Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2014

Significant Accounting Policies [Text Block]

5. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements in this Annual Report on Form 10-K have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements include the financial position, results of operations, and cash flows of Integrated Drilling Equipment Holdings Corp. and its subsidiaries, all of which are wholly-owned. All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

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, and inventory valuation and reserves. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less at the time of purchase to be a cash equivalent We maintain cash in bank deposit accounts, which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts.

Restricted Cash

Restricted cash primarily consists of cash proceeds set aside for payment of medical claims relating to our self-insurance group health program.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, and long-term debt. We believe the carrying values of cash and cash equivalents, trade receivables, and trade payables to be representative of their respective fair values because of short-term maturities or expected settlement dates. The carrying value of the term debt approximates fair value due to the variable interest rate.

Accounts Receivable

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Reserves for potential losses are based on our estimate of the probability of collection for certain accounts, our historical experience of bad debt expense and the aging of our accounts receivable balances. Accounts are written-off when the account is determined to no longer be collectible, based on our past collection history or after we have exhausted all possible means of collection.

Inventories

Inventories consist of raw materials, finished goods, and work-in-process. Inventories of raw materials and finished goods are stated at the lower of cost or market using the average cost method. Allowances for excess and obsolete inventories are determined based on our historical usage of inventory as well as our future manufacturing needs. Inventories are disclosed net of reserves for excess and obsolete inventory of $225 thousand and $350 thousand at December 31, 2014 and 2013, respectively.

Intangibles

Intangibles are stated at cost, less accumulated amortization, and consist of technical drawings and engineering work relating to our rig technology and product design. Amortization is computed on a straight-line method over five years.

The carrying value of these assets is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant negative industry or economic trends or unanticipated competition. No impairment of intangible assets were recorded for the year ended December 31, 2014. Impairment of intangibles assets amounted to $858 thousand for the year ended December 31, 2013.

Property, Equipment and Improvements

Property, equipment and improvements are stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs that do not extend the useful life of equipment are charged to expense as incurred. Replacements of significant items and major renewals and betterments are capitalized. When property and equipment is sold or otherwise disposed of, the related cost and accumulated depreciation or amortization are removed from the respective accounts and the resulting gain or loss on disposition is reflected in the statement of operations.

Depreciation is computed using useful lives under the straight-line method as follows:


Buildings		30 years
Leasehold improvements		Shorter of useful life or lease term
Machinery and equipment		5 years
Software		5 years
Vehicles		5 years
Furniture and fixtures		5 years

Assets acquired under capital leases are amortized over the shorter of the estimated useful lives or the respective lease term.

We review our property, equipment and improvements for impairment whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. No impairment was recorded for the years ended December 31, 2014 or 2013, respectively.

Deferred Financing Costs

Deferred financing costs associated with long-term debt are carried at cost and expensed using the effective interest rate method over the term of the notes. If the related debt is prepaid, the Company accelerates the recognition of an appropriate amount of the costs as interest expense.

In December 2012, in connection with the Term Facility, the Company recorded warrants issued as deferred financing costs. The Company carries these warrants at fair value, which is based upon our closing stock price at the end of a reporting period, and is re-measured on a recurring basis. The estimated fair value of these warrants, was $57 thousand and $603 thousand as of December 31, 2014 and 2013, respectively. The deferred financing costs are being amortized over the amended term of the loan.

Accumulated amortization for all deferred financing costs as of December 31, 2014 and 2013 totaled $2.1 million and $1.6 million, respectively.

Revenue Recognition

We report earnings from firm-price and modified firm-price long-term contracts on the percentage-of-completion method. Earnings are recorded based on the ratio of costs incurred to date to total estimated costs. Costs include direct material, direct labor, and job related overhead. Losses expected to be incurred on contracts are charged to operations in the period such losses are determined.

The percentage-of-completion method requires us to make estimates regarding the total costs of the project, progress against the project schedule and the estimated completion date, all of which impact the amount of revenue and gross margin we recognize in each reporting period. Significant projects and their related costs and profit margins are updated and reviewed at least quarterly by our senior management members. Factors that may affect future project costs and margins include weather, production inefficiencies, availability and cost of labor, materials and subcomponents and other factors. These factors can impact the accuracy of our estimates and materially impact our future reported earnings. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on contracts are recognized in the period in which they become known. Losses expected to be incurred on jobs in progress, are charged to income as soon as such losses are known.

The asset, “unbilled revenue,” which is included in accounts receivable, represents revenues recognized in excess of amounts billed. The liability, “customer advanced billings and payments,” represents billings in excess of revenues recognized. The asset, “work-in-process,” which is included in inventories, represents the cost of labor, material, and overhead in excess of amounts billed on jobs accounted for under the completed-contract method. Where we believe that we are unable to reasonably forecast cost-to-complete at start-up, our policy is to account for fixed-priced contracts under the completed contact method. Under this method, income is recognized only when a contract is completed or substantially complete and collection is reasonably assured.

Revenues derived from “time and material” contracts are recognized as the work is performed and collection is reasonably assured. We record revenue from our field and technical service and repair operations on a completed service basis after customer acknowledgement that the service has been completed and accepted and collection is reasonably assured.

In addition, we sell certain purchased parts and products. These revenues are recorded when the product is shipped and title passes to the customer and collection is reasonably assured.

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the net income of the Company.

The following table (in thousands, except share and per share amounts) sets forth the computation of basic and diluted loss per share:

	2014			2013
Basic:
Net loss	$	(866	)	$	(7,660	)
Weighted average common shares		8,809,917			8,703,986
Basic loss per share	$	(0.10	)	$	(0.88	)
Diluted:
Net loss	$	(866	)	$	(7,660	)
Basic weighted average common shares		8,809,917			8,703,986
Potential common shares		141,733			142,212
Diluted weighted average common shares		8,951,650			8,846,198
Diluted loss per share⁽¹⁾	$	(0.10	)	$	(0.88	)

(1)

There were no dilutive shares included in the computation of diluted loss per share for the years ended December 31, 2014 and 2013, because their inclusion would be anti-dilutive.

Advertising Costs

Advertising costs are expensed as incurred and are included in selling expenses. Advertising costs for the years ended December 31, 2014 and 2013 amounted to $10 thousand and $63 thousand, respectively.

Income Taxes

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the future generation of taxable income during the periods in which those temporary differences become deductible. Management has considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. During 2013, the Company recorded a non-cash charge to establish a valuation allowance of $4.7 million against our gross deferred tax assets of $5.3 million. The valuation allowance is based on an assessment of both positive and negative evidence when measuring the need for a valuation allowance.

Currently, the Company has a reduced backlog which has created a greater degree of uncertainty that a sufficient level of future profitability will be generated to realize the deferred tax assets. This, along with the losses incurred year to date, represented sufficient negative evidence to require a valuation allowance. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

Concentration of Credit Risks

Current energy prices are important contributors to positive cash flow for our customers as well as expectations about future spending levels. However, any prolonged increase or decrease in oil and natural gas prices affects the levels of exploration, development and production activity within the oil and natural gas industry, and can negatively impact spending by our customers.

The Company’s customers also take into account the volatility of energy prices and other risk factors by requiring higher returns for individual projects if there is a high perceived risk. Any of these factors could affect the demand for oil and natural gas and could have an adverse effect on our results of operations. The Company mitigates its exposure to credit risk by performing ongoing credit evaluations of its customer base.

For the year ended December 31, 2014, revenues from two customers individually exceeded 10% of revenues, and aggregated to $44.3 million or 51% of total revenues. For the year ended December 31, 2013, revenues from four customers individually exceeded 10% of revenues, and aggregated to $77.4 million or 75% of total revenues.

As of December 31, 2014, three customers individually exceeded 10% of trade accounts receivable, and aggregated to $8.8 million or 56% of trade accounts receivable outstanding. As of December 31, 2013 two customers individually exceeded 10% of trade accounts receivable, and aggregated to $6.9 million or 69% of trade accounts receivable outstanding.

Capital Resource Risks

The Company derives all its revenues from companies in the oil and gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility in oil and gas prices. The Company competes with larger national and multi-national companies that have longer operating histories, greater financial, technical and other resources and greater name recognition. The Company’s results of operations, cash flows and financial condition may be affected by these factors. Additionally, these factors could impact the Company’s ability to obtain additional debt and equity capital required to implement the Company’s rig construction and growth strategy, and the cost of that capital.

Our primary source of liquidity is cash generated from the sales of our products and services. 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.

Contingencies

Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources, are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Reclassifications

Certain reclassifications have been made in prior period financial statements to conform with current period presentation. The reclassifications have no impact on the Company’s financial position, results of operations, or cash flows.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

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Integrated Drilling Equipment Holdings Corp 10-K