10-Q 1 v359454_10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
Commission File Number: 000-54417
 
Integrated Drilling Equipment Holdings Corp.
(Exact name of registrant as specified in its charter)
____________________
 
Delaware
(State or other jurisdiction of
incorporation or organization)
27-5079295
(I.R.S. Employer
Identification Number)
 
 
25311 I-45 North
Woodpark Business Center, Bldg 6
Spring, Texas 77380
(Address of principal executive offices)
77380
(Zip Code)
 
Registrant’s telephone number, including area code:  (281) 465-9393

Not Applicable
(Former name or former address, 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 S  No  £
 
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).   £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
£ 
 
Accelerated filer
£
 
 
 
 
 
Non-accelerated filer
£
(Do not check if a smaller reporting company)
Smaller reporting company
S
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £  No  S
 
As of November 14, 2013, there were 8,685,700 shares of Company’s common stock issued and outstanding.
 
 
 
TABLE OF CONTENTS
 
 
 
Page 
PART I.
 
 
 
 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
1
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
3
 
 
 
 
Condensed Consolidated Balance Sheets
3
 
 
 
 
Condensed Consolidated Statements of Operations
4
 
 
 
 
Condensed Consolidated Statements of Changes in Stockholders’ Deficit
5
 
 
 
 
Condensed Consolidated Statements of Cash Flows
6
 
 
 
 
Notes to Condensed Consolidated Financial Statements
7
 
 
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

15
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
22
 
 
 
ITEM 4.
CONTROLS AND PROCEDURES
22
 
 
 
PART II
 
 
 
 
 
ITEM 1.
LEGAL PROCEEDINGS
23
 
 
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
24
 
 
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
24
 
 
 
ITEM 4.
MINE SAFETY AND DISCLOSURES
24
 
 
 
ITEM 5.
OTHER INFORMATION
24
 
 
 
ITEM 6.
EXHIBITS
25
 
PART I.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q (the “report”) 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. These forward-looking statements can be identified by the use of forward-looking language, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “forecasts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. These forward-looking statements include any statements that are not statements of historical facts. These forward-looking statements are based on management’s current expectations, but actual results may differ materially due to various factors, including:
 
·
Our ability to comply with the covenants under our credit agreements and our ability to renegotiate the terms of these agreements if we are in default.
 
 
·
Impact of the termination of the PEMEX contracts and our potential liability for liquidated damages.
 
 
·
Our limited operating history and ability to generate consistent cash flows.
 
 
·
Our ability to maintain existing customers, generate new orders and timely deliver our products.
 
 
·
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 these laws and regulations.
 
 
·
Losses on fixed-price contracts or loss of any of our major customers.
 
 
·
Our ability to service our debt.
 
 
·
That 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.
 
 
-1-

 
 
·
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, or we may issue additional equity securities.
 
 
·
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.
   
 
·
Other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission.
 
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 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. 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.
(unaudited)
 
(in thousands, except share and par value)
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
878
 
$
1,602
 
Restricted cash
 
 
93
 
 
503
 
Accounts receivable, net
 
 
11,621
 
 
27,393
 
Inventories, net
 
 
7,488
 
 
12,339
 
Deferred financing costs, net
 
 
-
 
 
-
 
Deferred tax assets
 
 
-
 
 
1,036
 
Prepaid expenses and other current assets
 
 
304
 
 
1,041
 
Total current assets
 
 
20,384
 
 
43,914
 
 
 
 
 
 
 
 
 
Intangibles, net
 
 
3,493
 
 
4,429
 
Property, equipment and improvements, net
 
 
2,741
 
 
3,349
 
Deferred financing costs, net
 
 
2,125
 
 
3,012
 
Deferred tax assets
 
 
242
 
 
2,837
 
Deposits
 
 
91
 
 
91
 
Total assets
 
$
29,076
 
$
57,632
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Deficit
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
Current maturities of long-term debt
 
$
33,280
 
$
600
 
Current portion of capital lease obligations
 
 
25
 
 
40
 
Trade accounts and other payables
 
 
14,733
 
 
23,712
 
Accrued liabilities
 
 
9,925
 
 
11,555
 
Deferred tax liabilities
 
 
242
 
 
-
 
Customer advanced billings and payments, and other
 
 
6,304
 
 
13,320
 
Total current liabilities
 
 
64,509
 
 
49,227
 
 
 
 
 
 
 
 
 
Long-term debt, less current maturities
 
 
-
 
 
36,810
 
Capital lease obligations, net of current
 
 
16
 
 
33
 
Total liabilities
 
 
64,525
 
 
86,070
 
 
 
 
 
 
 
 
 
Commitments and contingencies (Note 13)
 
 
 
 
 
 
 
Stockholders’ deficit
 
 
 
 
 
 
 
Common stock $0.0001 par value per share:
 
 
 
 
 
 
 
Authorized shares 100,000,000;
 
 
 
 
 
 
 
Issued shares 8,685,700 and 8,646,700, respectively
 
 
1
 
 
1
 
Accumulated deficit
 
 
(35,450)
 
 
(28,439)
 
Total stockholders’ deficit
 
 
(35,449)
 
 
(28,438)
 
Total liabilities and stockholders’ deficit
 
$
29,076
 
$
57,632
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
-3-

 
Integrated Drilling Equipment Holdings Corp.
(unaudited)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
(in thousands, except share
and per share amounts)
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
$
8,014
 
$
58,420
 
$
49,566
 
$
185,416
 
Services
 
 
7,662
 
 
18,256
 
 
29,680
 
 
52,955
 
Total revenue
 
 
15,676
 
 
76,676
 
 
79,246
 
 
238,371
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold and services
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
 
5,449
 
 
50,444
 
 
37,374
 
 
177,307
 
Services
 
 
5,001
 
 
9,497
 
 
20,584
 
 
34,479
 
Total cost of goods sold and services
 
 
10,450
 
 
59,941
 
 
57,958
 
 
211,786
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expense
 
 
5,521
 
 
8,949
 
 
19,701
 
 
22,570
 
Depreciation and amortization expense
 
 
516
 
 
525
 
 
1,644
 
 
1,370
 
Income (loss) from operations
 
 
(811)
 
 
7,261
 
 
(57)
 
 
2,645
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other (income) expense
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
1,553
 
 
309
 
 
3,845
 
 
742
 
Other income
 
 
(579)
 
 
(22)
 
 
(1,038)
 
 
(151)
 
Income (loss) before income taxes
 
 
(1,785)
 
 
6,974
 
 
(2,864)
 
 
2,054
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes (benefit)
 
 
 
 
 
 
 
 
 
 
 
 
 
Current
 
 
82
 
 
62
 
 
274
 
 
62
 
Deferred
 
 
4,122
 
 
2,533
 
 
3,873
 
 
825
 
Total income taxes (benefit)
 
 
4,204
 
 
2,595
 
 
4,147
 
 
887
 
Net income (loss)
 
$
(5,989)
 
$
4,379
 
$
(7,011)
 
$
1,167
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
8,685,700
 
 
5,575,671
 
 
8,677,843
 
 
5,575,671
 
Diluted
 
 
8,827,849
 
 
5,575,671
 
 
8,820,098
 
 
5,575,671
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.69)
 
$
0.79
 
$
(0.81)
 
$
0.21
 
Diluted
 
$
(0.68)
 
$
0.79
 
$
(0.79)
 
$
0.21
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
-4-

 
Integrated Drilling Equipment Holdings Corp.
(unaudited)
 
 
 
Shares Issued
 
Stock
 
Accumulated
 
Total
Stockholders’
 
(in thousands, except share data)
 
Common
 
Preferred
 
Common
 
Preferred
 
Deficit
 
Deficit
 
Balances at December 31, 2011
 
 
5,575,671
 
 
-
 
$
-
 
$
-
 
 
(5,948)
 
 
(5,948)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Loss
 
 
-
 
 
-
 
 
-
 
 
-
 
 
1,167
 
 
1,167
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at September 30, 2012
 
 
5,575,671
 
 
-
 
$
-
 
$
-
 
$
(4,781)
 
$
(4,781)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2012
 
 
8,646,700
 
 
-
 
 
1
 
 
-
 
 
(28,439)
 
 
(28,438)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Loss
 
 
-
 
 
-
 
 
-
 
 
-
 
 
(7,011)
 
 
(7,011)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares in exchange for warrants
 
 
39,000
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at September 30, 2013
 
 
8,685,700
 
 
-
 
$
1
 
$
-
 
$
(35,450)
 
$
(35,449)
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
-5-

 
Integrated Drilling Equipment Holdings Corp.
(unaudited)
 
 
 
Nine Months Ended
September 30,
 
(in thousands)
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Operating activities
 
 
 
 
 
 
 
Net income (loss)
 
$
(7,011)
 
$
1,167
 
Adjustments to reconcile net income (loss) to cash provided by (used in) operating
    activities
 
 
 
 
 
 
 
Depreciation and amortization expense
 
 
1,644
 
 
1,370
 
Deferred income tax (benefit)
 
 
3,873
 
 
825
 
Provision for bad debts
 
 
68
 
 
-
 
Amortization of deferred financing costs
 
 
887
 
 
125
 
Loss on sale of fixed assets
 
 
56
 
 
-
 
Change in warrant valuation
 
 
(1,027)
 
 
-
 
Paid-in-kind interest expense
 
 
303
 
 
-
 
Changes in operating assets and liabilities
 
 
 
 
 
 
 
Trade accounts receivable
 
 
15,703
 
 
(4,917)
 
Inventories
 
 
4,851
 
 
14,861
 
Other current assets
 
 
737
 
 
257
 
Trade accounts and other payables
 
 
(8,979)
 
 
11,638
 
Accrued liabilities
 
 
(602)
 
 
3,350
 
Customer advanced billings and payments
 
 
(7,016)
 
 
(39,781)
 
Net cash provided by (used in) operating activities
 
 
3,487
 
 
(11,105)
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
Capital expenditures for intangibles
 
 
-
 
 
(1,577)
 
Capital expenditures for property, equipment and improvements
 
 
(196)
 
 
(1,021)
 
Proceeds from sales of property, equipment and improvements
 
 
40
 
 
-
 
Decrease (increase) in restricted cash
 
 
410
 
 
(464)
 
Increase in deposits
 
 
-
 
 
(11)
 
Net cash provided by (used in) investing activities
 
 
254
 
 
(3,073)
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
Issuance of long-term debt
 
 
85,715
 
 
29,000
 
Repayments of long-term debt
 
 
(90,148)
 
 
(16,997)
 
Payment of capital lease
 
 
(32)
 
 
(30)
 
Net cash provided by (used in) financing activities
 
 
(4,465)
 
 
11,973
 
Decrease in cash and cash equivalents
 
 
(724)
 
 
(2,205)
 
Cash and cash equivalents
 
 
 
 
 
 
 
Beginning of period
 
 
1,602
 
 
4,129
 
End of period
 
$
878
 
$
1,924
 
 
 
 
 
 
 
 
 
Noncash activity
 
 
 
 
 
 
 
Property and equipment acquired through capital leases
 
$
-
 
$
43
 
Interest paid-in-kind
 
 
303
 
 
-
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
-6-

 
Integrated Drilling Equipment Holdings Corp.
(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 Company’s business is conducted through two operating segments: (1) Electrical Products and Services and (2) Drilling Products and Services.
 
The Company’s 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.
 
The Company’s drilling segment is a full service provider of drilling rigs and their components. The Company designs, manufactures, and services complete land-based drilling rigs, as well as rig subsystems and parts. The Company also provides 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, the Company fabricates 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 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 Company’s 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 3 of the audited consolidated financial statements for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K, and are supplemented by the notes to these unaudited 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 audited consolidated financial statements for the year ended December 31, 2012.
 
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 audited consolidated financial statements for the year ended December 31, 2012 included in the Company’s 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 Company’s Condensed Consolidated Financial Statements are expressed in U.S. dollars and have been prepared by the Company in accordance with GAAP. 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-

 
On December 14, 2012, Integrated Drilling Equipment Holdings Inc. completed a merger (the “Merger”) with Empeiria Acquisition Corp. (“EAC”). 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 financial information for periods and dates prior to December 14, 2012, include information for IDE only.

2.
Company Financing
 
On December 14, 2012, Integrated Drilling Equipment Holdings Corp., a Delaware corporation (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 December 14, 2012, 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 provides for a $20 million committed asset-based revolving credit facility, with a sublimit for letters of credit (as amended, the “Revolving Facility”).
 
As of September 30, 2013, the Company was not in compliance with the minimum liquidity, minimum EBITDA and total leverage ratio covenants under the Revolving Facility and Term Facility.
 
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. As a result of the accelerated payment dates of each facility, the outstanding balances of each are classified as current as of September 30, 2013.
 
In connection with the amendments described above, the Borrowers are 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 will occur under both the Term Facility and Revolving Facility if the Borrowers are unable to satisfy one of these requirements. As of October 1, 2013, the Company has implemented and is in compliance with the cost reduction plan. In addition, as of November 14, 2014, the Company has 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 is in compliance with the terms of its credit agreements.
 
In the event of an acceleration of amounts due under its debt facilities 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, which would have a material adverse effect on its business, prospects 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 the 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.
 
 
-8-

 
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 IDE that they were in default of its guarantee obligations under the contracts signed on March 22, 2013 because IDE 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 Company’s default.
     
As a result of their 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 September 30, 2103, 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):
 
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
 
 
 
 
Trade Accounts Receivable
 
$
7,389
 
$
15,694
 
Unbilled revenue and other
 
 
4,858
 
 
12,318
 
Less: Allowance for doubtful accounts
 
 
(626)
 
 
(619)
 
 
 
$
11,621
 
$
27,393
 

5.
Uncompleted Contracts
 
Costs, estimated earnings and billings on uncompleted contracts are summarized below (in thousands):
 
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
 
 
 
 
Costs incurred on uncompleted contracts
 
$
21,051
 
$
133,010
 
Earned margin
 
 
3,176
 
 
23,497
 
Earned revenue
 
 
24,227
 
 
156,507
 
Less: Billings to date
 
 
26,182
 
 
156,120
 
 
 
$
(1,955)
 
$
387
 
Included in the accompanying balance sheets under the following captions:
 
 
 
 
 
 
 
Accounts receivable
 
$
4,289
 
$
11,871
 
Customer advanced billings and payments
 
 
(6,244)
 
 
(11,484)
 
 
 
$
(1,955)
 
$
387
 

6.
Inventories
 
Inventories consist of the following (in thousands): 
 
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
 
 
 
 
Raw materials and finished goods
 
$
5,911
 
$
7,127
 
Work in process
 
 
1,777
 
 
5,412
 
Reserve
 
 
(200)
 
 
(200)
 
 
 
$
7,488
 
$
12,339
 
 
 
-9-

 
7.
Intangibles
 
Intangibles consist of the following (in thousands):
 
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
 
 
 
 
Rig technology and product design
 
$
5,785
 
$
5,786
 
Less: Accumulated amortization
 
 
(2,292)
 
 
(1,357)
 
 
 
$
3,493
 
$
4,429
 
 
Amortization expense for the nine months ended September 30, 2013 and 2012 amounted to $935 thousand and $575 thousand, respectively.

8.
Property, Equipment and Improvements
 
Property, Equipment and Improvements, including capital leases, consists of the following (in thousands):
 
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
 
 
 
 
Machinery and equipment
 
$
3,133
 
$
3,067
 
Leasehold improvements
 
 
4,544
 
 
4,544
 
Assets under capital leases
 
 
146
 
 
146
 
Less: Accumulated depreciation
 
 
(5,082)
 
 
(4,408)
 
 
 
$
2,741
 
$
3,349
 
 
Depreciation expense relating to machinery and equipment and leasehold improvements for the nine months ended September 30, 2013 and 2012 amounted to $679 thousand and $476 thousand, respectively.
 
Depreciation expense relating to capital leases for the nine months ended September 30, 2013 and 2012 amounted to $30 thousand and $19 thousand, respectively.

9.
Debt and Redeemable Preferred Stock
 
Debt and redeemable preferred stock consisted of the following (in thousands):
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
Short-Term
 
Long-Term
 
Short-Term
 
Long-Term
 
$2.5 million redeemable preferred stock (1)
 
$
2,500
 
$
-
 
$
-
 
$
2,500
 
$20.0 million revolving credit facility (2)
 
 
10,757
 
 
-
 
 
-
 
 
14,890
 
$20.0 million credit agreement (3)
 
 
20,023
 
 
-
 
 
600
 
 
19,420
 
Total debt and redeemable preferred stock
 
$
33,280
 
$
-
 
$
600
 
$
36,810
 
 
 
 
(1)
$2.5 million of redeemable preferred stock (25,000 shares of preferred stock at $100 per share) is redeemable at our option at any time on 15 days' notice, at any time after the first anniversary of the date on which all indebtedness for borrowed money is repaid in full. The optional 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 will be subject to mandatory redemption on the date which is 181 days following the latest maturity date of our indebtedness outstanding on December 14, 2012. 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 preferred stock.
 
 
-10-

 
 
(2)
$20.0 million revolving credit facility which expires on March 31, 2014, as amended on October 17, 2013 (see Note 2). Borrowings under this revolving credit facility bear interest at a rate determined by the lending institution, with a minimum rate of 1.5%. The interest rate at September 30, 2013 and 2012 was 4.75%. 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 Company’s tangible and intangible assets.
 
 
(3)
$20.0 million credit agreement matures on September 30, 2014, as amended on October 17, 2013 (see Note 2). Loans under this credit agreement 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 September 30, 2013, this cash interest rate is 12%. In addition to the cash interest rate, all loans bear an additional paid-in-kind (PIK) interest at a rate of 2% per annum. 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 Company's tangible and intangible assets.

10.
Defined Contribution Plans
 
The company has a 401k plan for eligible employees; however, during the nine months ended September 30, 2013 and 2012 we did not make any contributions to the plan.

11.
Income Taxes
 
The effective tax rate for the nine months ended September 30, 2013 and 2012 was 144.8% and 43.2%, 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 gross deferred tax assets of $5.2 million, 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.

12.
Segment Information
 
We have two reportable operating segments: (1) Electrical Products and Services and (2) Drilling Products and Services. The Company’s Electrical Products and Services segment designs, manufactures, installs and services rig electrical and control systems including SCR’s and VFD’s, as well as electrical cabling, lighting systems, closed circuit video systems, gas and fire detection systems, and communication systems. The Company’s Drilling Products and Services segment designs, manufactures, and services complete land-based drilling rigs, as well as rig subsystems and parts.
 
 
-11-

 
The accounting policies of our reporting segments are the same as those used to prepare our consolidated financial statements as of December 31, 2012 and 2011 (in thousands):
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Electrical (1)
 
$
13,990
 
$
25,450
 
$
45,888
 
$
74,903
 
Drilling (2)
 
 
2,057
 
 
58,485
 
 
38,368
 
 
190,975
 
Other/eliminations
 
 
(371)
 
 
(7,259)
 
 
(5,010)
 
 
(27,507)
 
Total revenues
 
 
15,676
 
 
76,676
 
 
79,246
 
 
238,371
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment profit
 
 
 
 
 
 
 
 
 
 
 
 
 
Electrical
 
 
2,832
 
 
7,522
 
 
9,032
 
 
15,941
 
Drilling
 
 
(805)
 
 
3,918
 
 
112
 
 
(1,796)
 
Other/eliminations
 
 
(2,322)
 
 
(3,654)
 
 
(7,557)
 
 
(10,130)
 
Total segment profit
 
 
(295)
 
 
7,786
 
 
1,587
 
 
4,015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization expense
 
 
516
 
 
525
 
 
1,644
 
 
1,370
 
Interest expense
 
 
1,553
 
 
309
 
 
3,845
 
 
742
 
Interest income
 
 
-
 
 
-
 
 
-
 
 
-
 
Other
 
 
(579)
 
 
(22)
 
 
(1,038)
 
 
(151)
 
Income (loss) before income taxes
 
$
(1,785)
 
$
6,974
 
$
(2,864)
 
$
2,054
 
 
 
(1)
Includes $0.3 million and $7.3 million of intersegment transactions for the three months ended September 30, 2013 and 2012, respectively, and $4.8 million and $27.5 million of intersegment transactions for the nine months ended September 30, 2013 and 2012, respectively.
 
 
 
 
(2)
Includes $.05 million and $0.2 million of intersegment transactions for the three and nine months ended September 30, 2013. There were no intersegment transactions in 2012.
   
 
 
September 30,
2013
 
December 31,
2012
 
Assets
 
 
 
 
 
 
 
Electrical
 
$
92,046
 
$
47,998
 
Drilling
 
 
72,959
 
 
39,464
 
Other/eliminations
 
 
(135,929)
 
 
(29,830)
 
Total assets
 
$
29,076
 
$
57,632
 
 
 
 
 
 
 
 
 
Capital expenditures
 
 
 
 
 
 
 
Electrical
 
$
184
 
$
765
 
Drilling
 
 
-
 
 
806
 
Other
 
 
12
 
 
269
 
Total capital expenditures
 
$
196
 
$
1,840
 

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, 2012, we had stop loss insurance for claims in excess of $75 thousand per individual and claims in excess of $2.4 million aggregate group loss. Effective May 1, 2013, we have 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.
 
 
-12-

 
Restricted Cash
 
The Company has voluntarily set aside funds to be used for claims relating to its self-insured health benefit program. As of September 30, 2013, the company has restricted $93 thousand of cash to be used for this purpose.
 
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 Drillmec’s 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 the 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 IDE’s actual profits from the PEMEX contracts and the development costs that Drillmec incurred in developing the proprietary information in question. The Company intends 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 too early to predict an outcome and therefore no provision has been recorded as of September 30, 2013, for any potential liability arising from this litigation.

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
September 30,
 
Nine Months Ended
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(5,989)
 
$
4,379
 
$
(7,011)
 
$
1,167
 
Weighted average common shares
 
 
8,685,700
 
 
5,575,671
 
 
8,677,843
 
 
5,575,671
 
Basic income (loss) per share
 
$
(0.69)
 
$
0.79
 
$
(0.81)
 
$
0.21
 
Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(5,989)
 
$
4,379
 
$
(7,011)
 
$
1,167
 
Basic weighted average common shares
 
 
8,685,700
 
 
5,575,671
 
 
8,677,843
 
 
5,575,671
 
Potential common shares
 
 
142,149
 
 
-
 
 
142,255
 
 
-
 
Diluted weighted average common shares
 
 
8,827,849
 
 
5,575,671
 
 
8,820,098
 
 
5,575,671
 
Diluted income (loss) per share
 
$
(0.68)
 
$
0.79
 
$
(0.79)
 
$
0.21
 
 
 
-13-

 
15.
Subsequent Events
 
On October 31, 2013, the Company issued 124,217 common shares to TerraNova Capital Partners Inc. and its related parties to satisfy a $1.2 million obligation for financial advisory services provided to the Company in connection with the December 14, 2012 merger with Empeiria Acquisition Corp.
 
On November 14, 2013, the Company entered into a Stock Purchase Agreement (the “Series B Purchase Agreement”) with Empeiria Investors LLC (“EI”), pursuant to which EI purchased 5,000 shares of Series B Preferred Stock (the “Series B Preferred Shares”) 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 (the “Series C Purchase Agreement”) with Stephen D. Cope, pursuant to which Mr. Cope purchased 5,000 shares of Series C Preferred Stock (the “Series C Preferred Shares”) at a price per share of $100 for aggregate proceeds to the Company of $0.5 million.
 
 
-14-

 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes to those statements included elsewhere in this report. This discussion may contain 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 “Item 1A” in our Annual Report on Form 10-K for the year ended December 31, 2012 and in “Item 1A” in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.
 
Overview
 
Empeiria Acquisition Corp. (“EAC”) was incorporated in Delaware in January 2011, for the purpose of acquiring one or more operating businesses or assets (“initial business transaction”). 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 (the “Acquired Company”), and Stephen Cope, in his capacity as representative of IDE’s stockholders (the “Representative”). On December 14, 2012, EAC consummated its initial business transaction with the Acquired Company (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 Acquired Company 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 the Acquired Company only.
 
On April 11, 2013, EAC changed its name to Integrated Drilling Equipment Holdings Corp.
 
Our Business
 
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: Electrical Products and Services and Drilling Products and Services.
 
Our Electrical Products and Services 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 Products and Services 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 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 customer’s 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.
 
Management is currently focused on improving the production process for complete rig packages and continuing to implement lean manufacturing processes. We also plan to leverage our IEC division’s 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.
 
 
-15-

 
Recent Developments
 
On March 22, 2013, the Company entered into four substantially identical purchase agreements for modular drilling units with Integrated Trade Systems, Inc., an agent for PEMEX. The collective value of the four agreements is approximately $354 million and each agreement is for the design, construction, delivery, and installation of one modular drilling unit on existing PEMEX shallow offshore platforms. While the Company has performed extensive subcontract work on offshore platforms, the agreements represent the Company’s first offshore lead contractor engagement.
 
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 IDE that they were in default of its guarantee obligations under the contracts signed on March 22, 2013 because IDE 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 contracts due to the Company’s default.
 
Consolidated Results of Operations
 
(Dollars in thousands)
 
Three Months
Ended September 30,
 
 
Nine Months
Ended September 30,
 
 
 
 
2013
 
 
2012
 
 
2013
 
 
2012
 
 
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
$
8,014
 
51.1
%
 
$
58,420
 
76.2
%
 
$
49,566
 
62.5
%
 
$
185,416
 
77.8
%
 
Services
 
 
7,662
 
48.9
%
 
 
18,256
 
23.8
%
 
 
29,680
 
37.5
%
 
 
52,955
 
22.2
%
 
Total revenue
 
 
15,676
 
100.0
%
 
 
76,676
 
100.0
%
 
 
79,246
 
100.0
%
 
 
238,371
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold and services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
 
5,449
 
68.0
%
 
 
50,444
 
86.3
%
 
 
37,374
 
75.4
%
 
 
177,307
 
95.6
%
 
Services
 
 
5,001
 
65.3
%
 
 
9,497
 
52.0
%
 
 
20,584
 
69.4
%
 
 
34,479
 
65.1
%
 
Total cost of goods sold and services
 
 
10,450
 
66.7
%
 
 
59,941
 
78.2
%
 
 
57,958
 
73.1
%
 
 
211,786
 
88.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expense
 
 
5,521
 
35.2
%
 
 
8,949
 
11.7
%
 
 
19,701
 
24.9
%
 
 
22,570
 
9.5
%
 
Depreciation and amortization expense
 
 
516
 
3.3
%
 
 
525
 
0.7
%
 
 
1,644
 
2.1
%
 
 
1,370
 
0.6
%
 
Income from operations
 
 
(811)
 
(5.2)
%
 
 
7,261
 
9.5
%
 
 
(57)
 
(0.1)
%
 
 
2,645
 
1.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other (income) expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
1,553
 
9.9
%
 
 
309
 
0.4
%
 
 
3,845
 
4.9
%
 
 
742
 
0.3
%
 
Other (income) expense
 
 
(579)
 
(3.7)
%
 
 
(22)
 
(0.0)
%
 
 
(1,038)
 
(1.3)
%
 
 
(151)
 
(0.1)
%
 
Income (loss) before income taxes
 
 
(1,785)
 
(11.4)
%
 
 
6,974
 
9.1
%
 
 
(2,864)
 
(3.6)
%
 
 
2,054
 
0.9
%
 
Income taxes (benefit):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current
 
 
82
 
0.5
%
 
 
62
 
0.1
%
 
 
274
 
0.3
%
 
 
62
 
0.0
%
 
Deferred
 
 
4,122
 
26.3
%
 
 
2,533
 
3.3
%
 
 
3,873
 
4.9
%
 
 
825
 
0.3
%
 
Total income taxes (benefit)
 
 
4,204
 
26.8
%
 
 
2,595
 
3.4
%
 
 
4,147
 
5.2
%
 
 
887
 
0.4
%
 
Net income (loss)
 
$
(5,989)
 
(38.2)
%
 
$
4,379
 
5.7
%
 
$
(7,011)
 
(8.8)
%
 
$
1,167
 
0.5
%
 
 
  
-16-

  
Quarter Ended September 30, 2013 Compared to Quarter Ended September 30, 2012
 
Revenues
 
Revenues were $15.7 million and $76.7 million for the third quarter of 2013 and 2012, respectively, a decrease of $61.0 million or 80%. This decrease was driven by a $50.4 million decrease in products revenue and a $10.6 million decrease in services revenue. This significant decrease in products revenue was primarily driven by a decrease in complete rig packages ($53.2 million) due to having entered into fewer contracts in the third quarter of 2013 versus the comparable 2012 quarter. This variance was partially offset by an increase in power systems ($2.9 million). 
 
Cost of Sales
 
Cost of Sales were $10.5 million and $59.9 million for the third quarter of 2013 and 2012, respectively, a decrease of $49.5 million or 83%. This decrease was primarily driven by the $61.0 million decrease in revenues as noted above. As a percent of revenue, cost of sales were 66.7% of revenue in the third quarter of 2013 versus 78.2% of revenue in the comparable 2012 quarter. The decrease in cost of sales as a percentage of revenue was due to improved margins in the product revenue segment. For the quarter ended September 30, 2013, Products margins improved to 32% of revenue versus 13.7% of revenue in the comparable 2012 quarter. This improvement was due to the company’s efforts at implementing lean manufacturing in the production of complete rigs. For the quarter ended September 30, 2013, Services margins declined to 34.7% of revenue versus 48% of revenue in the comparable 2012 quarter. The reduction in margin was due principally to reduced revenues and related absorption of overhead costs.
 
Selling, General and Administration Expenses
 
Selling, general and administration expenses were $5.5 million and $8.9 million for the third quarter of 2013 and 2012 respectively, a decrease of $3.4 million. This decrease was primarily due to a reduction of $2.6 million in salary and burden related expenses and a reduction of $1.3 million in rental equipment, partially offset by an increase of $0.6 million in professional fees.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expense was $0.5 million in the third quarter of 2013 and in the comparable 2012 quarter.
 
Income (Loss) from Operations
 
Loss from operations was $0.8 million in the third quarter of 2013, compared to operating income of $7.3 million in the third quarter of 2012. The $8.1 million decrease primarily resulted from a reduction in gross margin of $11.5 million in the 2013 third quarter versus the comparable 2012 quarter, partially offset by $3.4 million of reduced selling, general and administrative expenses as noted above. The decrease in gross margin was primarily due to reduced revenues.
 
Other (Income) Expense and Income Taxes
 
Total other expense was $1.0 million and $0.3 million in the third quarters of 2013 and 2012, respectively. Interest expense was $1.6 million and $0.3 million in the third quarter of 2013 and 2012 respectively, an increase of $1.2 million. This increase in interest expense was principally due to substantially higher debt levels in the third quarter of 2013 versus the comparable 2012 quarter. Other income was $0.6 million in the third quarter of 2013 versus other income of $0.02 million in the comparable 2012 quarter, primarily due to a change in warrant valuation.
   
Income tax expense was $4.2 million and $2.6 million in the third quarter of 2013 and 2012, respectively. During the third quarter of 2013, the Company recorded a non-cash charge to establish a valuation allowance of $4.6 million against our gross deferred tax assets of $5.2 million. The valuation allowance is calculated in accordance with the provisions of Accounting Standards Codification 740, Income Taxes (ASC 740) which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance.
 
Currently, the Company has a reduced backlog of complete rig contracts, 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 under the provisions of ASC 740. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.
 
 
-17-

   
Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
 
Revenues
 
Revenues were $79.2 million and $238.4 million for the first nine months of 2013 and 2012, respectively, a decrease of $159.1 million or 67%. This decrease was driven by a $135.9 million decrease in products revenue and a $23.3 million decrease in services revenue. This significant decrease in products revenue was driven by a $144.6 million decrease in complete rig product revenues due to fewer contracts entered into in the first nine months of 2013 versus the comparable 2012 period. This variance was partially offset by increases in power systems ($6.2 million) and fabrication ($4.2 million).
 
Cost of Sales
 
Cost of Sales were $58.0 million and $211.8 million for the first nine months of 2013 and 2012, respectively, a decrease of $153.8 million or 73%. This decrease was primarily driven by the $159.1 million decrease in revenues as noted above. As a percent of revenue, cost of sales were 73.1% of revenue in the first nine months of 2013 versus 88.8% of revenue in the comparable period in 2012. The decrease in cost of sales as a percentage of revenue was due to improved margins in both revenue segments. For the nine months ended September 30, 2013, Products margins improved to 24.6% of revenue versus 4.4% of revenues in the comparable 2012 period. This improvement was due to the company’s efforts at implementing lean manufacturing in the production of complete rigs. For the nine months ended September 30, 2013, Services margins decreased slightly to 30.6% of revenue versus 34.9% of revenue in the comparable 2012 period.
 
Selling, General and Administration Expenses
 
Selling, general and administration expenses were $19.7 million and $22.6 million for the first nine months of 2013 and 2012, respectively, a decrease of $2.9 million primarily due to a reduction of $3.3 million in salary and burden related expenses.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expense was $1.6 million in the first nine months of 2013 and $1.4 million in the comparable 2012 period.
 
Income (Loss) from Operations
 
Loss from operations was $0.06 million in the first nine months of 2013, compared to operating income of $2.6 million in the first nine months of 2012. The $2.7 million decrease primarily resulted from a decrease in gross margin of $5.3 million, partially offset by $2.9 million decrease in selling, general and administrative expenses and $0.2 million increase in depreciation expense. The decrease in gross margin was primarily due to reduced revenues.
 
Other (Income) Expense and Income Taxes
 
Total other expense was $2.8 million and $0.6 million in the first nine months of 2013 and 2012, respectively. Interest expense was $3.8 million and $0.7 million in the first nine months of 2013 and 2012, respectively, an increase of $3.1 million. The increase in interest expense was principally due to substantially higher debt levels in the first nine months of 2013 versus the comparable period in 2012. Other income was $1.0 million in the first nine months of 2013 versus other income of $0.2 million in comparable period in 2012, primarily due to a change in warrant valuation.
 
Income tax expense was $4.1 million and $0.9 million in the first nine months of 2013 and 2012, respectively. During the third quarter of 2013, the Company recorded a non-cash charge to establish a valuation allowance of $4.6 million against our gross deferred tax assets of $5.2 million. The valuation allowance is calculated in accordance with the provisions of Accounting Standards Codification 740, Income Taxes (ASC 740) which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance.
 
Currently, the Company has a reduced backlog of complete rig contracts, 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 under the provisions of ASC 740. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.
 
 
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Segment Results of Operations
 
Quarter Ended September 30, 2013 Compared to Quarter Ended September 30, 2012
 
Electrical Products and Services segment
 
Electrical Products and Services segment revenues were $14.0 million and $25.5 million for third quarters of 2013 and 2012, respectively, a decrease of $11.5 million or 45%. This decrease was primarily driven by $6.9 million of lower intersegment sales and $4.1 million of decreased electrical revenues as a result of decreased customer demand. Electrical Products and Services segment profit was $2.8 million and $7.5 million for the 2013 third quarter and the comparable 2012 quarter, respectively, a decrease of $4.7 million or 62.4%. Segment profits were 20.2% of 2013 and 29.6% of 2012 third quarter segment revenues. The $4.7 million decrease in segment profits was primarily driven by significantly reduced revenue in the third quarter of 2013 versus the comparable period of 2012 as noted above.
 
Drilling Products and Services segment.
 
Drilling Products and Services segment revenue was $2.1 million and $58.5 million for the third quarters of 2013 and 2012, respectively, a decrease of $56.4 million, or 96.5%. Drilling Products and Services segment loss was $0.8 million in the third quarter of 2013 versus a segment profit of $3.9 million for the third quarter of 2012, a decrease of $4.7 million in the comparable quarters. Segment losses were 39.1% of segment revenues in the third quarter of 2013 versus a segment profit of 6.7% of segment revenues in the comparable 2012 third quarter. The decline in Drilling Products and Services segment profits was due to significantly lower revenues in the third quarter of 2013 versus the comparable 2012 quarter.
 
Nine Months Ended September 30, 2013 versus Nine Months Ended September 30, 2012
 
Electrical Products and Services segment.
 
Electrical Products and Services segment revenues were $45.9 million and $74.9 million for the first nine months of 2013 and 2012, respectively, a decrease of $29.0 million or 38.7%. This decrease was primarily driven by $22.7 million of lower intersegment sales and $5.8 million of decreased electrical revenues as a result of decreased customer demand. Electrical Products and Services segment profit was $9.0 million and $15.9 million for the 2013 first nine months and the comparable period in 2012, respectively, a decrease of $6.9 million or 43.3%. Segment profits were 19.7% of 2013 and 21.3% of the 2012 first nine months respective segment revenues. The $6.9 million decrease in segment profits was primarily driven by lower revenues.
 
Drilling Products and Services segment.
 
Drilling Products and Services segment revenue was $38.4 million and $191.0 million for the first nine months of 2013 and 2012, respectively, a decrease of $152.6 million, or 79.9%. Drilling Products and Services segment income was $0.1 million in the first nine months of 2013 versus a segment loss of $1.8 million for the first nine months of 2012, an improvement of $1.9 million. The 2013 first nine months profit in Drilling Products and Services segment revenues was driven by improved margins on complete rigs.
 
Liquidity and Capital Resources
 
Our primary source of liquidity is cash generated from the sales of our products and services. Most of the Company’s fixed-price contracts for new land-based drilling rigs provide for progress payments throughout the manufacturing process. Most of the Company’s 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 December 14, 2012, in connection with the closing of the Merger, we entered into a $20.0 million term loan and security agreement, amended and restated a $20.0 million revolving credit and security agreement and issued 25,000 shares of Preferred Stock for $2.5 million.
 
 
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Company Financing
 
On December 14, 2012, the Company 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 December 14, 2012, 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 provides for a $20 million committed asset-based revolving credit facility, with a sublimit for letters of credit (as amended, the “Revolving Facility”).
 
On December 14, 2012, we also issued 25,000 shares of Preferred Stock for $2.5 million.
 
As of September 30, 2013, we were not in compliance with the minimum liquidity, minimum EBITDA, and total leverage ratio covenants in our Revolving Facility and Term Facility.
 
On October 17, 2013, we 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. As a result of the accelerated payment dates of each facility, the outstanding balances of each are classified as current as of September 30, 2013.
 
In connection with the amendments described above, we are 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 will occur under both the Term Facility and Revolving Facility if we are unable to satisfy one of these requirements. As of October 1, 2013, the Company has implemented and is in compliance with the cost reduction plan. In addition, as of November 14, 2014, the Company has 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 is in compliance with the terms of its credit agreements.
 
In the event of an acceleration of amounts due under its debt facilities 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, which would have a material adverse effect on its business, prospects and financial condition and raises substantial doubt about the Companys ability to continue as a going concern.
 
Cash Flows for the Third Quarter Ended September 30, 2013 and 2012
 
Net cash used in operating activities was $0.6 million in the third quarter of 2013 as compared to net cash used in operating activities of $2.3 million in the third quarter of 2012. The $1.7 million decrease in cash used by operating activities was primarily due to a $10.4 million increase in sources from working capital components and $1.6 million increase in deferred income taxes, partially offset by $10.4 million in lower net income. The $10.4 million sources from working capital was primarily due to higher customer advanced billings  ($37.9 million), partially offset by uses from accounts payable ($9.7 million), accounts  receivable ($8.7 million), inventory ($7.3 million) and accrued liabilities ($1.8 million).
 
There were no capital expenditures in the third quarter of 2013 as compared to $0.2 million in the third quarter of 2012.
 
The net cash provided by investing activities, in the third quarter of 2013, was $0.1 million as compared to net cash used in investing activities of $2.0 million in the third quarter of 2012. The $2.1 million decrease in cash used by investing activities was primarily due to $1.3 million fewer intangible purchases, $.5 million decrease in restricted cash, and $0.2 million of decreased capital expenditures.
 
The net cash provided by financing activities, in the third quarter of 2013, was $0.2 million as compared to net cash used in financing activities of $2.2 million in the third quarter of 2012. The $2.3 million decrease in cash used by financing activities was primarily due to $9.1 million of increased debt borrowings, partially offset by $6.8 million of increased debt repayments.
 
As a result of the foregoing activities, in the third quarter of 2013, the Company’s cash decreased by $0.3 million as compared to a decrease of cash of $6.5 million in the third quarter of 2012.
 
 
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Cash Flows for the Nine Months Ended September 30, 2013 and 2012
 
Net cash provided by operating activities was $3.5 million in the first nine months of 2013 as compared to net cash used in operating activities of $11.1 million in the first nine months of 2012. The $14.6 million decrease in cash used by operating activities was primarily due to a $19.3 million increase in sources from working capital components and $3.0 million increase in deferred income taxes, partially offset by $8.2 million in lower net income. The $19.3 million increase in sources from working capital was primarily due to higher customer advanced billings ($32.8  million), partially offset by uses  in inventory ($10.0 million) and accrued liabilities ($4.0 million).
 
Capital expenditures were approximately $0.2 million and $1.0 million in the first nine months of 2013 and 2012, respectively.
 
The net cash provided by investing activities, in the first nine months of 2013, was $0.3 million as compared to net cash used in investing activities of $3.1 million in the first nine months of 2012. The $3.3 million decrease in cash used by investing activities was primarily due to $1.6 million fewer intangible purchases, $.9 million decrease in restricted cash and $0.8 million of decreased capital expenditures.
 
The net cash used in financing activities, in the first nine months of 2013, was $4.5 million as compared to net cash provided by financing activities of $12.0 million in the first nine months of 2012. The $16.4 million decrease in cash provided by financing activities was primarily due to $73.2 million of  increased debt repayments, partially offset by $56.7 million of increased debt borrowings.
 
As a result of the foregoing activities, in the first nine months of 2013, the Company’s cash decreased by $0.7 million as compared to a decrease of cash of $2.2 million in the first nine months of 2012.
 
Future Cash Requirements
 
As of September 30, 2013, we had current maturities of long-term debt of $33.3 million, cash and cash equivalents of $0.9 million, and $5.8 million available under our amended and restated $20.0 million revolving credit and security agreement.
 
Additionally, the Company is in a net working capital deficit position as of September 30, 2013. The Company believes that its revenues will improve in the near term based on the outstanding quotes that we have with our existing and potentially new customers.  Should these increased revenues materialize, our net working capital deficit position will improve.  However, there can be no assurances that these outstanding quotes will materialize into executable contract orders.
 
We believe, as of November 14, 2013, that we will have the working capital resources necessary to meet our projected operational needs for fiscal year 2013 exclusive of the PEMEX liabilities, if any, based on our cash on hand and cash flow from operations. 
 
Critical Accounting Policies and Management Estimates
 
The Commission defines critical accounting policies as those that are, in management’s view, important to the portrayal of our financial condition and results of operations and demanding of management’s judgment. Our discussion and analysis of financial condition and results of operation are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates on experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.
 
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. A contract is considered complete when its manufacturing process is complete, the customer has been provided with all proper inspection and other required documentation, title and risk of loss has passed to the customer, collectability is reasonably assured and the product has been delivered.
 
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. 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 accounted for under ASC 605-35, Construction-Type and Production-Type 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.
 
 
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Allowance for Doubtful Accounts
 
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We review our allowance for doubtful accounts on a quarterly basis. 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 its accounts receivable balances. Accounts are written-off when an account is determined to no longer be collectable, based on our past collection history, or after we have exhausted all possible means of collection.
 
We have typically not experienced unanticipated bad debt losses as a result of our business practices of securing advance payments for a large percentage of our projects during the construction process, and securing final payments from customers that may present collectability issues prior to shipment.
 
Inventories
 
Inventories consist of raw materials and finished goods and work-in-process (see Revenue Recognition). Inventories of raw materials and finished goods are stated at the lower of cost or market using the average method. Allowances for excess and obsolete inventories are determined based on our historical usage of inventory on-hand as well as our future expectations related to our manufacture of product.
 
Recent Accounting Pronouncements   
 
In July 2013, the FASB issued guidance related to the financial statement presentation of an unrecognized tax benefit, a similar tax loss, or a tax credit carryforward exists. The new standard requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward unless certain circumstances exist. The standard is effective for us as of January 1, 2014, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial position, results of operations or cash flows.
 
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 its financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
 
Not applicable.
 
 
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 Chief Executive Officer and Chief 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 Commission 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 assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. 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.
 
 
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Based on the evaluation referred to above, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2013 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and such information is accumulated and communicated to management, including its principal executives and principal financial officers or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
 
Except as described below, there have been no changes in our internal control over financial reporting during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are still in the process of integrating the Acquired Company, which we acquired on December 14, 2012, and which was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, into our overall internal control over financial reporting process.
 
PART II.
 
 
 
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 Drillmec’s 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 the 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 IDE’s actual profits from the PEMEX contracts and the development costs that Drillmec incurred in developing the proprietary information in question. The Company intends to defend this litigation vigorously. This case is in the preliminary stages and too early to predict an outcome and therefore no provision has been recorded as of September 30, 2013, for any potential liability arising from this litigation. 
 
The Company produced documents in response to discovery requests on September 30, 2013.  This case is in the preliminary stages and the Company intends to defend this litigation vigorously.
 
ITEM 1A.   RISK FACTORS
 
The Company may be not able to comply with the covenants under its credit agreements causing a default and may not be able to renegotiate the terms of these agreements if the Company is in default.
 
As of September 30, 2013, we were not in compliance with the minimum liquidity, minimum EBITDA, and total leverage ratio covenants in our Revolving Facility and Term Facility. On October 17, 2013, we amended the Revolving Facility and Term Facility to address these covenants and the Company is currently in compliance with the terms of the amended credit agreements.
 
We may not be able to comply with the amended covenants under our Revolving Facility and our Term Facility.  An event of default will occur if we are unable to comply with the covenants.  If we are in default, we may be unable to negotiate amendments and/or waivers to our credit agreements. Additionally, there can be no assurance that the Company would be able to find other lenders to refinance these agreements.
 
In the event of an acceleration of amounts due under its debt facilities 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, which would have a material adverse effect on its business, prospects and financial condition and raises substantial doubt about the Company's ability to continue as a going concern.
   
The Company has received notices from PEMEX terminating its four purchase agreements for modular drilling units and may be liable for liquidated damages.
 
 
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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 its four purchase agreements for modular drilling units. The collective value of the four agreements was approximately $354.0 million. As a result of their 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 September 30, 2013, 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.
 
 
None.
 
 
 
On December 14, 2012, the Company and its subsidiaries (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 (the “Term Facility”).
 
On December 14, 2012, 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 provides for a $20 million committed asset-based revolving credit facility, with a sublimit for letters of credit (the “Revolving Facility”).
 
On April 9, 2013, we amended the Term Facility and Revolving Facility to provide among other things, that the minimum liquidity covenants shall not be tested again until May 31, 2013.
 
As of September 30, 2013, we were not in compliance with the minimum liquidity, minimum EBITDA, and total leverage ratio covenants in our Revolving Facility and Term Facility.
 
On October 17, 2013, we 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 minimun 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 amendments described above, we are 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 will occur under both the Term Facility and Revolving Facility if we are unable to satisfy one of these requirements. As of October 1, 2013, the Company has implemented and is in compliance with the cost reduction plan. In addition, as of November 14, 2013, the Company has 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 is in compliance with the terms of its credit agreements.
 
 
Not applicable.
 
   
On November 14, 2013, the Company entered into a Stock Purchase Agreement (the “Series B Purchase Agreement”) with Empeiria Investors LLC (“EI”), pursuant to which EI purchased 5,000 shares of Series B Preferred Stock (the “Series B Preferred Shares”) 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 (the “Series C Purchase Agreement”) with Stephen D. Cope, pursuant to which Mr. Cope purchased 5,000 shares of Series C Preferred Stock (the “Series C Preferred Shares”) at a price per share of $100 for aggregate proceeds to the Company of $0.5 million.
 
The Series B Preferred Shares and the Series C Preferred Shares are not entitled to vote and are not convertible into shares of common stock of the Company. The Series B Preferred Shares will accrue cumulative dividends at a rate of 20% per annum and the Series C Preferred Shares will accrue cumulative dividends at a rate of 14% per annum. Interest on the Series B Preferred Shares and the Series C Preferred Shares will be payable only with additional shares of the same series of preferred stock. The Series B Preferred Shares and the Series C Preferred Shares will participate in any dividend as and when declared by the board of directors and paid to holders of shares of common stock of the Company, on a share-for-share basis. The shares will have a liquidation preference equal to the purchase price of the preferred stock plus all accrued and unpaid dividends at the date of liquidation.
 
At any time after the first anniversary of the date on which all indebtedness for borrowed money of the Company is repaid in full, the Company may redeem the Series B Preferred Shares and the Series C Preferred Shares on 15 days’ notice at a redemption price equal to the purchase price, plus all accrued and unpaid dividends to the date of redemption, subject to compliance with any restrictions in the Company’s then-outstanding indebtedness. The Series B Preferred Shares and the Series C Preferred Shares will be subject to mandatory redemption on the date which is 181 days following the latest maturity date of any indebtedness of the Company outstanding on November 14, 2013.
 
For additional information regarding the rights and preferences of the Series B Preferred Shares and the Series C Preferred Shares, see the Certificate of Designation of Series B Preferred Stock filed as Exhibit 4.1 to this Quarterly Report on Form 10-Q and the Certificate of Designation of Series C Preferred Stock filed as Exhibit 4.2 to this Quarterly Report on Form 10-Q.
 
The Series B Preferred Shares and the Series C Preferred Shares issued are exempt from registration under the Securities Act pursuant to Section 4(a)(2) because the transactions did not involve public offerings.
 
 
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The following exhibits are filed as part of, or incorporated by reference into, this report.
 
Exhibit Number
Description
4.1*
Certificate of Designation of Series B Preferred Stock. 
4.2*
Certificate of Designation of Series C Preferred Stock.
10.1
Second Amendment to Term Loan and Security Agreement between Integrated Drilling Equipment Holdings Corp., Integrated Drilling Equipment, LLC, and Integrated Drilling Equipment Company Holdings, LLC, and Elm Park Capital Management, LLC. as agent for the lenders, dated October 17, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 23, 2013).
10.2
Second Amendment to Amended and Restated Revolving Credit and Security Agreement between Integrated Drilling Equipment Holdings Corp. (formerly Empeiria Acquisition Corp.), Integrated Drilling Equipment, LLC and Integrated Drilling Equipment Holdings, LLC. and PNC Bank, National Association as agent for the lenders, dated October 17, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 23, 2013).
10.3*
Stock Purchase Agreement, dated as of November 14, 2013, by and between Integrated Drilling Equipment Holdings Corp. and Empeiria Investors LLC.
10.4* 
Stock Purchase Agreement, dated as of November 14, 2013, by and between Integrated Drilling Equipment Holdings Corp. and Stephen D. Cope. 
31.1*
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2*
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
32.1*
Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350
32.2*
Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350
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
 
* Filed 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: November 14, 2013
/s/ Stephen Cope
 
Stephen Cope
 
Chief Executive Officer
 
  (Principal executive officer)  
 
Dated: November 14, 2013  
/s/ N. Michael Dion
 
N. Michael Dion
 
Chief Financial Officer and Executive Vice President
 
  (Principal financial and accounting officer)  
 
 
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