NOTE 2 – CONTRACTS RECEIVABLE AND RETAINAGE

The principal customers of the Company include major and large independent oil and gas companies and their contractors. Of our contracts receivable balance at March 31, 2013, $102.6 million, or 76.4%, is with four customers.

On July 13, 2012, we received notice from our customer, Bluewater Industries (“Bluewater”), requesting (i) a slowdown of work on ATP Oil & Gas (UK) Limited’s (“ATP UK’s”) Cheviot project ordered pursuant to a master service contract between Bluewater and the Company (the “Contract”), and (ii) an amendment to the scheduled payment terms under the Contract. On August 16, 2012, we entered into a binding agreement (the “Agreement”) with Bluewater, an engineering consulting firm engaged by ATP UK to oversee the fabrication of the Cheviot project, to amend and restate the Contract and suspend the project. Among other things, the Agreement outlines the revised payment terms for the contracts receivable balance (the “Balance”) and the limitations on Bluewater’s ability to request an extended suspension of work. Specifically, Bluewater must pay $200,000 on or before the last day of each calendar month until February 28, 2013, with the remaining outstanding Balance due on or before March 31, 2013. We also entered into a security agreement with Bluewater pursuant to which Bluewater granted us a security interest in certain of its equipment currently located on our facilities. All installments under the Agreement were paid through February 28, 2013. However, the remaining balance of $30.9 million was not paid at March 31, 2013. As of April 1, 2013, the Agreement terminated and the Company has initiated action to enforce its rights under the security agreement. To date, the Company has not sold, licensed, or leased any of the equipment subject to the security agreement to another party.

We recorded a $14.5 million reserve on the Balance as of December 31, 2012. We believe the outstanding Balance, comprised of contracts receivable of $30.9 million less billings in excess of costs and earnings of $2.9 million as of March 31, 2013, and the $14.5 million reserve, is collectible through the disposition of project deliverables and the enforcement of our security interest. We estimated the reserve recorded from selling the underlying assets individually to a willing market participant, including normal ownership risks assumed by the purchaser, and from selling certain components at scrap value. The ultimate portion of the Balance that may be recovered is dependent upon various factors such as market interest in the project deliverables and equipment, which may change in the future. These changes may lead to a revision in the amount reserved against the Balance and the amount ultimately recovered.