation plan or arrangement for directors or executive officers. |
* | Filed herewith. |
** | Furnished herewith. |
*** | XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTEGRATED DRILLING EQUIPMENT HOLDINGS CORP.
Dated: August 14, 2014 | /s/ Jim Terry Jim Terry Chief Executive Officer (Principal Executive Officer) |
|
Dated: August 14, 2014 | /s/ N. Michael Dion N. Michael Dion Chief Financial Officer and Executive Vice President (Principal Financial and Accounting Officer) |
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