UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C., 20549
FORM 10-K
Tþ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
£o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-30351
DEEP DOWN, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 75-2263732 | |
| (State of other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |
| 8827 W. Sam Houston Pkwy | 77040 | |
| (Address of Principal Executive Office) | (Zip Code) |
Registrant’s telephone number, including area code:(281) 517-5000
Securities registered pursuant to Section 12(b) of the Act:NONE
Securities registered pursuant to Section 12(g) of the Act:Common Stock $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso No þ
Indicate by check mark whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ
Indicate by check mark whether the issuer (1) 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 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. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesþYes Noo No o
Indicate by check mark if disclosures of delinquent filers in response to Item 405 of Regulations S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer oAccelerated filer oNon-accelerated filer oSmaller reporting company þ
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso No þ
As of June 30, 2013, the aggregate market value of the voting stock and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of June 30, 2010, the last business day of our most recently completed second quarter, was approximately $8,521,700.
At April 13, 2011,March 25, 2014, the issuer had 206,399,15515,195,287 shares outstanding of Common Stock,common stock, par value $0.001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
| PART I | ||
| Item 1 | ||
| Item 2 | ||
| Item 3 | Legal Proceedings | |
| PART II | ||
| Item 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 8 | Financial Statements and Supplementary Data | |
| Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| Item 9A | Controls and Procedures | |
| Item 9B | Other Information | |
| PART III | ||
| Item 10 | Directors, Executive Officers and Corporate Governance | |
| Item 11 | Executive Compensation | |
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13 | Certain Relationships and Related Transactions, and Director Independence | |
| Item 14 | Principal | |
| PART IV | ||
| Item 15 | Exhibits, Financial Statement Schedules | |
| Signatures | ||
| i |
Forward-Looking Information
Unless otherwise indicated, the terms “Deep Down, Inc.”, “Deep Down”, “Company”, “we”, “our” and “us” are used in this report to refer to Deep Down, Inc., a Nevada corporation, and its wholly-owned subsidiaries.
In this Annual Report on Form 10-K (“the Report”), we may make certain forward-looking statements (“Statements”), including statements regarding our plans, strategies, objectives, expectations, intentions and resources that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We do not undertake to update, revise or correct any of the forward-looking information. The following discussion should also be read in conjunction with the audited consolidated financial statements and the notes thereto.
The statementsStatements contained in this Report that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statementsStatements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “should”, “intend”, “plan”, “could”, “is likely”, or “anticipates”, or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements that are not historical facts are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which, although considered reasonable by us, may not be realized. Because of the number and range of assumptions underlying our projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of us, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this report. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Therefore, our actual experience and the results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by us or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate.
| ii |
PART I
ITEM 1. Business.DESCRIPTION OF BUSINESS.
History
Deep Down, Inc. is a Nevada corporation engaged in the oilfield services industry. As used herein, “Deep Down”, “Company”, “we”, “our” and “us” may refer to Deep Down, Inc. and/or its subsidiaries. Deep Down, Inc. (OTCBB:(OTCQX: DPDW), a publicly traded Nevada corporation, was incorporated on December 14, 2006, through a reverse merger with MediQuip Holdings, Inc. (“MediQuip”), a publicly-traded Nevada corporation.
Deep Down is the parent company of the following wholly-owned subsidiaries: Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”); ElectroWave USA, Inc., a Nevada corporation (“ElectroWave”), since its acquisition April 2, 2007; Mako Technologies, LLC, a Nevada limited liability company (“Mako”), since its acquisition effective December 1, 2007; Flotation Technologies, Inc., a Maine corporation (“Flotation”), since its acquisition effective May 1, 2008 and; Deep Down International Holdings, LLC, a Nevada limited-liabilitylimited liability company (“DDIH”) and Deep Down Brasil Soluções Petróleo e Gás Ltda., since its formationa Brazil limited liability company (“Deep Down Brasil”). In August 2012, we consolidated the operations of Mako into Deep Down Delaware.
Our current operations are primarily conducted in February 2009. As discussed below, effective December 31, 2010,Deep Down Delaware. In addition to our strategy of continuing to grow and strengthen our operations, including by expanding our services and products in response to our customers’ demands, we engaged in a transaction in which allintend to continue to seek strategic acquisitions of complementary service providers, product manufacturers and technologies that are focused primarily on supporting deepwater and ultra-deepwater offshore exploration, development and production of oil and gas reserves and other maritime operations.
Our website address iswww.deepdowninc.com. We make available, free of charge on or through our website, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the operating assetsSecurities Exchange Act of 1934 as soon as reasonable after we electronically file such material with, or furnish it to, the Securities and liabilitiesExchange Commission (“SEC”). Paper or electronic copies of Flotation were contributed, alongsuch material may be requested by contacting the Company at our corporate offices. Information filed with other contributions we made, to a joint venture entity named Cuming Flotation Technologies, LLC (“CFT”), in return for a 20% common unit ownership interest in CFT.
On December 1, 2007, we acquired all of the common stock of Mako Technologies, Inc. We formed a wholly-owned subsidiary, Mako Technologies, LLC to complete the acquisition. Located in Morgan City, Louisiana, Mako servesserved the offshore petroleum and marine industries with technical support services, and equipment vital to offshore petroleum production, through the provision of highly qualified technicians, remotely operated vehicle (“ROV”) services, topside and subsea equipment and support systems used in diving operations, maintenance and repair operations, and offshore construction.
On June 5, 2008, we completed the acquisition of Flotation.Flotation Technologies, Inc., a Maine corporation (“Flotation”). We effectively dated the acquisition for accounting purposes as of May 1, 2008 and consummated the closing on June 6, 2008. Flotation engineers, designs and manufactures deepwater buoyancy systems using high-strength FlotecTM syntactic foam and polyurethane elastomers from its facilities in Biddeford, Maine.
As noted above, effective December 31, 2010, we engaged in a joint venture transaction in which all of Flotation'sFlotation’s operating assets and liabilities (except for one intercompany corporate overhead payable) were contributed, along with other contributions we made, to CFT in return for a 20%20 percent common unit ownership interest in CFT (the "JV"“JV”). For a more detailed explanation of this transaction, please see “Part II, Item 8. Financial Statements and Supplementary Data” Note 43, “Investment in Joint Venture”, to the consolidated financial statements “Investment in Joint Venture.”
On October 7, 2011, CFT consummated a transaction pursuant to that certain Stock Purchase Agreement (the “Purchase Agreement”), by and between CFT and a Houston-based company (“Buyer”) pursuant to which Buyer purchased from CFT (i) all of the issued and outstanding shares of capital stock of Cuming, (ii) the shares of 230 Bodwell Corporation, a Massachusetts corporation and subsidiary of Cuming, and (iii) certain assets that, immediately prior to closing, were acquired by Cuming, for periods beginning January 1,a purchase price of $60,000,000 (less certain debt and subject to purchase price adjustment for working capital and potential earn-out payments). Deep Down is entitled to 20 percent of the common equity proceeds (including earn-out payments) from the sale and will be subject to 20 percent of any indemnity obligations over the indemnity escrow amount (5 percent) pursuant to the Purchase Agreement. Such indemnity obligation will be capped at the amount of proceeds Deep Down receives pursuant to that certain Indemnification and Contribution Agreement dated October 7, 2011 except on(the “Indemnification Agreement”). Deep Down’s proceeds received from the basissale were approximately $6,375,000, which does not include any potential earn-out payments. The proceeds of our 20% common unit ownership interest in CFT. However, the operationsapproximately $6,375,000 are comprised of a $3,400,000 return of capital to Deep Down and Flotation will continue to be fully included in our presentation of historical information for periods ended December 31, 2010 and prior (since the acquisition of Flotation in 2008).
Business Overview
We provideare a global provider of specialized services to the offshore energy industry to support deepwater and ultra-deepwater exploration, development and production of oil and gas and other maritime operations. WeWhile we are primarily a service company, and we also produce custom engineered products that assist us in fulfilling service objectives for specific projects on a contractual basis. We design and manufacture a broad line of deepwater and ultra-deepwater, surface and offshore rig equipment solutions which are used by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. We also manufacture monitoring and control systems used by offshore energy and other maritime operations. Our products are often initially developed in direct response to customer requests for solutions to critical problems in the field. We also serve the growing offshore petroleum and maritime industries with technical management and support services. One of our greatest strengths is the extensive knowledge base of our service, engineering and management personnel in many aspects of the deepwater and ultra-deepwater industry. Set forth below is a more detailed description of important services and products we provide.
Our goal is to provide superior services and products to our clientscustomers in a safe, cost-effective and timely manner. We believe there is significant demand for, and brand name recognition of, our established products due to the technological capabilities, reliability, cost-effectiveness, timeliness of delivery and operational efficiency features of these products. Since our formation, we have introduced many new products that continue to broaden the market we currently serve.
See Note 1, to the consolidated financial statements, "Description“Description of Business and Summary of Significant Accounting Policies,"Policies”, to the consolidated financial statements included in this Report for information related to segment reporting.
Services and Products
Services.
We provide a wide variety ofProject Management and management services.
Spooling Services
. Our experienced personnel are involved in the operation of spooling equipment on many projects, including operations for other companies to run their spooling equipment. We have developed a very efficient (in both time and cost) system for spooling, utilizing our horizontal drive units, under-rollers, tensioners, carousels and rapid deployment cartridges.Testing and our pull-ins run smoothly because the same engineers who plan the pull-in operations are also involved in supervising the offshore operations. Our offshore servicemen comprise the topside umbilical support team and are familiar with the umbilical termination hardware. These same servicemen are often involved in terminating the umbilicals at the manufacturers’ yard several weeks prior to the installation. Everything is thoroughly tested prior to installation, including winches at the rental contractor’s yard and after set-up on the platform. Load cells are tested onshore, and the same load cells are used to test the system offshore. This eliminates variables and validates the condition of the pull-in system. We then perform pull-ins under more controlled conditions with increased confidence, resulting in safer operations.
Storage Management
. Our facility in Channelview, TX covers more than 50,000 square feet of internal high quality warehousing capacity and 300,000 square feet of external storage and is strategically located in Houston's Ship Channel area. Our warehouse is designed to provide clients with flexible and cost effective warehousing and storage management alternatives. Our professional and experienced warehouse staff, combined with the very latest in information technology, results in a fully integrated warehousing package designed to deliver effective solutions to client needs. Among other capabilities, we are capable of providing long-term specialized contract warehousing; long and short-term storage; modern materials handling equipment; undercover loading areas; quality security systems; integrated inventory management; packing and repacking; computerized stock controls; and labeling.Our shore-based facility located at Core Industries, Inc. in Mobile, AL has 6,500 square feet and marine industries with technical support services and products vitalhouses our 3,400 ton carousel system, used to offshore petroleum production. Our offerings in this area are primarily through the provisionstore customers’ products. The site is sufficient to allow for full system integration testing of ROV services which include the provision of skilled ROV operators/technicians and ROVour customers’ equipment as well as topside and subsea equipment, and support systems used in diving operations, maintenance and repair operations, and offshore construction.
ROV and ROV Tooling Services.
Deep Down Marine Technologies (DDMT).DDMT is a specialized division of Deep Down, Inc. primarily focused on the past few years,refurbishment and repurposing of recovered subsea distribution assets and providing support for offshore interventions.
Items refurbished and repurposed for clients include Logic Caps (LCs), Intermediate Logic Caps (ILCs), and Hydraulic Distribution Manifolds (HDMs). Once a recovered asset is received, it is cleaned, any production fluids are flushed out with a water-based control fluid, and the asset is moved into storage. As an emergency or intervention arises, we began providing maintenancepull the stored asset, reroute and fleet management servicesweld the tubing, and then perform a Factory Acceptance Test (FAT) per client specifications. Finally, we send out our service technicians and equipment to other ROV ownerssupport the offshore campaign.
Additionally, we perform various tasks in support of offshore interventions. We reconfigure Deep Down Hydrate Remediation Frames and Hydraulic Flying Leads (HFLs) at either one of our facilities or in the field. Our service technicians go offshore to pre-charge and make any changes to the frame needed to remediate hydrates.
We also developed the Fast Response Box (FRB), a concept cultivated from our vast offshore campaign experience. Our team identified the necessary components for an emergency reroute of a chemical or hydraulic line performed on the deck of a vessel. After the subsea distribution hardware is brought up, our service technicians safely depressurize, flush, cut out tubing, and reroute as an outsourced support functionrequired to their ROV fleet.
Our capabilities further include in-house software and mechanicshardware engineering to maintainprovide innovative solutions from wireless testing and refurbish our equipment in-between rentals. We carry a wide array ofmonitoring equipment, to serviceDynamic Positioning (DP) systems. We have also developed camera systems that can be setup at any site, enabling our clients to witness FATs, System Integration Testing (SIT) or vessel load-outs in real-time, from any location in the diving industry, including water blasting equipment, breathing air dive compressors, hot water units with feed pumps, man rider winches, hydraulic tools and hose reels, underwater video units, sonar units, magnetic gradiometers, dive radios, lift bags, volume tanks, decompression chambers, and hot water pressure washers.
Products.
We provide installation support equipment and component parts and assemblies for subsea distribution systems. We believe the key to successful installations of hardware is to design the subsea system by considering installation issues first, working backwards to the design of the hardware itself. This is why we have been instrumental in the development of hardware and techniques to simplify deepwater installations. We design, manufacture, fabricate, inspect, assemble, testFlying Leads. Deep Down is a leader in umbilical and steel flying lead installationsdesign, manufacture and installation; in the Gulf of Mexico and throughout the world. A few of our major product lines are highlighted below.
Deep Down employs the patented Moray® termination system on each end of the LSFL®. The Moray® termination is a light weight, high-strength, configurable and field serviceable framework used to connect any commercially available MQC (Multi-Quick Connect) plate to the LSFL® bundle. The Moray® termination assembly allows the installation load from the steel tubes or strength member to be transmitted directly to the framework and through to the installation rigging while isolating couplers from the load to maintain maximum compliance. The Moray® termination with compliant section is ideal for umbilical end terminations; it eliminates the need for bulky armor pots and is more manageable than a traditional umbilical end termination. In this application, the Moray® termination can be addedused to produce any combination requiredhouse multiple electrical, optical and auxiliary hydraulic interfaces in integrated ROV panels. Moray® termination assemblies can be outfitted with integrated buoyancy allowing quicker installation times by eliminating the need to recover buoyancy modules. Additionally, this allows for the transportation of various fluids, chemicals or data. The flying leads are then fitted with our terminations and Morays® that are attached to the multiple quick connection plate, and finished off with our elastomeric bend limiters. The non-helix wound design allows for our flying leads to be very installation friendly with minimal-bending stiffness. A Moray® is the termination head on the flying lead and connects the tubing assembly to the junction plate. A compliant Moray® consistsuse of a 20-foot flexible flying lead with an electro-hydraulic Moray® that is connected tosmaller class ROV on a full-sized umbilical withvessel of opportunity should the installation tension being applied through an armor pot and slings extending by the compliant section.
Umbilical Hardware
.Riser Isolation Valves (RIV) and Subsea Isolation Valve (SSIV) Services.Deep Down's new Riser Isolation Valve (RIV) and Subsea Isolation Valve (SSIV) control systems are unique solutions providing platform personnel the hydraulic control and electrical indication for subsea production valve manipulation. These systems provide numerous advantages to the storage systemclient including: emergency shutdown capabilities (ESD), valve positioning monitoring systems, and auxiliary positions for spare and/or future field development.
In addition to fabrication of these systems, Deep Down provides subsea installation engineering, consulting, and service personnel to support clients, installation contractors, valve vendors and more. Our expertise ensures scope is fully defined and delegated allowing for safe and successful installations. The Deep Down team provides commissioning and technical assistance to clients and platform personnel ensuring the systems are working properly and all operational information is handed over to the end users.
Capitalizing on our expertise in umbilical manufacturing, Subsea and Topside Umbilical Termination Assemblies (SUTA / TUTA), hydraulic and electrical flying leads, and super duplex welding, we provide quality products our clients can depend on. Project designs are guaranteed to be stackableinstallation friendly and interchangeable in subsurface conditions. The current system utilizes newly-designed 550 gallon tote tanks, baskets, and tool boxes that are all inter-changeable and stackable. Using common dimensions and designs allows a variety of different items to all be commonly stored and stacked, to minimize required storage area. The stacking philosophy can be applied to other custom applications if required. In order to maximize accessibility and to reduce maintenance, a variety of options are available such as galvanizing, ladders, and drip pans.
Installation AidsAids.. To help our clientscustomers and to meet our own internal needs, we have developed an extensive array of installation aids, including steel flying lead installation systems, a 5-ton Caterpillar® tensioner, a 10-foot radiustensioners, lay chute with work platform,chutes, many varieties of buoyancy, clump weights, VIV strakes, mud mats, dual tank skids, gang boxes, work vans, pumping and testing skids, control booths, fluid drum carriers, crimping systems, load cells, 300 and 340-ton under-rollers, apowered reels, 200-ton, 400-ton and 3,400-ton and 3,500 – ton carousel, UTAUTAJ and bridging Jumper running and parking deployment frames, termination shelters, pipe straightners,straighteners, ROV hooks and shackles, stackable SeaStax®SeaStax® tanks, baskets, Subsea Deployment Basket System (SDB®), Horizontal Drive Units (HDU) and boxes, and ballgrab rental rigging.Rapid Deployment Cartridges (RDC).
Buoyancy Products
Further expansion of our flotation product line includes drilling riser buoyancy modules, CoreTecTM drilling riser buoyancy modules, ROVitsTM buoyancy, Hydro-FloatTM mooring buoys, StablemoorTM low-drag ADCP deployment solution, Quick-Loc™ cable floats, HardballTM umbilical floats, Flotec™ cable and pipeline protection, InflexTM polymer bend restrictors,support hardware and installation buoyancyservices and development of any size and depth rating.
NHU®.Deep Down's patented Non-Helical Umbilical (NHU®) combines our experience manufacturing miles of loose steel tube flying leads, terminating conventional steel umbilicals, and encaseobserving installation behavior of all umbilicals. The NHU® can be manufactured in lengths up to 10 miles using super duplex tubes in standard sizes and protectin any configuration of hydraulic, electrical or optical elements. It is intended for long-term infield (static) or short-term dynamic service applications.
Multiple tubes are fed into the syntactic foam from damage. Somepatented Deep Down NHU® manufacturing mechanism, bundled, then extruded with a HDPE outer jacket. Umbilicals are not torque balanced on their own, so rather than expending resources to balance and imparting stresses to helically wind them, the NHU® uses the imbalance to its advantage, resulting in a standard bundle.
The proprietary NHU® manufacturing concept is fully containerized, portable and easily transported for setup anywhere in the world. The ability to manufacture in close proximity to subsea fields offers the benefits of our products are produced with proprietary, high-strength macrospheres.
Manufacturing
For over a direct part ofdecade, our financial condition and results of operations, except on the basis of our minority ownership interest in CFT.
In addition to increasing our production capacity, this move also provided the space to build our Steel Tube Flying Lead (STFL) Overhead Tracking System. This system will allow us to easily move STFL’s from station to station during production for welding, X-ray and Factory Acceptance Testing (FAT). We have also significantly expanded our clean, stainless steel welding and tube bending environment, which is separated from all carbon steel fabrication.
We are nearing completion of our 12’x60’ wet testing tank, adding the capability to test our products and rigging with buoyancy scenarios in the water. Featuring filtered water and underwater lighting, it will also enable us to launch and test small ROV’s and ROV operations.
The most substantial benefit to the design, manufacturing, testing,new facility will come when the dock on the property is completed. This will allow us to move large equipment and commissioningfabricated items by barge, eliminating the costs and limitations of heavy equipment used in both on- and offshore operations in a variety of markets and industries.
Our manufacturing plant is ISO 9001 and American Petroleum Institute certified. We maintaincontinue to improve our high standards ofand product quality through the use of quality assurance specialists who workworking with our product manufacturing personnel throughout the manufacturing process and inspect and document equipment as it is processed through our manufacturing facility.process. We have the capabilitycapacity to manufacture various products from each of our product lines at our major manufacturing facilitycomplete large turn-key projects and believe that this localized manufacturing capability is essential in order to compete with our major competitors. We maintain valuable relationships with several otherstill have reserve space for unforeseen emergency projects requiring immediate service and attention oil companies that own additional fabrication facilities in and around Houston, Texas. These other companies provide excellent subcontract manufacturing support on an as-needed basis. Our manufacturing process includes heat treatment, machining, fabrication, inspection, assembly and testing.
Customers
Demand for our deepwater and ultra-deepwater services, surface equipment and offshore rig equipment is substantially dependent on the condition of the oil and gas industry to invest in substantial capital expenditures as well as continual maintenance and improvements on its offshore exploration, drilling and production operations. The level of these expenditures is generally dependent upon various factors such as expected prices of oil and gas, exploration and production costs of oil and gas, and the level of offshore drilling and production activity. The prevailing view of future oil and gas prices are influenced by numerous factors affecting the supply and demand for oil and gas. These factors include worldwide economic activity, interest rates, cost of capital, environmental regulation, tax policies, and production levels and prices set and maintained by producing nations and OPEC. Capital expenditures are also dependent on the cost of exploring for and producing oil and gas, the sale and expiration dates of domestic and international offshore leases, the discovery rate of new oil and gas reserves in offshore areas and technological advances. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility.
Our principal customers are major integrated oil and gas companies, large independent oil and gas companies, foreign national oil and gas companies, subsea equipment manufacturers and subsea equipment installation contractors involved in offshore exploration, development and production. Offshore drilling contractors, engineering and construction companies, and other companies involved in maritime operations represent a smaller customer base.
We are not dependent on any one customer or group of customers. The number and variety of our products required in a given period by a customer depends upon their capital expenditure budget as well as the results of competitive bids. Consequently, a customer may account for a material portion of revenues in one period and may represent an immaterial portion of revenues in a subsequent period. While we are not dependent on any one customer or group of customers, the loss of one or more of our significant customers could, at least on a short-term basis, have an adverse effect on the results of our operations.
Marketing and Sales
We market our services and products throughout the world directly through our sales personnel in our Houston,Channelview, Texas and Morgan City, Louisiana offices (prior to December 31, 2010 we also had a sales presence in Biddeford, Maine).office. We periodically advertise in trade and technical publications of our customer base. We also participate in industry conferences and trade shows to enhance industry awareness of our products and services. Our customers generally order products and services after consultation with us on their project. Orders are typically completed within two weeks to three months depending on the type of product or service. Larger and more complex products may require four to six months to complete, though we have accepted several longer-term projects, including one that has exceeded a year completion.requiring significantly more time to complete. Our customers select our products and services based on the quality, reliability and reputation of the product or service, price, timely delivery and advance technology. For large drilling and production system orders, we engage our project management team to coordinate customer needs with engineering, manufacturing and service organizations, as well as with subcontractors and vendors. Our profitability on projects is dependent on performing accurate and cost-effective bids as well as performing efficiently in accordance with bid specifications. Various factors can adversely affect our performance on individual projects that could potentially adversely affect the profitability of a project.
Product Development and Engineering
The technological demands of the oil and gas industry continue to increase as offshore exploration and drilling operations expand into deeper and more hostile environments. Conditions encountered in these environments include well pressures of up to 15,000 psi, mixed flows of oil and gas under high pressure that may also be highly corrosive, and water depths in excess of 5,000 feet. We are continually engaged in product development activities to generate new products and to improve existing products and services to meet our customers’ specific needs. We also focus our activities on reducing the overall cost to the customer, which includes not only the initial capital cost but also operating costs associated with its products.
We have an established track record of introducing new products and product enhancements. Our product development work is conducted at our facilities in Houston and Channelview, Texas, and in the field (and prior to December 31, 2010, in Biddeford, Maine).field. Our application engineering staff also provides engineering services to customers in connection with the design and sales of our products. Our ability to develop new products and maintain technological advantages is important to our future success.
We believe that the success of our business depends more on the technical competence, creativity and marketing abilities of our employees than on any individual patent, trademark or copyright. Nevertheless, as part of our ongoing product development and manufacturing activities, our policy is to seek patents when appropriate on inventions concerning new products and product improvements. All patent rights for products developed by employees are assigned to us.
Competition
The principal competitive factors in the petroleum drilling, development and production and maritime equipment markets are quality, reliability and reputation of the product, price, technology, and timely delivery. We face significant competition from other manufacturers of exploration, production, and maritime equipment. Several of our primary competitors are diversified multinational companies with substantially larger operating staffs and greater capital resources and have a longer history in the manufacturing of these types of equipment. We compete principally with Dynacon, FMC, Kvaerner, Norson, Ocean Works, Oceaneering, VFL, and Halliburton Product Pipeline Services on our umbilical services; Dynacon, Ocean Works and Odem on our Launch and Recovery Systems; and Entech, Technip, Manatec and Pegasus on our installation management services.
Employees
At March 31, 2011,1, 2014, we had approximately 75a total of 84 employees, of which all 84 were full-time employees. Our employees are not covered by collective bargaining agreements and we generally consider our employee relations to be good. Our operations depend in part on our ability to attract a skilled labor force. While we believe that our wage rates are competitive and that our relationship with our skilled labor force is good, a significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we pay or both.
Governmental Regulations
A significant portion of our business activities are subject to federal, state, local and foreign laws and regulations and similar agencies of foreign governments. The technical requirements of these laws and regulations are becoming increasingly expensive, complex and stringent. These regulations are administered by various federal, state and local health and safety and environmental agencies and authorities, including the Occupational Safety and Health Administration of the U.S. Department of Labor and the U.S. Environmental Protection Agency. From time to time, we are also subject to a wide range of reporting requirements, certifications and compliance as prescribed by various federal and state governmental agencies. Expenditures relating to such regulations are made in the normal course of our business and are neither material nor place us at any competitive disadvantage. We do not currently expect that compliance with such laws will require us to make material additional expenditures.
We are also affected by tax policies, price controls and other laws and regulations generally relating to the oil and gas industry, including those specifically directed to offshore operations. Adoption of laws and regulations that curtail exploration and development drilling for oil and gas could adversely affect our operations by limiting demand for our services or products.
Increased concerns about the environment have resulted in offshore drilling in certain areas being opposed by environmental groups, and certain areas have been restricted. To the extent that new or additional environmental protection laws that prohibit or restrict offshore drilling are enacted and result in increased costs to the oil and gas industry in general, our business could be materially affected. In addition, these laws may provide for "strict liability" for damages to natural resources or threats to public health and safety, rendering a party liable for the environmental damage without regard to negligence or fault on the part of such party. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. Certain environmental laws provide for joint and several strict liabilities for remediation of spills and releases of hazardous substances. In addition, companies may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, as well as damage to natural resources. Such laws and regulations may also expose us to liability for the conduct of or conditions caused by others, or for our acts that were in compliance with all applicable laws at the time such acts were performed. Compliance with environmental laws and regulations may require us to obtain permits or other authorizations for certain activities and to comply with various standards or procedural requirements.
We cannot determine to what extent our future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations. We believe that our facilities are in substantial compliance with current regulatory standards. Based on our experience to date, we do not currently anticipate any material adverse effect on our business or consolidated financial position as a result of future compliance with existing environmental laws and regulations controlling the discharge of materials into the environment. However, future events, such as changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of regulatory agencies, or stricter or different interpretations of existing laws and regulations, may require additional expenditures which may be material.
Intellectual Property
While we are the holder of various patents, trademarks and licenses relating to our business, we do not consider any individual intellectual property to be material to our business operations.
ITEM 2. Description of PropertyDESCRIPTION OF PROPERTY
Our principal corporate offices were relocated toare located at 8827 W. Sam Houston Parkway N.,North, Suite 100, Houston, TX 77040 on February 21, 2009.77040. The 89-month lease term began on that datein February 2009 and includes an allowance for leasehold improvements by the landlord, plus a charge for monthly common area expenses (“CAM charges”) on a pro-rata basis of the total building expenses (including insurance, security, maintenance, property taxes and utilities) beginning on the sixth month of the lease term.. Monthly lease costs range from $12,177 to $14,391 plus CAM charges, due to a rent escalation clause over the term of the lease.
Our operating facilities for Deep Down Delaware continue to beare located at 15473 East Freeway, Channelview, Texas 77530. We purchased the77530 (“Channelview”) and at 18511-810 Beaumont Highway, Houston, Texas 77049 (“Highway 90”). Channelview property from the lessor in May 2009, which consists of approximately 811 acres of land that houses 60,000 square feet of manufacturing space and 7,000 square feet of office space. See Item 13 “Certain RelationshipsThese manufacturing facilities in Channelview, Texas, are subject to the liens of our lender, Whitney Bank, under our credit agreement. Highway 90 consists of approximately 20 acres of land, which includes 215,000 sq. ft. of indoor manufacturing space. We believe that our current space is suitable, adequate and Related Transactions,of sufficient capacity to support our current operations. The 10-year lease commenced in June 2013 at a base rate of $60,000 per month for the first 7 months and Director Independence” included in this Report$90,000 per month for information regarding the related natureremainder of the former lessor.
Additionally, we lease 6,500 square feet of storage space in Mobile, AL to house our 3,400 ton carousel system. The 5-year lease commenced in August 2010 at a base rate of $5,000 per month.
Mako leases its property and buildings from Sutton Industries at a base rate of $7,300$8,122 per month. Mako is located at 125 Mako Lane, Morgan City, LA 70380. The 5-year lease term commenced on June 1, 2006, and includes anwas renewed for five additional 5-year renewal option atyears in June 2011. As a result of our closure of our operations in Morgan City in August 2012, on December 13, 2012, this property was subleased for the endremainder of the initiallease term.
We have a fabrication facility located in Cleveland, Texas on property currently owned by one of our employees (and who is not one of our “named executive officers”). In October 2012, we reached an understanding with the owner of the property to December 31, 2010, we also had operating facilities and administrative offices located at 20 Morin Street, Biddeford, Maine 04005. We had originally acquiredpurchase the facility in May 2008property for a fair market valueaggregate consideration of $3.3 million, and the facility consisted of 3.61$500. The property includes 15 acres of land, including a 46,925 square-foot light industrial manufacturingand currently contains residential buildings, recreational facilities and livestock. We plan to expand the fabrication facility in order to increase our production capacity at such location, use the residential buildings at such location to house employees and administrative offices. Additionally,contractors for projects being conducted at the site, and otherwise use the facilities at the site for general corporate purposes.
Although the transaction had yet to be consummated, we took possession of the property in October 2008, Flotation entered into a 60-month lease for 18,000 square feet2012, and had paid the full purchase price of warehouse space, which was increased to 21,900 square feet in April 2009, within a 107,000 square foot warehouse located at 26 Morin Street, Biddeford, Maine and purchased a three-quarter acre parcel, which are both adjacent to Flotation’s operating facility. Both the owned and leased real property in Biddeford, Maine was contributed to CFT effective as of$500,000 by December 31, 2010. See Note 4 "Investment2013. These payments have been accounted for in Joint Venture" to the consolidatedour financial statements included inas purchase deposits. We hope to consummate the transaction within sixty days of the date of this Report.
ITEM 3. Legal ProceedingsLEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings arising in the normal course of business. As of the date of this Report, we are currently not involved as defendant in any pending, material legal proceedings.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range for Common Stock
Our common stock trades publicly on the OTC Bulletin Board ("OTCBB")Markets Group (OTCQX) under the symbol “DPDW.” The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The OTCBB securities are traded by a community of market makers that enter quotes and trade reports. This market is extremely limited and any prices quoted may not be a reliable indication of the value of our common stock.
| High | Low | |||||||
| Fiscal Year 2010: | ||||||||
| December 31, 2010 | $ | 0.10 | $ | 0.05 | ||||
| September 30, 2010 | $ | 0.07 | $ | 0.04 | ||||
| June 30, 2010 | $ | 0.17 | $ | 0.05 | ||||
| March 31, 2010 | $ | 0.15 | $ | 0.11 | ||||
| Fiscal Year 2009: | ||||||||
| December 31, 2009 | $ | 0.28 | $ | 0.11 | ||||
| September 30, 2009 | $ | 0.16 | $ | 0.10 | ||||
| June 30, 2009 | $ | 0.17 | $ | 0.10 | ||||
| March 31, 2009 | $ | 0.19 | $ | 0.08 | ||||
| High | Low | |||||||
| Fiscal Year 2013: | ||||||||
| December 31, 2013 | $ | 2.63 | $ | 1.80 | ||||
| September 30, 2013 | $ | 2.70 | $ | 1.44 | ||||
| June 30, 2013 | $ | 2.17 | $ | 1.55 | ||||
| March 31, 2013 | $ | 2.18 | $ | 1.22 | ||||
| Fiscal Year 2012: | ||||||||
| December 31, 2012 | $ | 1.44 | $ | 1.17 | ||||
| September 30, 2012 | $ | 1.60 | $ | 1.05 | ||||
| June 30, 2012 | $ | 1.80 | $ | 1.00 | ||||
| March 31, 2012 | $ | 1.59 | $ | 0.80 | ||||
Stockholders of Record
As of March 31, 2011,25, 2014, there were approximately 1,0501,088 stockholders of record of our common stock. All common stock held in street names are recorded in the Company’s stock register as being held by one stockholder.
Dividend Policy
To date, we have not paid any cash dividends and our present policy is to retain earnings for working capital use. Under the terms of our credit agreement with Whitney National Bank, we are restricted from paying cash dividends on our common stock, unless no default under the credit agreement exists at the time of or would arise after giving effect to any such distribution. We intend to retain operating capital for the growth of the companyCompany operations.
Equity Compensation Plan Information
The following table sets forth the outstanding equity instruments as of December 31, 2010:
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) | |||
Equity compensation plans approved by securityholders | 16,141,667 (1) | $0.13 | 11,468,000(1) | |||
Equity compensation plans not approved by securityholders | 638,812 (2) | $0.78 | ||||
| TOTAL | 16,780,479 | $0.15 | 11,468,000 |
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) | |||||||||
| Equity compensation plans approved by securityholders | 945,000 | (1) | $ | 1.98 | 2,289,153 | (1) | ||||||
| Equity compensation plans not approved by securityholders | 1,055,005 | (2) | – | |||||||||
| TOTAL | 2,000,005 | $ | 1.98 | 2,289,153 | ||||||||
| (1) | Represents 945,000 shares of common stock that may be issued upon exercise of outstanding options, pursuant to equity awards granted as of December 31, 2013 under the 2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan (the “Plan”) plus 2,289,153 additional shares of common stock available for future grant under the Plan. The total number of shares subject to grants and awards is 15 percent of issued and outstanding shares of common stock. The Plan was approved by security holders of our predecessor MediQuip Holdings, Inc. |
| (2) | Represents 1,055,005 shares of nonvested common stock. |
Item 7. (1) Represents approximately 31,100,000 sharesManagement’s Discussion and Analysis of common stock that may be issued pursuant to equity awards granted asFinancial Condition and Results of December 31, 2010, less 3,500,000 outstanding shares of restricted stock granted under the 2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan (the “Plan”) and approximately 11,468,000 additional shares of common stock available for future grant under the Plan. Shares available for grant is net of 3,500,000 restricted shares that were granted under the Plan to executives and employees in 2009 and 2010 (see additional discussion of terms and vesting under Executive Compensation). These restricted shares are included in the shares outstanding as of December 31, 2010. Under the Plan, the total number of shares subject to grants and awards is 15 percent of issued and outstanding shares of common stock. Effective in March 2010, we cancelled 2,000,000 outstanding options held by two executives which were scheduled to vest on February 14, 2011, and did not reissue any replacement options, thus increasing the number of securities available for future issuance. We recorded the remaining unamortized share-based compensation in March 2010 when the shares were cancelled. The Plan was approved by security holders of our predecessor MediQuip Holdings, Inc.Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, our actual results may differ materially from those anticipated in our forward-looking statements.
In this Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, all dollar and share amounts are in thousands of dollars and shares, unless otherwise indicated.
General
We are an oilfield services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, serving the worldwide offshore exploration and production industry. Our services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, ROVs and related services. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions. Our primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used between the platform and the wellhead. In connection with our JV, we install buoyancy modules on risers for deepwater drilling; we manufacture collars used with the riser buoyancy and we provide buoyancy repair and maintenance.
Industry and Executive Outlook
The timing of market recovery will depend upon several additional factors outside of our control, including the securing of permits, among other required approvals, necessary prior to commencement of deepwater operations in the GOM. Recently, several of our customers have received drilling permits. We expect our operations in the GOM will start improving sometime during the last half of 2011.
Our 2013 results were lower than planned primarily because of lower than anticipated revenues on a 3.5 MT portable umbilical carousel order, which we bought back from our customer at cost. This caused our revenues and productsnet income to be lower by $1,418. Additionally, our financial performance on a significant fixed-price order for a major oil company operating in Brazil was not as expected and ended up in a loss of $827. Finally, we had increased rent of $600 related to our new facility.
Nevertheless, we are very pleased with our continued success in obtaining new orders. The new facility has enabled us to expand our steel flying lead business, and we believe it will continue to grow and we will continue to focus on this sector of the industry worldwide.
Results of Operations
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2010 | 2009 | $ | % | |||||||||||||
| Revenues | $ | 42,471 | $ | 28,810 | $ | 13,661 | 47.4 | % | ||||||||
Revenues
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||||
| 2013 | 2012 | $ | % | |||||||||||||||
| Revenues | $ | 29,593 | $ | 29,034 | $ | 559 | 2% | |||||||||||
Revenues increased $13,661, or 47.4 percent, to $42,471 for the year ended December 31, 2010 from $28,8102013 were $29,593. Revenues for the previous year.year ended December 31, 2012 were $29,034. The $559 increase in revenues in the 2013 period was due to an increase of $1,871 in our subsea solutions services due to continued strong demand for our technologically innovative solutions, offset by a decrease of $1,312 in our ROV and topside equipment rental services due to decreased demand.
Cost of sales and gross profit
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||||
| 2013 | 2012 | $ | % | |||||||||||||||
| Cost of sales | $ | 20,879 | $ | 19,741 | $ | 1,138 | 6% | |||||||||||
| Gross Profit | $ | 8,714 | $ | 9,293 | $ | (579 | ) | (6)% | ||||||||||
| Gross Profit % | 29% | 32% | (3)% | |||||||||||||||
Gross profit for the year ended December 31, 2013 was $8,714, or 29 percent of revenues. Gross profit for the year ended December 31, 2012 was $9,293 or 32 percent of revenues. The $579, or 3 percentage-point decrease in gross profit in the 2013 period compared to the same period in 2012, was due primarily to generally higher demand fora $1,495 decrease related to our subsea solutions services, partially offset by a $916 improvement in our ROV and products, especiallytopside equipment rental services.
The $1,495 decrease related to our subsea solutions services occurred as a result of much lower than anticipated gross profit on two large fabrication projects. In addition, we incurred incremental rent expense on our new facility which we began leasing June 1, 2013. The $916 improvement in our ROV and topside equipment rental services resulted from the GOM and West Africa, leading to higher utilizationconsolidation of our personnel, equipment and ROVs, increased equipment and tooling rentals, greater output of engineered subsea projects (including installation support services) and increased manufacture of products for deepwater and ultra-deepwater projects.
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2010 | 2009 | $ | % | |||||||||||||
| Cost of sales | $ | 28,886 | $ | 19,888 | $ | 8,998 | 45.2% | |||||||||
| Gross Profit | $ | 13,585 | $ | 8,922 | $ | 4,663 | 52.3% | |||||||||
| Gross Profit % | 32.0% | 31.0% | 1.0% | |||||||||||||
We record depreciation expense related to revenue-generating fixed assetsproperty, plant and equipment as cost of sales, which totaled $2,327$1,425 and $1,615$1,317 for the years ended December 31, 20102013 and 2009, respectively. The increase2012, respectively. Depreciation included in 2010 resultedcost of sales increased $108 from 2012 to 2013 primarily as a result of the purchasescommencement of ROVs and other capital expendituresdepreciation of new assets acquired to increase capacity in 2010our capabilities and late in fiscal year 2009.
Selling, general and administrative expenses
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2010 | 2009 | $ | % | |||||||||||||
| Selling, general & administrative | $ | 13,963 | $ | 14,371 | $ | (408 | ) | (2.8)% | ||||||||
| Selling, general & administrative as a % of revenues | 32.9% | 49.9% | (17.0)% | |||||||||||||
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2013 | 2012 | $ | % | |||||||||||||
| Selling, general & administrative | $ | 8,769 | $ | 8,947 | $ | (178 | ) | (2)% | ||||||||
| Selling, general & administrative as a % of revenues | 30% | 31% | (1)% | |||||||||||||
Selling, general and administrative expenses (“SG&A”), as a percent of revenue, decreased 17.0% from the previous fiscal year. SG&A decreased $408 from the previous year, even though revenues for the same period increased by 47.4%. Now that we have completed the JV transaction, we will continue our cost containment program. During the year ended December 31, 2009, we reversed an accrual2013 was $8,769, or 30 percent of $586revenues. SG&A for registration penalty expense thatthe year ended December 31, 2012 was accrued during fiscal 2008.$8,947, or 31 percent of revenues. The effect$178, or 1 percent of this accrual reversalrevenues, decrease was driven primarily by $1,393 in 2009 indicates our SG&A actually declined by $994, which is a significant reduction in SG&A as a resultsavings realized from the previously mentioned consolidation of our cost containment program.
Depreciation and amortization expense (excluded from Cost of sales)
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2010 | 2009 | $ | % | |||||||||||||
| Depreciation | $ | 329 | $ | 343 | $ | (14 | ) | (4.1)% | ||||||||
| Amortization | 1,402 | 6,195 | (4,793 | ) | (77.4)% | |||||||||||
| Depreciation and amortization | $ | 1,731 | $ | 6,538 | $ | (4,807 | ) | (73.5)% | ||||||||
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2013 | 2012 | $ | % | |||||||||||||
| Depreciation expense excluded from Cost of sales | $ | 139 | $ | 140 | $ | (1 | ) | (1)% | ||||||||
| Amortization expense | 19 | 316 | $ | (297 | ) | (94)% | ||||||||||
| Total depreciation and amortization expense excluded from Cost of sales | $ | 158 | $ | 456 | $ | (298 | ) | (65)% | ||||||||
Depreciation expense excluded from cost of sales consists of depreciation related to our non-revenue generating property, plant and amortizationequipment. Depreciation expense excluded from cost of sales decreased $1 from 2012 to 2013.
Amortization expense consists primarily of depreciationamortization of our fixedintangible assets, that are not relatedincluding customer lists, trademarks, non-compete covenants, and patents. Amortization expense decreased $297 from 2012 to revenue generation, plus amortization2013 primarily as a result of the impairment of intangible assets includingrecorded in the fourth quarter of 2012.
Impairment of long-lived assets
In August 2012, we closed down our office in Morgan City, Louisiana, and consolidated the operations of Mako into Deep Down Delaware in Channelview, Texas. In November 2012, we evaluated Mako’s customer lists, technologytrademarks and trademarks. Depreciationnon-compete covenants in light of the consolidation and amortization expense, excluded from “Cost of sales” in the accompanying statements of operations, was $1,731 and $6,538 for the years ended December 31, 2010 and 2009, respectively.
Net interest expense
Net interest expense for the year ended December 31, 20102013 was $510 compared to $356 for the same prior year period.$195. Net interest expense for the yearsyear ended December 31, 2010 and 20092012 was $155. Net interest expense increased $40, due to higher interest-bearing debt balances. Net interest expense for each period was generated by our outstanding bank debt, capital leases and our outstanding subordinated debenture.
Equity in net (loss) income of net assets of wholly-owned subsidiary
Equity in net loss of joint venture
Other income (expense), net
Net other expense for the year ended December 31, 20102013 was comprised$188, and included $225 of acquisition and legal costs, which were partially offset by the recognition of a bargain purchase gain. There was no operating activity recorded in 2010. We recorded our 20% equity-method portion of CFT’s net loss in the amount of $254technology investment expense. Net other income for the year ended December 31, 2010.
Modified EBITDA
Our management evaluates our performance based on a non-GAAP measure, Adjusted EBITDA, which consists of earnings (net income or loss) available to common shareholders before cumulative effect of accounting change, net interest expense, income taxes, non-cash stockshare-based compensation expense, equity in net income or loss of joint venture, non-cash impairments, depreciation and amortization, other non-cash items and one-time charges.charges (“Modified EBITDA”). This measure may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with U.S.US GAAP. The measure should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing or financing activities, or other cash flow data prepared in accordance with U.S.US GAAP. The amounts included in the AdjustedModified EBITDA calculation, however, are derived from amounts included in the accompanying consolidated statements of operations data.
We believe AdjustedModified EBITDA is useful to an investorinvestors in evaluating our operating performance because it is widely used by investors in our industry to measure a company’s operating performance, without regard to items such as income taxes, net interest expense, depreciation and amortization, non-cash impairment, non-cash stock compensation expense, non-cash impairments, other non-cash items and one-time charges which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired; itacquired. It helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest) and; asset base (primarily depreciation and amortization) and; actions that do not affect liquidity (stock(share-based compensation expense, goodwill impairment andequity in net income or loss on contribution of assets of a wholly-owned subsidiary)joint venture) from our operating results; and it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase or acquisition in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.
The following is a reconciliation of net loss(loss) income to AdjustedModified EBITDA for the years ended December 31, 20102013 and 2009:
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2010 | 2009 | $ | % | |||||||||||||
| Net loss | $ | (17,415 | ) | $ | (16,781 | ) | $ | (634 | ) | (3.8 | )% | |||||
| Add back interest expense, net of interest income | 510 | 356 | 154 | 43.3 | % | |||||||||||
| Add back depreciation and amortization | 4,058 | 8,154 | (4,096 | ) | (50.2 | )% | ||||||||||
| Add back income tax expense (benefit) | 175 | (1,026 | ) | 1,201 | 117.1 | % | ||||||||||
| Add back loss on contribution of net assets of wholly-owned subsidiary | 10,119 | - | 10,119 | 100.0 | % | |||||||||||
| Add back share-based compensation | 727 | 836 | (109 | ) | (13.0 | )% | ||||||||||
| Add back goodwill impairment | 4,513 | 5,537 | (1,024 | ) | (18.5 | )% | ||||||||||
| Adjusted EBITDA | $ | 2,687 | $ | (2,924 | ) | $ | 5,611 | 191.9 | % | |||||||
| Year Ended December 31, | |||||||||
| 2013 | 2012 | ||||||||
| Net (loss) income | $ | (595 | ) | $ | (2,454 | ) | |||
| Add back interest expense, net of interest income | 195 | 155 | |||||||
| Add back depreciation and amortization | 1,583 | 1,773 | |||||||
| Add back income tax (benefit) expense | (18 | ) | 52 | ||||||
| Add back share-based compensation | 610 | 554 | |||||||
| Add back impairment of long-lived assets | – | 2,156 | |||||||
| Add back (deduct) bad debt expense (credit) | 61 | 1,134 | |||||||
| Add back non-recurring operational consolidation expense | – | 240 | |||||||
| Adjustment for estimated revenue reduction due to buy-back of fabricated asset | 1,418 | (1,418 | ) | (1) | |||||
| Add back technology investment expense | 225 | – | |||||||
| Add back equity in net loss of joint venture | 16 | 179 | |||||||
| Modified EBITDA | $ | 3,495 | $ | 2,371 | |||||
________________
(1) Modified EBITDA was $2,687 for the year ended December 31, 2010 compared2012 has been adjusted to $(2,924)include this transaction in order to enhance comparability of the measurement between periods.
Modified EBITDA was $3,495 for the previous year. The $5,611 improvementyear ended December 31, 2013. Modified EBITDA was $2,371 for the year ended December 31, 2012. Modified EBITDA increased $1,124 from the 2012 period to the 2013 period primarily drivendue to a $2,235 increase in gross profit before estimated revenue reduction due to the buy-back of a fabricated asset, non-recurring operational consolidation expense and depreciation, offset by improved operationsan increase of $949 in SG&A before share-based compensation, bad-debt provision, and reduced costs, particularlynon-recurring operational consolidation expense, and a decrease of $162 in the second half of the year.
| 12 |
Liquidity and Capital Resources and Liquidity
Overview
During ourthe fiscal years ended December 31, 20102013 and 2009,2012, we have supplemented the financing of our capital needs primarily through a combination of debt and equity financings. Most significant in this regard has been our debt facility
Credit Facility
Since 2008, we have maintained a credit facility (the “Facility”) with Whitney National Bank, a state chartered bank (“Whitney”). Our loans The Facility has been amended and restated several times, most recently on March 5, 2013. The current relevant terms of the Facility include:
| · | a committed amount under the revolving credit facility (“Revolving Credit Facility”) of $5,000, at an interest rate of 4.0 percent annum, maturing April 15, 2014; |
| · | a real estate term facility (“RE Term Facility”) of $2,000, at an interest rate of 4.0 percent annum, maturing April 15, 2018, with the Company obligated to make monthly increasing repayments of principal (along with accrued and unpaid interest thereon) starting at $8, beginning April 1, 2013; and |
| · | outstanding balances under the Facility are secured by all of the Company’s assets. |
As of December 31, 2013, the Company’s indebtedness under the AmendedRevolving Credit Facility and Restated Credit Agreement with Whitney (the “Restated Credit Agreement”) become due on April 15, 2012. We will need to raise additional debt or equity capital or renegotiate the existing debt prior to such date.RE Term Facility was $0 and $1,917, respectively. We are currently in discussions with several lenders who have expressed interest in refinancing our debt. Our plan is to refinance the outstanding indebtedness under the Restated Credit Agreement or seek termsnegotiations with Whitney that will providefor an extension of such Restatedthe Revolving Credit Agreement along with additional liquidity. However,Facility beyond the current April 15, 2014 maturity. We are confident that we cannot provide any assurance that any financing will be availableable to reach an agreement regarding this extension on or before April 15, 2014.
Our credit agreement with Whitney obligates us on acceptable terms or at all. If we are unable to raise additional capital or renegotiate our existing debt, this would have a material adverse impact on our business or would raise substantial doubt about our ability to continue as a going concern. In addition tocomply with the foregoing,following financial covenants:
| · | Leverage Ratio - The ratio of total debt to consolidated EBITDA must be less than 3.0 to 1.0; actual Leverage Ratio as of December 31, 2013: 2.78 to 1.0. |
| · | Fixed Charge Coverage Ratio -The ratio of consolidated EBITDA to consolidated net interest expense, plus principal payments on total debt, must be greater than 1.5 to 1.0; actual Fixed Charge Coverage Ratio as of December 31, 2013: 1.51 to 1.0. |
| · | Tangible Net Worth - Our consolidated net worth, after deducting other assets as are properly classified as “intangible assets,” plus 50 percent of net income, after provision for taxes, must be in excess of $13,000; actual Tangible Net Worth as of December 31, 2013: $25,344. |
| · | Moreover, we continue to have obligations for other covenants, including, among others, limitations on issuance of common stock, liens, transactions with affiliates, additional indebtedness and permitted investments. |
As of December 31, 2010,2013 and 2012, we were not in compliance with all of the financial covenants under the Restated Credit Agreement. covenants.
Other Debt
On March 25, 2011November 5, 2013, we obtainedentered into a waiverPurchase and Sale Agreement with a customer to buy back a 3.5 metric ton portable umbilical carousel, which we had fabricated specifically for these covenants asthis customer. Such Purchase and Sale Agreement calls for purchase price of $3,293 to be paid in 24 monthly installments of $137.2, commencing November 5, 2013 through October 5, 2015. The obligation is non-interest bearing. The balance of this debt at December 31, 2010.
Private Placement
During the factors described above create uncertainty, if our planned financial results are achievedthird quarter of 2013, we issued an additional 4,444 shares of common stock resulting in net cash proceeds of $7,628.
As a result of the Credit Facility, the Private Placement and cash we expect to generate from operations, we believe that we will have adequate liquidity to meet our future operating requirements, and we believe we will be able to raise additional capital or renegotiate our existing debt.
Summary of capital financing for our fiscal year ended December 31, 2010.
Principles of $2,000 or 80 percent of eligible receivables. All of this commitment was also available for Whitney to issue letters of credit (“L/C”) for our benefit. In December 2008, we entered into an amendment of the credit agreement that provided for us to receive a term loan in the principal amount of $1,150. Then, in May 2009, we entered into another amendment to the credit agreement providing for us to receive another term loan in the principal amount of $2,100. We used the proceeds from the December 2008 term loan to purchase a piece of equipment (a remotely operated vehicle) and we used the proceeds of the May 2009 term loan to purchase real property in Channelview, Texas. There was $850 outstanding under the revolving credit line available on December 31, 2009. We also used the credit agreement to have Whitney issue an irrevocable transferable standby L/C in the ordinary course of business, with an annual commission rate of 2.4 percent for $1,107 during the year ended December 31, 2009 (which such L/C related to a large contract we expect to have completed during 2011). The Restated Credit Agreement does not obligate Whitney to issue new L/Cs. However on September 1, 2010, Whitney did renew the aforementioned L/C under the same terms for a period of one year to expire on August 31, 2011. We paid the annual commission in advance, and the L/C will remain in effect until it expires.
The consolidated financial statements include the accounts of Deep Down Inc. and its wholly-owned subsidiaries.
Use of Estimates
The preparation of financial statements in consolidation.conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| 13 |
Segments
For the years ended December 31, 2013 and 2012, our operating segments, Deep Down Delaware and Mako have been aggregated into a single reporting segment. In August 2012, we consolidated the operations of Accounts Receivable
Long-Lived Assets
Property, plant and equipment. Property, plant and equipment is recognized as the servicestated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is provided, and “time and material” contracts are billed on a bi-weekly or monthly basis as costs are incurred. Customer billings for shipping and handling charges are included in revenue.
Goodwill. Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in which such losses are determined. Changes in job performance, job conditions, and total contract valuesa business combination. Goodwill is not subject to amortization, but is tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may result in revisions to costs and income and are recognizedinclude an adverse change in the period in which the revisions are determined. Unapproved change orders are accounted for in revenue and cost when it is probable that the costs will be recovered throughbusiness climate or a change in the contract price. Inassessment of future operations of a reporting unit.
The Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances where recoveryexist that indicate it is considered probable butmore likely than not that the revenues cannot be reliablyfair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative assessment or two-step impairment test is performed to determine whether goodwill impairment exists at the reporting unit.
The first step is to compare the estimated costs attributablefair value of each reporting unit with goodwill to change orders are deferred pending determinationits carrying amount, including goodwill. To determine fair value estimates, the Company uses the income approach based on discounted cash flow analyses, combined with a market-based approach. The market-based approach considers valuation comparisons of contract price.
There was no impairment of goodwill for the years ended December 31, 2013 and 2012. The quantitative assessment of goodwill we performed as of December 31, 2013 demonstrated that our goodwill’s fair value exceeded its carrying value by $1,350. Not achieving the financial performance estimates used in calculating the fair value may give rise to a future impairment.
Other intangible assets. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related costs have not yet been incurred.
We test for the impairment of long-livedother intangible assets upon the occurrence of a triggering event. We base our evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If these impairment indicators are present or other factors exist that indicate the carrying amount of an asset may not be recoverable, we determine whether an impairment has occurred through the use of an undiscounted cash flowsflow analysis of the asset at the lowest level for which identifiable cash flows exist. The undiscounted cash flow analysis consists of estimating the future cash flows that are directly associated with and expected to arise from the use and eventual disposition of the asset over its remaining useful life. These cash flows are inherently subjective and require significant estimates based upon historical experience and future expectations reflected in our budgets and internal projections. If the undiscounted cash flows do not exceed the carrying value of the long-lived asset, an impairment has occurred, and we recognize a loss for the difference between the carrying amount and the estimated fair value of the asset. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, is based on an estimate of discounted cash flows. Cash flows are generally discounted at an interest rate commensurate with our weighted average cost of capital for a similar asset.
In August 2012, we closed down our office in Morgan City, Louisiana, and consolidated the conditionsoperations of Mako into Deep Down Delaware in Channelview, Texas. In November 2012, we evaluated Mako’s customer lists, trademarks and concluded, asnon-compete covenants in light of December 31, 2009,the consolidation and determined that a triggering event had occurred that required an impairment analysis of long-livedthese other intangible assets (see further discussion below related to Goodwill annual testing). Forhad no future economic benefit. As a result, in the year ended December 31, 2009,2012, we recorded impairment charges totaling $4,616expense of $2,156 primarily to several long-lived intangible assets, which total impairment charges were recorded onwrite-off the statement of operations as amortization expense. There was no impairment of long-lived assets for the year ended December 31, 2010.
Revenue Recognition
We recognize revenue once the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery of the equipment has occurred or services have been rendered, (iii) the price of the equipment or service is fixed and determinable and (iv) collectability of the related receivable is reasonably assured. Service revenue is recognized as the service is provided, and time and materials contracts are billed on December 31a bi-weekly or monthly basis as costs are incurred. Customer billings for shipping and between annual evaluations if events occur or circumstances change that wouldhandling charges are included in revenue. Revenues are recorded net of sales taxes.
From time to time, we enter into fixed-price contracts. The percentage-of-completion method is used as a basis for recognizing revenue on these contracts. We recognize revenue as costs are incurred because we believe the incurrence of cost reasonably reflects progress made toward project completion.
Provisions for estimated losses on uncompleted fixed-price contracts (if any) are recorded in the period in which it is determined it is more likely than not reducea loss will be incurred. Changes in job performance, job conditions, and total contract values may result in revisions to costs and income and are recognized in the fair valueperiod in which the revisions are determined. Unapproved change orders are accounted for in revenue and cost when it is probable that the costs will be recovered through a change in the contract price. In circumstances where recovery is considered probable but the revenues cannot be reliably estimated, costs attributable to change orders are deferred pending determination of contract price.
Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis but cannot be invoiced under the terms of the reporting unit below its carrying amount.contract. Such circumstances could include a significant adverse changeamounts are invoiced upon completion of contractual milestones. Billings in legal factors or in business orexcess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the business climate or unanticipated competition.
Assets and Goodwill" to the consolidated financial statements for a discussion of testing inputs and assumptions. We recognized a goodwill impairment of $3,056 for Deep Down Delaware, $2,481 for Mako and $0 for Flotation for the year ended December 31, 2009. Remaining goodwill by reporting unit was $4,472, $2,874 and $2,083 for the Deep Down Delaware, Mako and Flotation reporting units, respectively, as of December 31, 2009.
Income Taxes
We follow the asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Our effective tax rates for 2010 and 2009 were (1.0) percent, and 5.98 percent, respectively.
We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the future. This requires management to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider all reasonably available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of future state, and federal pretaxpre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made, either to income or goodwill, depending upon when that portion of the valuation allowance was originally created.
We record an estimated tax liability or tax benefit for income and other taxes based on what we determine will likely be paid in the various tax jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent upon various matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to the estimated liability would be recorded as a provision or benefit to income tax expense in the period in which it becomes probable that the amount of the actual liability or benefit differs from the recorded amount.
Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. If and when our deferred tax assets are no longer fully reserved, we will begin to provide for taxes at the full statutory rate. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
Share-Based Compensation
We record share-based payment awards exchanged for employee service at fair value on the date of grant and expense the awards in the consolidated statements of operations over the requisite employee service period. Share-based compensation expense includes an estimate for forfeitures and is generally recognized over the expected term of the award on a straight-line basis. At December 31, 2013, we had two types of share-based employee compensation: stock options and restricted stock. In addition to employee service, the restricted stock awards also have a performance component.
Key assumptions used in the Black-Scholes model for stock option valuations include (1) expected volatility (2) expected term (3) discount rate and (4) expected dividend yield. Since we do not have a sufficient trading history to determine the volatility of our own stock, we based our estimates of volatility on a representative peer group consisting of companies in the same industry, with similar market capitalizations and similar stage of development. Additionally, we continue to use the simplified method related to employee option grants.
Earnings or Loss per Common Share
Basic earnings or loss per common share (“EPS”) is calculated by dividing net earnings or loss by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net earnings or loss by the weighted average number of common shares and dilutive common stock equivalents (stock options and warrants) outstanding during the period. Diluted EPS reflects the potential dilution that could occur if stock options and warrants to purchase common stock were exercised for shares of common stock. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Recent Accounting Pronouncements
Recent Accounting Pronouncements are included in “Part II, Item 8. Financial Statements” Note 1, “Description of Business and Summary of Significant Accounting Policies”, to the consolidated financial statements “Summary of Significant Accounting Policies.”
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Inflation and Seasonality
We do not believe that our operations are significantly impacted by inflation. Our business is not seasonal in nature.
ITEMItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The financial statements and schedules are included herewith commencing on page F-1.
F-1 | |
| Consolidated Balance Sheets – December 31, 2013 and 2012 | F-2 |
| Consolidated Statements of Operations – Years ended December 31, 2013 and 2012 | F-3 |
Consolidated Statements of Changes in Stockholders’ Equity – Years ended December 31, 2013 and 2012 | F-4 |
| Consolidated Statements of Cash Flows – Years ended December 31, 2013 and 2012 | F-5 |
| Notes to Consolidated Financial |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
| 17 |
Item 9A. ITEMControls and Procedures
Material Weakness Related to Percentage-of-Completion Accounting 9.for Fixed-Price Contracts.During the audit of our financial statements for the year ended December 31, 2012, we identified a control deficiency related to our percentage-of-completion (“POC”) accounting associated with fixed-price contracts. We concluded that the Company's processes, procedures and internal controls were not effective to ensure that, in general, amounts related to the revenue and costs associated with these contracts could be accounted for in accordance with generally accepted accounting principles. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Specifically, we determined that there was: (i) failure to account for a significant fixed-price contract using POC accounting; (ii) incorrect total contract revenue values input into the POC schedules; (iii) inaccurate cost-to-complete estimates; and (iv) intermingling of revenues and costs from contracts containing both fixed-price and time and expense components.
We established that these deficiencies resulted from: (i) lack of effective communication between operations and accounting personnel; (ii) lack of effective management review of contract terms; and (iii) lack of effective management review of the POC revenue recognition calculations.
During 2013, we effectively implemented the following internal controls and procedures over our POC accounting for fixed-price contracts:
| · | Addition of a contracts financial analysis function within project management to ensure: |
| o | Timely and accurate preparation of initial and updated detailed cost estimates and POC schedules for fixed- price contracts; |
| o | Proper segregation of accounting for time and materials aspects from POC aspects of contracts containing both; |
| o | Effective management review of contract terms; |
| o | Effective communication with accounting personnel; and |
| o | Effective management review of the POC revenue recognition calculations. |
For these reasons, we believe we have successfully remediated this material weakness as of December 31, 2013.
Evaluation of Disclosure Controls and Procedures
.The Company’s management, with the participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2013, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2013.
Management’s Report on Internal Control Over Financial Reporting.
Item
None.
PART III
Management’s remediation plans. ItemIn our efforts to continuously improve our internal controls, management has taken steps to enhance the following controls 10. Directors, Executive Officers and procedures subsequent to December 31, 2010 as part of our remediation efforts in addressing the material weaknesses above:Corporate Governance
The following table sets forth the names, ages and positions of our directors and executive officers.
| Name | Age | Position Held With Deep Down | |||
Ronald E. Smith (1) | President, Chief Executive Officer and Director | ||||
Eugene L. Butler | Executive Chairman and Chief Financial Officer | ||||
Mary L. Budrunas (1) | Vice President, Corporate Secretary and Director | ||||
| Director | |||||
_________________________
(1) Mr. Butler was appointed our Executive Chairman of the Board effective September 1, 2009. Effective April 29, 2010, in connection with Gay Mayeux’s appointment as Chief Financial Officer, the Board accepted the resignation of Mr. Butler as Chief Financial Officer. We continued to employ Mr. Butler as Executive Chairman of the Board under the Employment Agreement dated January 1, 2010. Mr. Butler was then was reappointed as Chief Financial Officer upon Ms. Mayeux’s departure, effective January 24, 2011.
Biographical information regarding each of our directors and named executive officers is as follows. The following paragraphs also include specific information about each director’s experience, qualifications, attributes or skills that led the Board of Directors to the conclusion that the individual should serve on the Board as of the time of this filing, in light of our business and structure:
Ronald E. Smith, President, Chief Executive Officer and Director
. Mr. Smith co-founded Deep Down in 1997 and has served as our Chief Executive Officer, President and Director since December 2006. Prior to December 2006, Mr. Smith was Deep Down’s President. Mr. Smith graduated from Texas A&M University with a Bachelor of Science degree in Ocean Engineering in 1981. Mr. Smith worked both onshore and offshore in management positions for Ocean Drilling and Exploration Company (ODECO), Oceaneering Multiflex, Mustang Engineering and Kvaerner before founding Deep Down. Mr. Smith’s interests include all types of offshore technology, nautical innovations, state of the art communications, diving technology, hydromechanics, naval architecture, dynamics of offshore structures, diving technology and marketing of new or innovative concepts. Mr. Smith is directly responsible for the invention or development of many innovative solutions for the offshore industry, including the first steel tube flying lead installation system.Mr. Smith is qualified for service on the Board due to his extensive background in many aspects of the offshore industry, spanning almost three decades. Mr. Smith’s wide range of knowledge and experience with the various technologies and platforms in the deepwater industry brings invaluable expertise to our Board.
Eugene L. Butler, Executive Chairman and Chief Financial Officer.
In addition to his extensive knowledge of us,Deep Down, Mr. Butler is qualified for service on the Board based on his leadership skills and long-standing senior management experience in the energy and petroleum industries. Additionally, his background in public accounting and investment banking, familiarity with complex accounting issues and financial statements, as well as his service on the board, including various committees, of another public company, provide invaluable financial expertise and overall insight to our Board.
Mary L. Budrunas, Vice-President, Corporate Secretary and Director.
Ms. Budrunas, co-founder of Deep Down, Inc. along with current chief executive officer Ronald E. Smith,Ms. Budrunas is qualified for service on the Board based on her extensive oil and gas industry experience. Such expertise provides valuable insight to the Board.
Randolph W. Warner, Director. Mr. Newbury joined Deep Down in March 2009 in the role of Corporate Business Development Manager, bringing more than 19 years of international experience and relationships in offshore business development, sales and marketing, and subsea service project support. Mr. Newbury’s initial role at Deep Down was the improvement in our marketing, sales and commercial aspects, additionally to oversee large project opportunities and to strengthen our contractual functions. In February 2010, Mr. Newbury was promoted to Vice President Business Development and was tasked with the additional responsibilities of corporate operations and interfacing with all of our business units. Prior to joining us, Mr. Newbury held various positions with increasing authority and responsibility with such companies as Subsea 7 from 2002 to 2009, a $2 billion multi-national service and equipment corporation serving the worldwide energy market, General Manager, North and Central America – i-Tech Division, Commercial Manager, North and Central America – ROV, Survey & DGPS, Business Development Manager, North America; Halliburton Subsea (US) 1999 – 2002, Senior Manager – Business Development, Operations Project Manager – ROV and Marine; Subsea International (US) 1997 – 1999, Safety, Quality and Environmental Group Manager & Human Resources & Payroll Manager, and Subsea Offshore Limited (Great Yarmouth and Aberdeen UK) 1990-1997, General Manager, HSEQ Global Manager, Quality Assurance Global Manager, Quality Assurance Engineer. Mr. Newbury has worked in most major oil producing regions of the world, including the Gulf of Mexico, Central America, North Sea, Asia, and Australia. Mr. Newbury’s main areas of focus over the past eight years have been in offshore business development, tendering, and contract negotiation. Mr. Newbury graduated in 1990 with a Bachelor of Science in Business Management.
Mr. HollingerWarner is
Corporate Governance
Code of BusinessEthics
The Company has adopted Codes of Ethical Conduct that apply to promote honest and ethical conduct and compliance with applicable laws, rules, regulations and standards on the part of our board of directors. This code addresses several matters, including conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of Company assets, compliance with laws, rules and regulationsall its directors, officers (including insider trading laws), and encouraging the reporting of any illegal or unethical behavior. We have also adopted Financial Officer’s Code of Business Conduct to promote honest and ethical conduct, proper disclosure of financial information in the Company’s periodic reports, and compliance with applicable laws, rules, and regulations by the Company’s officers and management personnel, including the Company’sits chief executive officer, chief financial officer, controller and controller.any person performing such functions) and employees. The policies established by this code are aimed at preventing wrongdoingCompany has previously filed copies of these Codes of Ethical Conduct and at promoting honest and ethical conduct, including ethical handling of actual and apparent conflicts of interest, the full, fair, accurate, timely and understandable disclosure in public communications, compliance with applicable laws, rules and regulations, and accountability for adherencethey can be located pursuant to the code through prompt internal reporting of violationsinformation shown in the Exhibit list items 14.1 and 14.2 to this Report. Copies of the code.
The Company’s Board of Directors wasis responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of ourthe Company's financial statements and other services provided by ourthe Company’s independent public accountants. We created an Audit Committee in April 2010 who will perform these functions. The Board of Directors reviews ourthe Company's internal accounting controls, practices and policies. Our Board of Directors has determined that Mr. Hollinger, Chairman of the Audit Committee,Warner qualifies as an independent audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to us or written representations of our officers and directors, we believe that all Section 16(a) filing requirements were filed on a timely basis, except basis.
that Mr. NewburyItem 11. Executive Compensation
As a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K, we have elected to follow scaled disclosure requirements for smaller reporting companies with respect to the disclosures required by Item 402 of Regulation S-K. Under the scaled disclosure requirements, the Company is not required to provide a Compensation Discussion and Mr. Hollinger were each not timely in the filing of one Form 3, Mr. Hollinger was not timely in the filing of two Form 4sAnalysis, Compensation Committee Report and Ms. Budrunas was not timely in the filing of one Form 5.
The following table sets forth information concerning the total compensation earned in the years ended December 31, 20102013 and 20092012 by our ChiefPrincipal Executive Officer and(“PEO”), our threetwo highest compensated executive officers other than our CEO, which included onePEO and another individual for whom disclosure would have been provided under this Item but for the fact such person was not an executive who resigned in January 2011officer at December 31, 2013 (collectively, our “Named Executive Officers” or “NEOs”).
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) (6) | Stock Awards ($) (1) | Option Awards ($) (1) | All Other Compensation ($) (2) | Total | ||||||||||||||||||
| Ronald E. Smith | 2010 | $ | 362,250 | $ | - | $ | - | $ | - | $ | 18,000 | $ | 380,250 | ||||||||||||
| President and Chief Executive Officer | 2009 | $ | 345,000 | $ | - | $ | 93,000 | $ | - | $ | 12,000 | $ | 450,000 | ||||||||||||
| Eugene L. Butler | 2010 | $ | 325,500 | $ | - | $ | - | $ | - | $ | 46,817 | $ | 372,317 | ||||||||||||
| Executive Chairman and Chief Financial Officer (3) | 2009 | $ | 310,000 | $ | - | $ | 93,000 | $ | 771,600 | $ | 24,348 | $ | 1,198,948 | ||||||||||||
| Gay Stanley Mayeux | 2010 | $ | 163,462 | $ | - | $ | 87,500 | $ | 61,600 | $ | 12,000 | $ | 324,562 | ||||||||||||
| Vice President and Chief Financial Officer (4) | 2009 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Michael J. Newbury | 2010 | $ | 190,000 | $ | - | $ | - | $ | 18,150 | $ | 12,000 | $ | 220,150 | ||||||||||||
Vice President of Operations and Business Development (5) | 2009 | $ | 109,615 | $ | - | $ | - | $ | - | $ | - | $ | 109,615 | ||||||||||||
| Name and Principal Position | Year | Salary | Bonus | Stock Awards | Option Awards | All Other Compensation (1) | Total | |||||||||||||||||||||
| Ronald E. Smith, | 2013 | $ | 412,096 | $ | – | $ | 812,000 | $ | – | $ | 68,143 | $ | 1,292,239 | |||||||||||||||
| President and Chief Executive Officer | 2012 | $ | 386,250 | $ | 2,500 | $ | – | $ | – | $ | 19,500 | $ | 408,250 | |||||||||||||||
| Eugene L. Butler, | 2013 | $ | 362,423 | $ | – | $ | 609,000 | $ | – | $ | 64,440 | $ | 1,035,863 | |||||||||||||||
| Executive Chairman and Chief Financial Officer | 2012 | $ | 349,500 | $ | – | $ | – | $ | – | $ | 44,037 | $ | 393,537 | |||||||||||||||
| Ira B. Selya, Corporate Controller | 2013 | $ | 184,404 | $ | – | $ | – | $ | – | $ | – | $ | 184,404 | |||||||||||||||
| Michael J. Newbury, | 2013 | $ | 54,808 | $ | – | $ | – | $ | – | $ | 15,309 | $ | 70,117 | |||||||||||||||
| Vice President (2) | 2012 | $ | 190,000 | $ | – | $ | – | $ | – | $ | 12,000 | $ | 202,000 | |||||||||||||||
| (1) | Amounts in 2013 represent: |
| · | Automobile allowances of $19,500, $19,500 and $3,462 to Messrs. Smith, Butler and Newbury, respectively; |
| · | Payments for vacation not taken in 2013 of $48,643, $14,365 and $11,847 for Messrs. Smith, Butler and Newbury, respectively; |
| · | Reimbursement of $16,775 to Mr. Butler for federal and state payroll withholdings customarily withheld for an employee; and |
| · | Reimbursement of $13,800 to Mr. Butler for healthcare premiums. |
| (2) | Mr. | |
Narrative Disclosure to Summary Compensation Table
Employment agreements with Named Executive Officers
All of the compensation described in the foregoing table, other than those amounts shown in the “Bonus”, “Stock Awards” and “Option Awards” columns, was paid to the NEOsNamed Officers pursuant to agreements with Deep Down.
Agreement with Mr. Smith has. On January 1, 2010, the Company entered into an employment agreement to serve as our President and Chief Executive Officer, which provided initiallywith Mr. Smith for annual cash compensation of $345,000, and a monthly vehicle allowance of $1,000. Effective January 1, 2010, Mr. Smith’s annual cash compensation was increased to $362,250, and a monthly vehicle allowance of $1,500. The term of Mr. Smith’s employment agreement is through January 1, 2013,three years, and is subject to further automatic renewals for annual periods up to an additional two years.
Agreement with Mr. Butler. On January 1, 2010, Mr. Butler’s consulting agreement was replaced bythe Company entered into an employment agreement. The employment agreement provides forwith Mr. Butler to receive cash compensation of $325,500 andfor a monthly vehicle allowance of $1,500. The term of Mr. Butler’s employment agreement is through January 1, 2013,three years, and is subject to further automatic renewals for annual periods up to an additional two years.
Agreement with Mr. Newbury. On March 15, 2013, Mr. Newbury notified the Company that he would resign as Vice President effective March 28, 2013 to pursue other opportunities. At the time of Mr. Newbury’s departure, the employment agreement was through January 1, 2013; Ms. Mayeux resigned from the Company effective January 24, 2011.
The amounts included for 20092013 in the “Stock Awards” column above reflect grantsawards of 750,000 restricted shares of our common stock, provided to each of Messrs. Smith, and Butlerwhich were granted on March 23, 2009 underJune 5, 2013, which will vest in one-third increments on the Plan. Eachnext three anniversary dates of the grantsdate of grant. Vesting is dependent on continued employment with Deep Down on the anniversary dates. The restricted shares of our common stock vested in its entirety on March 23, 2011.
Outstanding Equity Awards at December 31, 2010
The following tables present information regarding thetable summarizes outstanding equitystock option awards held by each of the NEOsclassified as exercisable and unexercisable as of December 31, 2010. Mr. Smith had no outstanding option2013 for our Named Officers. The table also summarizes nonvested stock awards assuming a market value of $2.06 per share (the closing market price of the Company’s stock on that date.
| Name | Option Grant Date | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable (#) | Option Exercise Price ($/Sh) | Option Expiration Date | |||||
| Eugene L. Butler | 9/1/2009 | 3,333,333 | 6,666,667 (1) | 0.10 | 9/1/2014 | |||||
| 3/23/2009 | 666,667 | 1,333,333 (2) | 0.12 | 3/23/2014 | ||||||
| Gay Stanley Mayeux | 4/29/2010 | - | 1,000,000 (3) | 0.11 | 4/29/2015 | |||||
| Michael J. Newbury | 2/19/2010 | - | 250,000 (4) | 0.12 | 2/19/2015 |
| OPTION AWARDS | STOCK AWARDS | |||||||||||||||||||||
| Number of Securities Underlying Unexercised Options | Number of Securities Underlying Unexercised Options | Option Exercise Price | Option Expiration | Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock that Have Not Vested | |||||||||||||||||
| Name | Exercisable (#) | Unexercisable (#) | ($)(1) | Date (2) | (#)(3) | ($) | ||||||||||||||||
| Ronald E. Smith | 83,334 | 41,666 | 1.80 | 6/8/2016 | 41,667 | 85,834 | ||||||||||||||||
| 400,000 | 824,000 | |||||||||||||||||||||
| Eugene L. Butler | 83,334 | 41,666 | 1.80 | 6/8/2016 | 41,667 | 85,834 | ||||||||||||||||
| 500,000 | – | 2.00 | 9/1/2014 | |||||||||||||||||||
| 100,000 | – | 2.40 | 3/23/2014 | |||||||||||||||||||
| 300,000 | 618,000 | |||||||||||||||||||||
| Ira B. Selya | 25,000 | 12,500 | 1.80 | 6/8/2016 | 12,500 | 25,750 | ||||||||||||||||
| (1) | The |
| (2) | Each option |
| The restrictions on these shares of |
| Name | Award Grant Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock that Have Not Vested ($)(1) | Number of Shares or Units of Stock That Vested (#) | Market Value of Shares or Units of Stock that Have Vested ($)(1) | |||||
| Ronald E. Smith | 3/23/2009 | 750,000 | (2) | $60,000 | - | - | ||||
| 2/14/2008 | 350,000 (3) | $28,000 | ||||||||
| Eugene L. Butler | 3/23/2009 | 750,000 | (2) | $60,000 | - | - | ||||
| 2/14/2008 | 350,000 (3) | $28,000 | ||||||||
| Gay Stanley Mayeux | 5/25/2010 | 1,000,000 | (4) | $80,000 | - | - |
Benefits payable upon change in control
Each of Mr. Butler’s and Mr. Smith’s (the “Executive”) employment agreements contain provisions related to change in control. Ms. Mayeux’ employment agreement contained the same provisions, however her agreement was terminated in connection with her departure in January 2011.
In the event of termination of the Executive’s employment for any reason, he will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which the Executive is entitled or vested under the terms of all employee benefit and compensation plans, agreements and arrangements in which the Executive is a participant as of the date of termination. In addition, subject to executing a general release in favor of us, the Executive will be entitled to receive certain severance payments in the event his employment is terminated by the Company “other than for cause” or by the Executive with “good reason.” These severance payments include the following:
(i) a lump sum in cash equal to one times the Executive’s annual base salary (at the rate in effect on the date of termination), provided, however, that isif such termination occurs prior to the date that is twelve months following a change of control, then such payment will be equal to three times the Executive’s annual base salary (at the rate in effect on the date of termination);
(ii) a lump sum in cash equal to the average annual bonus paid to the Executive for the prior two full fiscal years preceding the date of termination; provided, however, that isif such termination occurs prior to the date that is twelve months following a change of control, then such payment will be equal to two times the average annual bonus paid to the Executive for the prior two full fiscal years preceding the date of termination;
(iii) a lump sum in cash equal to a pro rata portion of the annual bonus payable for the period in which the date of termination occurs based on the actual performance under our annual incentive bonus arrangement; provided, however, that such pro rata portion shall be calculated based on the Executive’s annual bonus for the previous fiscal year; provided further thatbut if no previous annual bonus has been paid to the Executive, then the lump sum cash payment for this current pro rata annual bonus obligation shall be no less than fifty percent of Executive’ annual base salary; and
(iv) if the Executive’s termination occurs prior to the date that is twelve months following a Changechange of Control (as defined in the Employment Agreement),control, then each and every share option, restricted share award and other equity-based award that is outstanding and held by the Executive shall immediate vest and become exercisable.
Each of the Executives have agreed to not, during the respective term of his employment and for a one-year period after his termination, engage in Competition“Competition” (as defined in the Employment Agreement) with us, solicit business from any of our customer or potential customers, solicit the employment or services of any person employed by or a consultant to us on the date of termination or with six months prior thereto, or otherwise knowingly interfere with our business or accounts or any of our subsidiaries.
The Employment Agreements also provide that we, to the extent permitted by applicable law and our by-laws, will defend, indemnify and hold harmless the Executive from any and all claims, demands or causes of action, including reasonable attorneys’ fees and expenses, suffered or incurred by the Executive as a result of the assertion or filing of any claim, demand, litigation or other proceedings based upon statements, acts or omissions made by or on behalf of the Executive pursuant to the Employment Agreement or in the course and scope of the Executive’s employment with us. We will also maintain and pay all applicable premiums for directors’ and officers’ liability insurance which shall provide full coverage for the defense and indemnification of the Executives, to the fullest extent permitted by applicable law.
Compensation of Directors
Determining Director Compensation
The Company’s Audit Committee Report
The Company uses a combination of cash and equity-based compensation, in the form of restricted stock and options to purchase common shares, to attract and retain qualified candidates to serve on the Board. We do not have a separatebelieve our compensation committee. Accordingly,arrangement for Independent Directors is comparable to the extent that decisions are made regarding the compensation policies pursuant to whichstandards of peer companies within our named executive officers are compensated, they are made byindustry and geographical location.
We pay our Board.
The following table provides certain information with respect to the 20102013 compensation of our directors who served in such capacity during the year. The 20102013 compensation of those directors who are also our named executive officers is disclosed in the Summary Compensation Table above. We refer to our directors who are neither employed by us nor by our principal stockholders as outside directors. Compensation for our outside directorsIndependent Directors consists of equity and cash as described below. Our outside directoronly Independent Director as of the date of this statementReport is Mark R. Hollinger.
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) (1) | Option Awards ($) (1) | All Other Compensation ($) | Total | |||||||||||||||
Eugene L. Butler (2) | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Ronald E. Smith (2) | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Mary L. Budrunas (2) | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Mark R. Hollinger | $ | 32,500 | $ | 87,500 | $ | 50,800 | $ | - | $ | 170,800 | ||||||||||
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) (1) | Option Awards ($) | All Other Compensation ($) | Total | |||||||||||||||
| Eugene L. Butler (2) | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||
| Ronald E. Smith(2) | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||
| Mary L. Budrunas(2) | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||
| Randolph W. Warner | $ | 3,000 | $ | 60,000 | $ | – | $ | – | $ | 63,000 | ||||||||||
(1) | Included in the “Stock Awards” |
In May 2013, we granted 30,000 restricted shares, par value $0.001 per share, to Mr. Warner. The shares were valued at $2.00 per share and vest over three years in equal tranches on the grant date anniversary, with continued service on our Board of Directors; we are amortizing the related share-based compensation of $60,000 over the three-year requisite service period.
| (2) | Each of our directors who also serve as our executive officers, do not receive any additional compensation for their performance of services as directors. We may agree to provide compensation to these directors in the future. |
Equity CompensationItem
Security Ownership of $2,000 per meeting of the Board of Directors attended in personCertain Beneficial Owners and $1,000 per meeting attended by telephone or other electronic means. All directors are also entitled to reimbursement of expenses. Outside directors serving in specified committee positions also receive the following additional annual retainers:
| Chairman of the Audit Committee | $ | 10,000 | ||
| Chairman of the Compensation Committee | $ | 10,000 | ||
| Chairman of the Governance Committee | $ | 5,000 |
Set forth below is made on an annual basis, in shares of stock determined by the current market price of the stock at the time of each payment.
| Name of Beneficial Owner (1) | Shares of Common Stock Beneficially Owned | Percent of Common Stock Outstanding | |||
| Directors and Executive Officers: | |||||
| Ronald E. Smith (2) | 45,337,301 | 22.0% | |||
| Mary L. Budrunas (2) | 45,337,301 | 22.0% | |||
| Eugene L. Butler (4) | 5,674,092 | 2.7% | |||
| Michael J. Newbury (5) | 83,334 | * | |||
| Mark R. Hollinger (6) | 1,166,666 | * | |||
| All directors and officers as a group (5 persons) | 52,261,393 | (7) | 24.7% | ||
| 5% Shareholders: | |||||
| Flotation Investor, LLC | 20,000,000 | 9.7% | |||
| 767 Fifth Avenue, 17th Floor | |||||
| New York, New York 10153 | |||||
| Robert E. Chamberlain, Jr. (3) | 19,750,975 | 9.6% | |||
| 2909 N. Island Drive | |||||
| Seabrook, Texas 77586 | |||||
| * Less than 1% | |||||
| Shares Beneficially Owned | ||||||||||||||||
| Name of Beneficial Owner (1) | Shares of Common Stock Beneficially Owned as of March 25, 2014 | Shares Underlying Options Which Are or Will Become Exercisable Prior to May 24, 2014 | Total Beneficial Ownership as of May 25, 2014 | Percent of Outstanding Common Stock (2) | ||||||||||||
| Goldman Capital Management, Inc. | 845,000 | – | 845,000 | (3) | 5.3% | |||||||||||
| The Perlus Microcap Fund L.P. | 1,077,706 | – | 1,077,706 | (4) | 6.8% | |||||||||||
| Wellington Management Company, LLC | 2,000,000 | – | 2,000,000 | (5) | 12.5% | |||||||||||
| Directors and Executive Officers: | ||||||||||||||||
| Ronald E. Smith (6) | 1,588,859 | 83,334 | 1,672,193 | (7) | 10.5% | |||||||||||
| Mary L. Budrunas (6) | 930,651 | – | 930,651 | 5.8% | ||||||||||||
| Eugene L. Butler | 381,585 | 583,334 | 964,919 | (8) | 6.0% | |||||||||||
| Randolph W. Warner | 30,000 | – | 30,000 | (9) | * | |||||||||||
| Ira B. Selya | 12,500 | 25,000 | 37,500 | (10) | * | |||||||||||
| All directors and officers as a group (5 persons) | 2,943,595 | 691,668 | 3,635,263 | 22.8% | ||||||||||||
_____________________
* Less than 1%
| (1) | A person is deemed to be the beneficial owner of securities that can be acquired within 60 days from the date set forth above through the exercise of any option, warrant or right. Shares of common stock subject to options, warrants or rights that are currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage of the person holding such options, warrants or rights, but are not deemed outstanding for computing the percentage of any other person. |
| (2) | The |
| (3) | Based on a Schedule 13G filed with the SEC dates April 1, 2013, Goldman Capital Management Inc. may be deemed the beneficial owners of 845,000 shares outstanding as of |
| (4) | Based on a Schedule 13G/A filed with the SEC dated January 30, 2014. The Perlus Microcap Fund L.P., Perlus Limited and Perlus Investment Management LLP may be deemed the beneficial owners of 1,077,706 shares outstanding as of December 31, 2013. |
| (5) | Based on a Schedule 13G filed with the SEC dated September 30, 2013, Wellington Management Company, LLC may be deemed the beneficial owners of 2,000,000 shares outstanding as of December 31, 2013. Wellington Trust Company, NA similarly filed a Schedule 13G on such date and we presume it is part of a group with Wellington Management Company, LLP. |
| (6) | Mr. Smith and Ms. Budrunas are |
| (7) | Includes 41,667 shares of restricted stock, |
| Includes 41,667 shares of restricted stock, |
| (9) | Includes 30,000 shares of restricted stock, |
| Includes 12,500 shares of restricted stock, | ||
Disclosure regarding our equity compensation plans as required by this item is incorporated by reference to the information set forth under Item 5 “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II of this report.
ITEM 13.
Certain Relationships and Related Transactions
Our Board of Related Person Transactions
Director Independence
We believe that director Randolph W. Warner is “independent” under the requirements of Deep Down and Eugene Butler, Executive Chairman, CFO and Director of Deep Down, were investors in Ship and Sail, Inc. (“Ship and Sail”), a former vendor of Deep Down. During the year ended December 31, 2010, we made payments of $10,000 to Ship and Sail, and we expensed the prepaid balance of $38,000 as of December 31, 2009 during the first quarter of 2010. The payments and expense to Ship and Sail related to services provided by that entity for the supportRule 303A.02 of the development of marine technology which is currently being marketed. Ship and Sail discontinued operations in mid-2010, thus there is no longer a related party relationship. As disclosed in the 2009 Form 10-K, we made a deposit for a boat in the amount of $100,000 which was written off in connection with the discontinued operations of Ship and Sail.
We intend to JUMA, a company owned by Ronald E. Smith, and his wife Mary L. Budrunas, Corporate Secretary and Director of Deep Down, in the amount of $35,000; there is no balance due as of December 31, 2010. Payments related to the monthly rental of a boat owned by JUMA, in connection with the development of marine technology as discussed above. The board of directors approved the arrangement between JUMA and Deep Down with a termination date of December 31, 2010. No future payments are anticipated to JUMA.
ITEM 14. Principal Accountant Fees and ServicesPRINCIPAL ACCOUNTANT FEES AND SERVICES
We retained KPMG,HEIN & Associates, LLP (“KPMG”HEIN”) as our principal accountant in 2010.2011. We had no relationship with KPMGHEIN prior to their retention as our principal accountant. The following table sets forth the aggregate fees paid to KPMG HEIN for audit services rendered in connection with ourthe Company’s consolidated financial statements and reports for the yearyears ended December 31, 2010,2013 and 2012, and for other services rendered during that yearthose years on behalf of Deep Down and its subsidiaries, and fees billed to us by PricewaterhouseCoopers LLP for audit and other services during 2009:
| December 31, 2010 | December 31, 2009 | |||||||
| (i) Audit Fees | $ | 821,700 | $ | 502,023 | ||||
| (ii) Audit Related Fees | - | - | ||||||
| (iii) Tax Fees | 118,307 | 5,250 | ||||||
| (iv) All Other Fees | - | - | ||||||
| December 31, 2013 | December 31, 2012 | |||||||
| (i) Audit Fees | $ | 200,019 | $ | 173,650 | ||||
| (ii) Audit Related Fees | – | – | ||||||
| (iii) Tax Fees | 41,500 | 42,558 | ||||||
| (iv) All Other Fees | – | – | ||||||
Audit Fees
: Consists of fees billed for professional services rendered for the audit of Deep Down’s consolidated financial statements, the review of interim condensed consolidated financial statements included in quarterly reports, services that are normally provided in connection with statutory and regulatory filings or engagements and attest services, except those not required by statute or regulation.Audit-Related Fees
: Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit and review of Deep Down’s consolidated financial statements and are not reported under "Audit Fees."Tax Fees
: Consists of tax compliance, tax preparation and other tax services. Tax compliance and tax preparation consists of fees billed for professional services related to assistance with tax returns. Other tax services consist of fees billed for other miscellaneous tax consulting.All Other Fees
: None.Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The Audit Committee of the Board of Directors pre-approves all audit and permissible non-audit services provided by KPMG.HEIN. These services may include audit services, audit-related services, tax services and other services. The Audit Committee of the Board of Directors may also pre-approve particular services on a case-by-case basis and may delegate pre-approval authority to one or more directors. If so delegated, the director must report any pre-approval decision to the Board of Directors at its first meeting after the pre-approval was obtained.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | The following consolidated financial statements of Deep Down, Inc. and subsidiaries are filed as part of this Report under Item 8 – Financial Statements and Supplementary Data: |
| Reports of Independent Registered Public Accounting Firms | F-1 |
F-2 | |
| Consolidated Statements of Operations – Years ended December 31, 2013 and 2012 | F-3 |
Consolidated Statements of Changes in Stockholders’ Equity – Years ended December 31, 2013 and 2012 | F-4 |
| Consolidated Statements of Cash Flows – Years ended December 31, 2013 and 2012 | F-5 |
| Notes to Consolidated Financial Statements– Years ended December 31, 2013 and 2012 | F-6 |
| (b) | Exhibits. |
| 2.1 | Agreement and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc., and the majority shareholders of Deep Down, Inc. (incorporated by reference from Exhibit 2.1 to our Form 10-KSB/A filed | |
| 3.1 | Articles of Incorporation of Deep Down, Inc. (conformed to include the amendment of the Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008 (incorporated by reference from Exhibit A to our Schedule 14C filed on August 15, 2008). | |
| 3.2 | Amended and Restated By Laws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008). | |
| 4.1 | ||
| Securities Purchase Agreement, dated | ||
Registration Rights Agreement, dated September 9, 2013, between Deep Down, Inc. | ||
| 10.1 | Amended and Restated Credit Agreement, entered into as of April 14, 2010, between Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.31 to our Form 10-K filed | |
| 10.2 | First Amendment to Amended and Restated Credit Agreement, dated December 31, 2010, by and among Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.4 to our Form 8-K filed | |
| 10.3 | Second Amendment to Amended and Restated Credit Agreement, dated April 12, 2011, by and among Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated by reference from Exhibit 10.42 to our Form 10-K filed on April 15, 2011). | |
| 10.4 | Third Amendment to Amended and Restated Credit Agreement, dated as of June 9, 2011, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 15, 2011). | |
| 10.5 | Fourth Amendment to Amended and Restated Credit Agreement, dated April 15, 2012, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 10-Q filed on May 15, 2012). | |
| 10.6 | Fifth Amendment to Amended and Restated Credit Agreement, dated as of March 5, 2013, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on March 12, 2013). |
| 10.7 | Guaranty, dated as of November 11, 2008, by ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.2 to our Form 10-Q filed | |
Joinder to Guaranty, dated as of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.5 to our Form 10-K filed |
Security Agreement, dated as of November 11, 2008, among Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 10-Q filed | ||
Joinder to Security Agreement, dated as of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.7 to our Form 10-K filed | ||
First Amendment to Security Agreement, dated as of December 18, 2008, by Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 8-K filed | ||
| 10.12 | Second Amendment to Security Agreement, executed as of May 29, 2009, by Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc., for the benefit of Whitney National Bank (incorporated by reference from Exhibit 10.4 to our Form 8-K filed on June 2, 2009). | |
| 10.13 | Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing, executed as of May 29, 2009, by Deep Down, Inc., as grantor, in favor of Gary M. Olander, as trustee, for the benefit of Whitney National Bank, as beneficiary (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 2, 2009). | |
| 10.14 | Ratification of Guaranty, Security Agreement, and Intercreditor Agreement, dated April 14, 2010, among Deep Down, Inc., a Nevada corporation, as borrower, and ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc., a Delaware corporation, each a guarantor, and Whitney National Bank, a national banking association, as lender (incorporated by reference from Exhibit 10.36 to our Form 10-K filed | |
| 10.15 | First Modification to Deed of Trust, dated April 14, 2010, executed by Deep Down, Inc., as grantor, for the benefit of Whitney National Bank, as lender (incorporated by reference from Exhibit 10.37 to our Form 10-K filed | |
| 10.16 | First Modification to Assignment of Leases and Rents, dated April 14, 2010, executed by Deep Down, Inc., as assignor, and Whitney National Bank, as assignee (incorporated by reference from Exhibit 10.38 to our Form 10-K filed | |
| 10.17 | Office Building Lease, dated November 24, 2008, between Deep Down, Inc. and A-K-S-L 49 Beltway 8, L.P. (incorporated herein by reference from Exhibit 10.18 to our Form 10-K filed | |
| 10.18 | Purchase and Sale Agreement, dated May 22, 2009, by and between Deep Down, Inc. and JUMA Properties, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 2, 2009). | |
| 10.19† | Employment Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Eugene L. Butler (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on January 15, 2010). | |
Amended and Restated Employment Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Ronald E. Smith (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on January 15, 2010). | ||
Stock Option, Stock Warrant and Stock Award Plan (incorporated by reference from Exhibit 4.10 to our Form S-1 Registration Statement (file no. 333-152435) filed | ||
| 10.22 | Stock Purchase Agreement, dated May 3, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on May 5, 2010). | |
| 10.23 | Amendment No. 1 to Stock Purchase Agreement, dated July 13, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on July 14, 2010). | |
| 10.24 | Amendment No. 2 to Stock Purchase Agreement, dated October 4, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on October 4, 2010). |
| 10.25 | Amendment No. 3 to Stock Purchase Agreement, dated effective as of October 31, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on November 8, 2010). | |
| 10.26 | Agreement and Amendment No. 4 to Stock Purchase Agreement, dated effective as of November 30, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on December 9, 2010). | |
| 10.27 | Contribution Agreement, dated December 31, 2010, by and among Deep Down, Inc., Flotation Technologies, Inc., Cuming Flotation Technologies, LLC and Flotation Investor, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on January 5, 2011). | |
| 10.28 | Contract Assignment and Amendment Agreement, dated December 31, 2010, by and among Deep Down, Inc., Cuming Flotation Technologies, LLC and Cuming Corporation (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on January 5, 2011). | |
| 10.29 | Amended and Restated Limited Liability Company Agreement of Cuming Flotation Technologies, LLC, dated December 31, 2010 (incorporated by reference from Exhibit 10.5 to our Form 8-K filed on January 5, 2011). | |
| 10.30 | Management Services Agreement, dated effective as of January 1, 2011, by and among Deep Down, Inc. and Cuming Flotation Technologies, LLC (incorporated by reference from Exhibit 10.6 to our Form 8-K filed on January 5, 2011). | |
| 10.31 | First Amendment to Management Services Agreement, dated effective as of March 1, 2011, by and among Deep Down, Inc. and Cuming Flotation Technologies, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on March 8, 2011). | |
| Acquisition Term Note, dated June 9, 2011, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 15, 2011). | ||
| 10.34 | ||
| 10.35 | Equipment Term Note, dated as of March 5, 2013, made by Deep Down, Inc. to the order of Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on March 12, 2013). | |
| 10.36 | Building and Land Lease Agreement between W&P Development Corporation, as Landlord, and Deep Down, |
| 14.1 | Directors Code of Business Conduct (incorporated | |
| 14.2 | Financial Officer’s Code of Business | |
| 21.1* | Subsidiary list. | |
| 31.1* | Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer of Deep Down, Inc. | |
| 31.2* | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of Deep Down, Inc. | |
Section 1350 Certification of the President and Chief Executive Officer of Deep Down, Inc. | ||
| 32.2# | Section 1350 Certification of the Chief Financial Officer of Deep Down, Inc. | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Schema Document | |
| 101.CAL* | XBRL Calculation Linkbase Document | |
| 101.DEF* | XBRL Definition Linkbase Document | |
| 101.LAB* | XBRL Label Linkbase Document | |
| 101.PRE* | XBRL Presentation Linkbase Document |
_____________________
* Filed or furnished herewith.
# Furnished herewith.
† Exhibit constitutes a management contract or compensatory plan or arrangement.
| 28 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DEEP DOWN, INC. /s/ Ronald E. Smith Ronald E. Smith President | ||
(Principal Executive Officer)
/s/ Eugene L. Butler
Eugene L. Butler
Executive Chairman and EUGENE L. BUTLER, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
(Principal Financial Officer)
/s/ Ira B. Selya
Ira B. Selya
Corporate Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | |||
| /s/ | President, Chief Executive Officer and Director | |||
Ronald E. Smith | (Principal Executive Officer) | |||
| /s/Eugene L. | Executive Chairman and Chief Financial Officer | |||
| Eugene L. Butler | (Principal Financial | |||
| /s/ | Vice-President, Corporate Secretary and Director | |||
| Mary L. Budrunas | ||||
| /s/Randolph W. Warner | Director | |||
| Randolph W. Warner | ||||
| 29 |
EXHIBIT INDEX
| Exhibit Number | Description of Exhibit | |
| 2.1 | Agreement and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc., and the majority shareholders of Deep Down, Inc. (incorporated by reference from Exhibit 2.1 to our Form 10-KSB/A filed | |
| 3.1 | Articles of Incorporation of Deep Down, Inc. (conformed to include the amendment of the Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008 (incorporated by reference from Exhibit A to our Schedule 14C filed on August 15, 2008). | |
| 3.2 | Amended and Restated By Laws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008). | |
| 4.1 | ||
| Securities Purchase Agreement, dated | ||
Registration Rights Agreement, dated September 9, 2013, between Deep Down, Inc. | ||
| 10.1 | Amended and Restated Credit Agreement, entered into as of April 14, 2010, between Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.31 to our Form 10-K filed | |
| 10.2 | First Amendment to Amended and Restated Credit Agreement, dated December 31, 2010, by and among Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.4 to our Form 8-K filed | |
| 10.3 | Second Amendment to Amended and Restated Credit Agreement, dated April 12, 2011, by and among Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated by reference from Exhibit 10.42 to our Form 10-K filed on April 15, 2011). | |
| 10.4 | Third Amendment to Amended and Restated Credit Agreement, dated as of June 9, 2011, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 15, 2011). | |
| 10.5 | Fourth Amendment to Amended and Restated Credit Agreement, dated April 15, 2012, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 10-Q filed on May 15, 2012). | |
| 10.6 | Fifth Amendment to Amended and Restated Credit Agreement, dated as of March 5, 2013, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on March 12, 2013). | |
| 10.7 | Guaranty, dated as of November 11, 2008, by ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.2 to our Form 10-Q filed | |
Joinder to Guaranty, dated as of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.5 to our Form 10-K filed |
Security Agreement, dated as of November 11, 2008, among Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 10-Q filed | ||
Joinder to Security Agreement, dated as of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.7 to our Form 10-K filed | ||
First Amendment to Security Agreement, dated as of December 18, 2008, by Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 8-K filed |
| 10.12 | Second Amendment to Security Agreement, executed as of May 29, 2009, by Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc., for the benefit of Whitney National Bank (incorporated by reference from Exhibit 10.4 to our Form 8-K filed on June 2, 2009). | |
| 10.13 | Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing, executed as of May 29, 2009, by Deep Down, Inc., as grantor, in favor of Gary M. Olander, as trustee, for the benefit of Whitney National Bank, as beneficiary (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 2, 2009). | |
| 10.14 | Ratification of Guaranty, Security Agreement, and Intercreditor Agreement, dated April 14, 2010, among Deep Down, Inc., a Nevada corporation, as borrower, and ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc., a Delaware corporation, each a guarantor, and Whitney National Bank, a national banking association, as lender (incorporated by reference from Exhibit 10.36 to our Form 10-K filed | |
| 10.15 | First Modification to Deed of Trust, dated April 14, 2010, executed by Deep Down, Inc., as grantor, for the benefit of Whitney National Bank, as lender (incorporated by reference from Exhibit 10.37 to our Form 10-K filed | |
| 10.16 | First Modification to Assignment of Leases and Rents, dated April 14, 2010, executed by Deep Down, Inc., as assignor, and Whitney National Bank, as assignee (incorporated by reference from Exhibit 10.38 to our Form 10-K filed | |
| 10.17 | Office Building Lease, dated November 24, 2008, between Deep Down, Inc. and A-K-S-L 49 Beltway 8, L.P. (incorporated herein by reference from Exhibit 10.18 to our Form 10-K filed | |
| 10.18 | Purchase and Sale Agreement, dated May 22, 2009, by and between Deep Down, Inc. and JUMA Properties, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 2, 2009). | |
| 10.19† | Employment Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Eugene L. Butler (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on January 15, 2010). | |
Amended and Restated Employment Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Ronald E. Smith (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on January 15, 2010). | ||
Stock Option, Stock Warrant and Stock Award Plan (incorporated by reference from Exhibit 4.10 to our Form S-1 Registration Statement (file no. 333-152435) filed | ||
| 10.22 | Stock Purchase Agreement, dated May 3, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on May 5, 2010). | |
| 10.23 | Amendment No. 1 to Stock Purchase Agreement, dated July 13, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on July 14, 2010). | |
| 10.24 | Amendment No. 2 to Stock Purchase Agreement, dated October 4, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on October 4, 2010). | |
| 10.25 | Amendment No. 3 to Stock Purchase Agreement, dated effective as of October 31, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on November 8, 2010). | |
| 10.26 | Agreement and Amendment No. 4 to Stock Purchase Agreement, dated effective as of November 30, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on December 9, 2010). | |
| 10.27 | Contribution Agreement, dated December 31, 2010, by and among Deep Down, Inc., Flotation Technologies, Inc., Cuming Flotation Technologies, LLC and Flotation Investor, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on January 5, 2011). | |
| 10.28 | Contract Assignment and Amendment Agreement, dated December 31, 2010, by and among Deep Down, Inc., Cuming Flotation Technologies, LLC and Cuming Corporation (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on January 5, 2011). | |
| 10.29 | Amended and Restated Limited Liability Company Agreement of Cuming Flotation Technologies, LLC, dated December 31, 2010 (incorporated by reference from Exhibit 10.5 to our Form 8-K filed on January 5, 2011). |
| 10.30 | Management Services Agreement, dated effective as of January 1, 2011, by and among Deep Down, Inc. and Cuming Flotation Technologies, LLC (incorporated by reference from Exhibit 10.6 to our Form 8-K filed on January 5, 2011). | |
| 10.31 | First Amendment to Management Services Agreement, dated effective as of March 1, 2011, by and among Deep Down, Inc. and Cuming Flotation Technologies, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on March 8, 2011). | |
| Acquisition Term Note, dated June 9, 2011, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 15, 2011). | ||
| 10.34 | ||
| 10.35 | Equipment Term Note, dated as of March 5, 2013, made by Deep Down, Inc. to the order of Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on March 12, 2013). | |
| 10.36 | Building and Land Lease Agreement between W&P Development Corporation, as Landlord, and Deep Down, |
| 14.1 | Directors Code of Business Conduct (incorporated | |
| 14.2 | Financial Officer’s Code of Business | |
| 21.1* | Subsidiary list. | |
| 31.1* | Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer of Deep Down, Inc. | |
| 31.2* | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of Deep Down, Inc. | |
Section 1350 Certification of the President and Chief Executive Officer of Deep Down, Inc. | ||
| 32.2# | Section 1350 Certification of the Chief Financial Officer of Deep Down, Inc. | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Schema Document | |
| 101.CAL* | XBRL Calculation Linkbase Document | |
| 101.DEF* | XBRL Definition Linkbase Document | |
| 101.LAB* | XBRL Label Linkbase Document | |
| 101.PRE* | XBRL Presentation Linkbase Document |
_____________________
* Filed or furnished herewith.
# Furnished herewith.
† Exhibit constitutes a management contract or compensatory plan or arrangement.
Report of Independent Registered Public Accounting Firm To the |
Deep Down, Inc.:
Houston, Texas
We have audited the accompanying consolidated balance sheetsheets of Deep Down, Inc. and subsidiaries (the “Company”) as of December 31, 2010,2013 and 2012, and the related consolidated statementstatements of operations, statement of changes in stockholders’shareholders' equity and cash flows for the yearyears then ended. These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Deep Down, Inc. and their subsidiaries atas of December 31, 2009,2013 and 2012, and the results of their operations and their cash flows for the yearyears then ended, December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine management’s assertion about the effectiveness of Deep Down, Inc.’s internal control over financial reporting as of December 31, 2013 included in Item 9A of Part II in the Company’s Annual Report on Form 10-K for the effects of the matter discussed in Note 2, as to which the date is April 15, 2011
/s/ Hein & Associates LLP
Hein & Associates LLP
Houston, Texas
March 28, 2014
DEEP DOWN, INC.
CONSOLIDATED BALANCE SHEETS
| (In thousands, except par value amounts) | December 31, 2010 | December 31, 2009 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,730 | $ | 912 | ||||
| Accounts receivable, net of allowance of $245 and $304, respectively | 5,518 | 7,662 | ||||||
| Inventory | 223 | 896 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | - | 267 | ||||||
| Prepaid expenses and other current assets | 267 | 225 | ||||||
| Total current assets | 9,738 | 9,962 | ||||||
| Property, plant and equipment, net | 11,676 | 20,011 | ||||||
| Investment in joint venture | 3,146 | - | ||||||
| Intangibles, net | 2,908 | 12,342 | ||||||
| Goodwill | 4,916 | 9,429 | ||||||
| Other assets | 1,240 | 960 | ||||||
| Total assets | $ | 33,624 | $ | 52,704 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 5,719 | $ | 2,865 | ||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 446 | 4,984 | ||||||
| Deferred revenues | 315 | 89 | ||||||
| Current portion of long-term debt | 1,609 | 1,497 | ||||||
| Total current liabilities | 8,089 | 9,435 | ||||||
| Long-term debt, net | 2,443 | 5,379 | ||||||
| Total liabilities | 10,532 | 14,814 | ||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders' equity: | ||||||||
Common stock, $0.001 par value, 490,000 shares authorized, 207,399 and 180,451 shares, respectively, issued and outstanding | 207 | 180 | ||||||
| Additional paid-in capital | 63,751 | 61,161 | ||||||
| Accumulated deficit | (40,866 | ) | (23,451 | ) | ||||
| Total stockholders' equity | 23,092 | 37,890 | ||||||
| Total liabilities and stockholders' equity | $ | 33,624 | $ | 52,704 | ||||
| (In thousands, except par value amounts) | ||||||||
| December 31, 2013 | December 31, 2012 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,260 | $ | 1,523 | ||||
| Accounts receivable, net of allowance of $1,006 and $1,211, respectively | 4,979 | 7,140 | ||||||
| Inventory | 254 | 232 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 5,847 | 2,547 | ||||||
| Prepaid expenses and other current assets | 274 | 321 | ||||||
| Total current assets | 16,614 | 11,763 | ||||||
| Property, plant and equipment, net | 15,395 | 13,103 | ||||||
| Investment in joint venture | 468 | 984 | ||||||
| Intangibles, net | 119 | 126 | ||||||
| Goodwill | 4,916 | 4,916 | ||||||
| Other assets | 790 | 607 | ||||||
| Total assets | $ | 38,302 | $ | 31,499 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 2,788 | $ | 4,289 | ||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 201 | 753 | ||||||
| Deferred revenues | – | 44 | ||||||
| Current portion of long-term debt | 1,716 | 680 | ||||||
| Total current liabilities | 4,705 | 5,766 | ||||||
| Long-term debt, net | 3,218 | 2,936 | ||||||
| Total liabilities | 7,923 | 8,702 | ||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $0.001 par value, 10,000 shares authorized, 0 shares issued and outstanding | – | – | ||||||
| Common stock, $0.001 par value, 24,500 shares authorized, 15,261 and 10,152 shares issued and outstanding, respectively | 15 | 10 | ||||||
| Additional paid-in capital | 72,142 | 63,970 | ||||||
| Accumulated deficit | (41,778 | ) | (41,183 | ) | ||||
| Total stockholders' equity | 30,379 | 22,797 | ||||||
| Total liabilities and stockholders' equity | $ | 38,302 | $ | 31,499 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
DEEP DOWN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 20102013 and 2009
Year Ended December 31, | ||||||||
| (In thousands, except per share amounts) | 2010 | 2009 | ||||||
| Revenues | $ | 42,471 | $ | 28,810 | ||||
| Cost of sales: | ||||||||
| Cost of sales | 26,559 | 18,272 | ||||||
| Depreciation expense | 2,327 | 1,616 | ||||||
| Total cost of sales | 28,886 | 19,888 | ||||||
| Gross profit | 13,585 | 8,922 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 13,964 | 14,371 | ||||||
| Depreciation and amortization | 1,731 | 6,538 | ||||||
| Goodwill impairment | 4,513 | 5,537 | ||||||
| Total operating expenses | 20,208 | 26,446 | ||||||
| Operating loss | (6,623 | ) | (17,524 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense, net | (510 | ) | (356 | ) | ||||
| Loss on contribution of net assets of wholly-owned subsidiary | (10,119 | ) | - | |||||
| Equity in net loss of joint venture | (254 | ) | - | |||||
| Other income, net | 266 | 73 | ||||||
| Total other expense | (10,617 | ) | (283 | ) | ||||
| Loss before income taxes | (17,240 | ) | (17,807 | ) | ||||
| Income tax (expense) benefit | (175 | ) | 1,026 | |||||
| Net loss | $ | (17,415 | ) | $ | (16,781 | ) | ||
| Net loss per share, basic and diluted | $ | (0.09 | ) | $ | (0.09 | ) | ||
Weighted-average common shares outstanding, basic and diluted | 193,147 | 179,430 | ||||||
| Year Ended | ||||||||
| December 31, | ||||||||
| (In thousands, except per share amounts) | 2013 | 2012 | ||||||
| Revenues | $ | 29,593 | $ | 29,034 | ||||
| Cost of sales: | ||||||||
| Cost of sales | 19,454 | 18,424 | ||||||
| Depreciation expense | 1,425 | 1,317 | ||||||
| Total cost of sales | 20,879 | 19,741 | ||||||
| Gross profit | 8,714 | 9,293 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 8,769 | 8,947 | ||||||
| Depreciation and amortization | 158 | 456 | ||||||
| Impairment of long-lived assets | – | 2,156 | ||||||
| Total operating expenses | 8,927 | 11,559 | ||||||
| Operating loss | (213 | ) | (2,266 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense, net | (195 | ) | (155 | ) | ||||
| Equity in net loss of joint venture | (16 | ) | (179 | ) | ||||
| Other, net | (189 | ) | 198 | |||||
| Total other income (expense) | (400 | ) | (136 | ) | ||||
| Loss before income taxes | (613 | ) | (2,402 | ) | ||||
| Income tax benefit (expense) | 18 | (52 | ) | |||||
| Net loss | $ | (595 | ) | $ | (2,454 | ) | ||
| Net loss per share: | ||||||||
| Basic | $ | (0.05 | ) | $ | (0.24 | ) | ||
| Diluted | $ | (0.05 | ) | $ | (0.24 | ) | ||
| Weighted-average shares outstanding: | ||||||||
| Basic | 11,858 | 10,185 | ||||||
| Diluted | 11,860 | 10,185 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
DEEP DOWN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 20102013 and 2009
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| (In thousands) | Shares (#) | Amount ($) | Capital | Deficit | Total | |||||||||||||||
| Balance at December 31, 2008 | 177,351 | $ | 177 | $ | 60,328 | $ | (6,670 | ) | $ | 53,835 | ||||||||||
| Net loss | - | - | - | (16,781 | ) | (16,781 | ) | |||||||||||||
| Restricted stock issued for service | 3,100 | 3 | (3 | ) | - | - | ||||||||||||||
| Share-based compensation | - | - | 836 | - | 836 | |||||||||||||||
| Balance at December 31, 2009 | 180,451 | $ | 180 | $ | 61,161 | $ | (23,451 | ) | $ | 37,890 | ||||||||||
| Net loss | - | - | - | (17,415 | ) | (17,415 | ) | |||||||||||||
| Issuance of common stock pursuant to a | ||||||||||||||||||||
| private placement | 5,150 | 5 | 510 | - | 515 | |||||||||||||||
| Issuance of restricted stock | 1,798 | 2 | (27 | ) | - | (25 | ) | |||||||||||||
| Stock issued | 20,000 | 20 | 1,380 | - | 1,400 | |||||||||||||||
| Share-based compensation | - | - | 727 | - | 727 | |||||||||||||||
| Balance at December 31, 2010 | 207,399 | $ | 207 | $ | 63,751 | $ | (40,866 | ) | $ | 23,092 | ||||||||||
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| (In thousands) | Shares (#) | Amount ($) | Capital | Deficit | Total | |||||||||||||||
| Balance at December 31, 2011 | 10,244 | $ | 10 | $ | 63,504 | $ | (38,729 | ) | $ | 24,785 | ||||||||||
| Net loss | – | – | – | (2,454 | ) | (2,454 | ) | |||||||||||||
| Shares purchased and retired | (40 | ) | – | (48 | ) | – | (48 | ) | ||||||||||||
| Shares issued due to reverse split rounding | 2 | – | – | – | – | |||||||||||||||
| Unvested restricted stock award shares forfeited and retired | (16 | ) | – | – | – | – | ||||||||||||||
| Shares surrendered to settle employee tax liabilities and retired | (38 | ) | – | (40 | ) | – | (40 | ) | ||||||||||||
| Share-based compensation | – | – | 554 | – | 554 | |||||||||||||||
| Balance at December 31, 2012 | 10,152 | $ | 10 | $ | 63,970 | $ | (41,183 | ) | $ | 22,797 | ||||||||||
| Net loss | – | – | – | (595 | ) | (595 | ) | |||||||||||||
| Restricted stock awards | 730 | 1 | (1 | ) | – | – | ||||||||||||||
| Issuance of common stock, net | 4,444 | 4 | 7,624 | – | 7,628 | |||||||||||||||
| Unvested restricted stock award shares forfeited and retired | (33 | ) | – | – | – | – | ||||||||||||||
| Shares surrendered to settle employee tax liabilities and retired | (32 | ) | – | (61 | ) | – | (61 | ) | ||||||||||||
| Share-based compensation | – | – | 610 | – | 610 | |||||||||||||||
| Balance at December 31, 2013 | 15,261 | $ | 15 | $ | 72,142 | $ | (41,778 | ) | $ | 30,379 | ||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
DEEP DOWN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 20102013 and 2009
Year Ended December 31, | ||||||||
| (In thousands) | 2010 | 2009 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (17,415 | ) | $ | (16,781 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Impairment of goodwill | 4,513 | 5,537 | ||||||
| Equity in loss of joint venture | 254 | - | ||||||
| Share-based compensation | 727 | 836 | ||||||
| Stock issued for services | 14 | - | ||||||
| Bad debt expense | 72 | 192 | ||||||
| Depreciation and amortization | 4,058 | 8,154 | ||||||
| (Gain) loss on disposal of property, plant and equipment | (190 | ) | 78 | |||||
| Deferred income taxes, net | - | (909 | ) | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 1,669 | 2,918 | ||||||
| Inventory | 79 | 466 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 267 | 441 | ||||||
| Prepaid expenses and other current assets | 233 | 409 | ||||||
| Other assets | 189 | (113 | ) | |||||
| Accounts payable and accrued liabilities | 2,827 | (1,454 | ) | |||||
| Deferred revenues | 227 | 80 | ||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | (1,567 | ) | 2,678 | |||||
| Net cash (used in) provided by operating activities | (4,043 | ) | 2,532 | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of property, plant and equipment | (2,634 | ) | (6,117 | ) | ||||
| Proceeds from sale of property, plant and equipment | 251 | 148 | ||||||
| Investment in cost method securities | (25 | ) | (200 | ) | ||||
| Cash paid for equity investment in joint venture | (1,400 | ) | - | |||||
| Contribution of net assets of wholly-owned subsidiary | 10,119 | - | ||||||
| Proceeds from final settlement of acquisition of Flotation | - | 58 | ||||||
| Cash paid for capitalized software | (278 | ) | (614 | ) | ||||
| Proceeds from note receivable | (87 | ) | (22 | ) | ||||
| Change in restricted cash | - | 136 | ||||||
| Net cash provided by (used in) investing activities | 5,946 | (6,611 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock | 1,901 | - | ||||||
| Stock cancelled for payroll taxes | (25 | ) | - | |||||
| Borrowings of long-term debt | - | 3,000 | ||||||
| Repayments of long-term debt | (961 | ) | (504 | ) | ||||
| Net cash provided by financing activities | 915 | 2,496 | ||||||
| Change in cash and equivalents | 2,818 | (1,583 | ) | |||||
| Cash and cash equivalents, beginning of period | 912 | 2,495 | ||||||
| Cash and cash equivalents, end of period | $ | 3,730 | $ | 912 | ||||
| Supplemental schedule of noncash operating, investing and financing activities: | ||||||||
| Cash paid for interest | $ | 519 | $ | 373 | ||||
| Prepaid insurance purchased with debt | $ | 305 | $ | - | ||||
| Fixed assets purchased with debt | $ | - | $ | 2,100 | ||||
| Fixed assets purchased with capital lease | $ | 253 | $ | 92 | ||||
| Fixed assets transferred to other assets | $ | 100 | $ | - | ||||
| Restricted stock issued for service | $ | 2 | $ | 3 | ||||
| Year Ended | ||||||||
| December 31, | ||||||||
| (In thousands) | 2013 | 2012 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (595 | ) | $ | (2,454 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Impairment of long-lived assets | – | 2,156 | ||||||
| Depreciation and amortization | 1,583 | 1,773 | ||||||
| Share-based compensation | 610 | 554 | ||||||
| Bad debt expense | 61 | 1,134 | ||||||
| Equity in net loss of joint venture | 16 | 179 | ||||||
| Abandonment of patents | – | 80 | ||||||
| Forgiveness of debt | – | (10 | ) | |||||
| Gain on sales of property, plant and equipment | (30 | ) | (198 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 2,039 | (2,460 | ) | |||||
| Inventory | (22 | ) | – | |||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | (3,300 | ) | (2,463 | ) | ||||
| Prepaid expenses and other current assets | 47 | (59 | ) | |||||
| Other assets | 250 | 34 | ||||||
| Accounts payable and accrued liabilities | (1,501 | ) | 1,723 | |||||
| Deferred revenues | (44 | ) | (216 | ) | ||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | (552 | ) | (1,014 | ) | ||||
| Net cash used in operating activities | (1,438 | ) | (1,241 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of property, plant and equipment | 120 | 263 | ||||||
| Payments received on notes receivable | 13 | 55 | ||||||
| Cash paid for patents | – | (35 | ) | |||||
| Cash paid for exclusive product rights | – | (125 | ) | |||||
| Cash paid for deposits, net | (413 | ) | (166 | ) | ||||
| Purchases of property, plant and equipment | (776 | ) | (1,519 | ) | ||||
| Cash distribution received from joint venture | 500 | – | ||||||
| Net cash (used in) provided by investing activities | (556 | ) | (1,527 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from long-term debt | 1,021 | 1,170 | ||||||
| Deferred financing costs on bank term loan | (45 | ) | – | |||||
| Proceeds from issuance of common stock, net | 7,628 | – | ||||||
| Cash paid for purchase of our common stock | – | (48 | ) | |||||
| Principal payments on long-term debt | (2,873 | ) | (1,810 | ) | ||||
| Net cash provided by financing activities | 5,731 | (688 | ) | |||||
| (Decrease) increase in cash and cash equivalents | 3,737 | (3,456 | ) | |||||
| Cash and cash equivalents, beginning of year | 1,523 | 4,979 | ||||||
| Cash and cash equivalents, end of year | $ | 5,260 | $ | 1,523 | ||||
| Supplemental schedule of operating, investing and financing activities: | ||||||||
| Cash paid for interest | $ | 170 | $ | 139 | ||||
| Prepaid insurance purchased on credit | $ | – | $ | 385 | ||||
| Property, plant and equipment acquired via debt | $ | 3,170 | $ | 1,200 | ||||
| Shares of common stock surrendered to settle employee payroll tax liabilities | $ | 61 | $ | 40 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
Notes to Consolidated Financial Statements for the Years ended December 31, 20102013 and 2009
(Amounts in thousands except per share amounts)
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Summary of Significant Accounting Policies
Deep Down, Inc., a Nevada corporation (“Deep Down Nevada”), and its wholly-owned subsidiaries, Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”); Mako Technologies, LLC, a Nevada limited-liability company (“Mako”) (operations consolidated into Deep Down Delaware in August 2012); Flotation Technologies, Inc., a Maine corporation (dissolved in August 2012), Deep Down International Holdings, LLC, a Nevada limited-liability company, and Deep Down Brasil, Ltda., a Brazil limited liability company (“Deep Down Brasil”), (collectively referred to as “Deep Down”, “we”, “us” or the “Company”) is an oilfield services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, serving the worldwide offshore exploration and production industry. Our services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, flotation and drill riser buoyancy, Remote Operated Vehicles (“ROVs”) and toolings.related services. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions. Deep Down’s primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used between the platform and the wellhead.
Additionally in Note 4 “InvestmentAugust 2012, we consolidated the operations of Mako in Joint Venture���, effective December 31, 2010, we engagedMorgan City, Louisiana into Deep Down Delaware in a transaction in which all of the operating assets and liabilities of our wholly-owned subsidiary, Flotation Technologies, Inc. ("Flotation"), were contributed, along with other contributions we made, to a joint venture entity named Cuming Flotation Technologies, LLC (“CFT”), in return for a 20% common unit ownership interest in CFT.
Liquidity
As a deepwater service provider, our revenues, profitability, cash flows, and future rate of growth are substantially dependent on the condition of the global oil and gas industry generally, and our customers’ ability to invest capital for offshore exploration, drilling and production and maintain or increase levels of expenditures for maintenance of offshore drilling and production facilities. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. We enter into large, fixed-price contracts which may require significant lead time and investment. A decline in offshore drilling and production activity could result in lower contract volume or delays in significant contracts which could negatively impact our earnings and cash flows. Our earnings and cash flows could also be negatively affected by delaydelays in payments by significant customers or delays in completion of our contracts for any reason. While our objective is to enter into contracts with our customers that are cash flow positive, we may not always be able to achieve this objective. We are dependent on our cash flows from operations to fund our working capital requirements and the uncertainties noted above create risks that we may not achieve our planned earnings or cash flow from operations, which may require us to raise additional debt or equity capital. There can be no assurance that we could raise additional capital.
During ourthe fiscal years ended December 31, 20102013 and 2009,2012, we have supplemented the financing of our capital needs primarily through a combination of debt and equity financings. Most significant in this regard has been our debt facilitySince 2008, we have maintained a credit facility with Whitney National Bank, a state chartered bank (“Whitney”); see additional discussion in Note 6, “Long-Term Debt”. Our loans outstanding underDuring the Amendedthird quarter of 2013, we issued an additional 4,444 shares of common stock resulting in net cash proceeds of $7,628. As a result of our credit facility, the private placement and Restated Credit Agreement with Whitney (the “Restated Credit Agreement”) become due on April 15, 2012. We will needcash we expect to raise additional debt or equity capital or renegotiate the existing debt prior to such date. We are currently in discussions with several lenders who have expressed interest in refinancing our debt. Our plan is to refinance the outstanding indebtedness under the Restated Credit Agreement or seek terms with Whitney that will provide an extension of such Restated Credit Agreement along with additional liquidity. However, we cannot provide any assurance that any financing will be available to us on acceptable terms or at all. If we are unable to raise additional capital or renegotiate our existing debt, this would have a material adverse impact on our business or would raise substantial doubt about our ability to continue as a going concern. In addition to the foregoing, as of December 31, 2010, we were not in compliance with the financial covenants under the Restated Credit Agreement. On March 25, 2011 we obtained a waiver for these covenants as of December 31, 2010.
Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of Deep Down and its wholly-owned subsidiaries for the years ended December 31, 20102013 and 2009.2012. All intercompany transactions and balances have been eliminated.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have not resulted in any changes to previously reported net income (loss) or cash flows.
Notes to Consolidated Financial Statements for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share amounts)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segments
For the fiscal years ended December 31, 20102013 and 2009,2012, our operating segments, Deep Down Delaware Mako and FlotationMako have been aggregated into a single reporting segment. Effective December 31, 2010In August 2012, we contributed allconsolidated the operations of Flotation’s operating assets and liabilities to CFT.Mako in Morgan City, Louisiana into Deep Down Delaware in Channelview, Texas. While the operating segments have different product lines;lines, they are very similar. They are all service-based operations revolving around our personnel’s expertise in the deepwater and ultra-deepwater industry, and any equipment is produced to a customer specified design and engineered using Deep Down personnel’s expertise, with installation and project management as part of our service revenue to the customer. Additionally, the operating segments have similar customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages. Our operations are located in the United States, thoughalthough we occasionally makegenerate sales to multi-nationalinternational customers.
Cash and Cash Equivalents and Restricted Cash
We consider all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with foreign and domestic banks and, at times, may exceed federally insured limits.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We utilize a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Our financial instruments consist primarily of cash equivalents, trade receivables and payables, and debt instruments. The carrying values of cash accounts receivable, accounts payableequivalents and notes payable approximatetrade receivables and payables approximated their fair values at December 31, 2013 and 2012 due to their short-term maturities. We calculated the short-term maturityfair values of these instruments.
Accounts Receivable
Trade receivables are uncollateralized customer obligations due under normal trade terms. We provide an allowance for doubtful accounts on trade receivables based on historical collection experience, the level of past due accounts and a specific review of each customer’s trade receivable balance with respect to their ability to make payments and expectations of future conditions that could impact the collectability of accounts receivable.payments. When specific accounts are determined to be uncollectable,require an allowance, they are expensed asby a provision for bad debt expensedebts in that period. At December 31, 20102013 and 2009,2012, we estimated the allowance for doubtful accounts requirement to be $245$1,006 and $304,$1,211, respectively. Bad debt expense totaled $72$61 and $192$1,134 for the years ended December 31, 20102013 and 2009,2012, respectively.
Notes to Consolidated Financial Statements for the Years ended December 31, 20102013 and 2009
(Amounts in thousands except per share amounts)
Concentration of Credit Risk
As of December 31, 2013, five of our customers accounted for 31 percent, 14 percent, 14 percent, 12 percent and 9 percent of total trade accounts receivable. As of December 31, 2012, five of our customers accounted for 53 percent, 7 percent, 7 percent, 6 percent and 5 percent of total trade accounts receivable.
For the year ended December 31, 2013, our five largest customers accounted for 38 percent, 13 percent, 11 percent, 8 percent and 7 percent of total revenues. For the year ended December 31, 2012, our four largest customers accounted for 30 percent, 15 percent, 6 percent and 5 percent of total revenues.
Inventory
Inventory, which consists of spare parts and Workmaterials used in Progress
| December 31, 2010 | December 31, 2009 | |||||||
| Raw materials | $ | 167 | $ | 765 | ||||
| Work in progress | 56 | 84 | ||||||
| Finished goods | - | 47 | ||||||
| Total inventory | $ | 223 | $ | 896 | ||||
Long-Lived Assets
Property, plant and materials that are not appropriate to be billed to customers at such date, according to the contractual terms.
Goodwill. Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and external costs relatedliabilities assumed in a business combination. Goodwill is not subject to the acquisition and development of internal use softwareamortization, but is tested for impairment annually during the application development stagesfourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include an adverse change in the business climate or a change in the assessment of projects.
The Company assesses whether a goodwill impairment exists using both qualitative and packaged software andquantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the direct labor costsfair value of internally-developed software and are included with Other Assetsa reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than not that the accompanying balance sheets. Capitalized costs are amortized usingfair value of a reporting unit is less than its carrying amount, the straight-line method overCompany does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative assessment or two-step impairment test is performed to determine whether goodwill impairment exists at the reporting unit.
The first step is to compare the estimated livesfair value of each reporting unit with goodwill to its carrying amount, including goodwill. To determine fair value estimates, the Company uses the income approach based on discounted cash flow analyses, combined with a market-based approach. The market-based approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly traded businesses operating in industries consistent with the reporting unit. If the fair value of a reporting unit is less than its carrying amount, the second step of the software, which range from threeimpairment test is performed to five years. determine the amount of impairment loss, if any. The costs capitalized insecond step compares the application development stage include the costs of design, coding, installation of hardware and testing. We capitalize costs incurred during the development phaseimplied fair value of the project as permitted. Costs incurred duringreporting unit goodwill with the preliminary project orcarrying amount of that goodwill. If the post-implementation/operation stagescarrying amount of the project are expensed as incurred.
There was no impairment of goodwill for the years ended December 31, 20102013 and 20092012. The quantitative assessment of goodwill we performed as of December 31, 2013 demonstrated that our goodwill’s fair value exceeded its carrying value by $1,350. Not achieving the financial performance estimates used in calculating the amount of $225. We review this investment onfair value may give rise to a regular basis to determine if there has been a decline in market value.
Other intangible assets
. Our other intangible assets generally consist of assets acquiredNotes to Consolidated Financial Statements for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share amounts)
We test for the impairment of long-livedother intangible assets upon the occurrence of a triggering event. We base our evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If these impairment indicators are present or other factors exist that indicate the carrying amount of an asset may not be recoverable, we determine whether an impairment has occurred through the use of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist. The undiscounted cash flow analysis consists of estimating the future cash flows that are directly associated with and expected to arise from the use and eventual disposition of the asset over its remaining useful life. These cash flows are inherently subjective and require significant estimates based upon historical experience and future expectations reflected in our budgets and internal projections. If the undiscounted cash flows do not exceed the carrying value of the long-lived asset, an impairment has occurred, and we recognize a loss for the difference between the carrying amount and the estimated fair value of the asset. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, is based on an estimate of discounted cash flows. Cash flows are generally discounted at an interest rate commensurate with our weighted average cost of capital for a similar asset.
In August 2012, we closed down our office in Morgan City, Louisiana, and consolidated the Years ended December 31, 2010operations of Mako into Deep Down Delaware in Channelview, Texas. In November 2012, we evaluated Mako’s customer lists, trademarks and 2009
Equity Method Investments
Equity method investments in joint ventures are reported as investments in joint venture inon the consolidated balance sheets, and our share of earnings or losses is included in the statement of operations andjoint venture is reported as equity in net income or loss of joint venture in the consolidated statements of operations. At December 31, 2010, our accumulated deficit included $254 related to the undistributed equity in net loss of joint venture.
Lease Obligations
We lease land, buildings, vehicles and certain equipment under non-cancellable operating leases. Since February 2009, we leasehave leased our corporate headquarters in Houston, Texas, under a non-cancellable operating lease. Deep Down Delaware leases indoor manufacturing space and Mako leases office, warehouse and operating space in Morgan City, Louisiana, under a non-cancellable operating lease, and Flotation leases their manufacturing and warehousing locationslease. As a result of the consolidation of Mako’s operations into Deep Down Delaware in Biddeford, Maine under non-cancellable operating leases;August 2012; in December 2012, we sub-leased this lease obligation was contributedspace to CFT effective December 31, 2010 as discussed in Note 4 “Investment in Joint Venture.”a third party. We also lease certain office and other operating equipment under capital leases; the related assets are included with Property, Plantproperty, plant and Equipmentequipment on the consolidated balance sheets.
At the inception of a lease, we evaluate eachthe agreement to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used for such an evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty.
Notes to Consolidated Financial Statements for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share amounts)
Revenue Recognition
We recognize revenue once the following four criterionscriterion are met: (i) persuasive evidence of an arrangement exists,exists; (ii) delivery of the equipment has occurred or services have been rendered, (iii) the price of the equipment or service is fixed and determinable and (iv) collectability of the related receivable is reasonably assured. Service revenue is recognized as the service is provided, and “timetime and material”materials contracts are billed on a bi-weekly or monthly basis as costs are incurred. Customer billings for shipping and handling charges are included in revenue.
From time to time, we enter into large fixed price contracts which we determine that recognizing revenues for these types of contracts is appropriate using thefixed-price contracts. The percentage-of-completion method which compares the percentage of costs incurred to date to the estimated total costsis used as a basis for the contract. This method is appropriate because management considers total costs the best available measure of progress.
Provisions for estimated losses on uncompleted large fixed-price contracts (if any) are maderecorded in the period in which such losses are determined.it is determined it is more likely than not a loss will be incurred. Changes in job performance, job conditions, and total contract values may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Unapproved change orders are accounted for in revenue and cost when it is probable that the costs will be recovered through a change in the contract price. In circumstances where recovery is considered probable but the revenues cannot be reliably estimated, costs attributable to change orders are deferred pending determination of contract price.
Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones.milestones. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer and contracts are not shown as complete until virtually all anticipated costs have been incurred and the items are shippedrisk of loss has passed to the customer.
Assets and liabilities related to costs and estimated earnings in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year, thus complete collection of amounts related to these contracts may extend beyond one year, though such long-term contracts include contractual milestone billings as discussed above.
Income Taxes
We follow the asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Our effective tax rates for 2010 and 2009 were (1.0) percent, and 5.98 percent, respectively.
We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the future. This requires management to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider all reasonably available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of future state, and federal pretaxpre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made, either to income or goodwill, depending upon when that portion of the valuation allowance was originally created.
We record an estimated tax liability or tax benefit for income and other taxes based on what we determine will likely be paid in the various tax jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent upon various matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to the estimated liability would be recorded as a provision or benefit to income tax expense in the period in which it becomes probable that the amount of the actual liability or benefit differs from the recorded amount.
Notes to Consolidated Financial Statements for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share amounts)
Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. If and when our deferred tax assets are no longer fully reserved, we will begin to provide for taxes at the full statutory rate. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
Share-Based Compensation
We record share-based payment awards exchanged for employee servicesservice at fair value on the date of grant and expense the awards in the consolidated statements of operations over the requisite employee service period. Share-based compensation expense includes an estimate for forfeitures and is generally recognized over the expected term of the award on a straight-line basis. At December 31, 2010,2013, we had two types of share-based employee compensation: stock options and restricted stock.
Key assumptions used in the Black-Scholes model for stock option valuations include (1) expected volatility (2) expected term (3) discount rate and (4) expected dividend yield. Since we do not have a sufficient trading history to determine the volatility of our own stock, we based our estimates of volatility on a representative peer group consisting of companies in the same industry, with similar market capitalizations and similar stage of development. Additionally, we continue to use the simplified method related to employee option grants.
| December 31, 2010 | December 31, 2009 | ||
| Dividend yield | 0% | 0% | |
| Risk free interest rate | 2.08% - 2.49% | 1.69% - 2.33% | |
| Expected life of options | 3.5 years | 3 years | |
| Expected volatility | 94.7% - 97.4% | 88.5% - 92.8% |
Earnings or Loss per Common Share
Basic EPSearnings or loss per common share (“EPS”) is calculated by dividing net income/(loss)earnings or loss by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income/(loss)earnings or loss by the weighted average number of common shares and dilutive common stock equivalents (stock awardsoptions and stock options)warrants) outstanding during the period. DilutiveDiluted EPS reflects the potential dilution that could occur if stock options and warrants to purchase common stock were exercised for shares of common stock. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board issued accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The followingguidance states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should 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. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is a reconciliationnot available at the reporting date under the tax law of the numberapplicable jurisdiction to settle any additional income taxes that would result from the disallowance of shares (denominator) useda tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the basicfinancial statements as a liability and diluted EPS computations:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Numerator: | ||||||||
| Net income (loss) | $ | (17,415 | ) | $ | (16,781 | ) | ||
| Denominator: | ||||||||
Weighted average number of common shares outstanding | 193,147 | 179,430 | ||||||
| Effect of dilutive securities | - | - | ||||||
| Denominator for diluted earnings per share | 193,147 | 179,430 | ||||||
Net loss per common share outstanding, basic and diluted | $ | (0.09 | ) | $ | (0.09 | ) | ||
| Diluted net loss per common share | $ | (0.09 | ) | $ | (0.09 | ) | ||
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect would have been anti-dilutive.
Notes to Consolidated Financial Statements for the Years ended December 31, 20102013 and 2009
(Amounts in thousands except per share amounts)
NOTE 2: COSTS, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS
Costs, estimated earnings and requires new disclosures for 1) significant transfersbillings on uncompleted contracts are summarized below:
| December 31, 2013 | December 31, 2012 | |||||||
| Costs incurred on uncompleted contracts | $ | 14,496 | $ | 9,915 | ||||
| Estimated earnings on uncompleted contracts | 5,539 | 4,714 | ||||||
| 20,035 | 14,629 | |||||||
| Less: Billings to date on uncompleted contracts | (14,389 | ) | (12,835 | ) | ||||
| $ | 5,646 | $ | 1,794 | |||||
| Included in the accompanying consolidated balance sheets under the following captions: | ||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | $ | 5,847 | $ | 2,547 | ||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | (201 | ) | (753 | ) | ||||
| $ | 5,646 | $ | 1,794 | |||||
The balances in and out of Level 1 and Level 2 and the reasons for such transfers and 2) activity in Level 3 fair value measurements to show separate information about purchases, sales, issuances and settlements. In addition, this update amends Subtopic 820-10 to clarify existing disclosures around the disaggregation level of fair value measurements and disclosures for the valuation techniques and inputs utilized (for Level 2 and Level 3 fair value measurements). The provisions in ASU 2010-06 are applicable to interim and annual reporting periods beginning subsequent to December 15, 2009, with the exception of Level 3 disclosures of purchases, sales, issuances and settlements, which will be required in reporting periods beginning after December 15, 2010. The adoption of ASU 2010-06 did not impact our operating results, financial position or cash flows.
| December 31, 2010 | December 31, 2009 | |||||||
| Costs incurred on uncompleted contracts | $ | 319 | $ | 3,319 | ||||
| Estimated earnings on uncompleted contracts | 151 | 2,304 | ||||||
| 470 | 5,623 | |||||||
| Less: Billings to date on uncompleted contracts | (916 | ) | (10,340 | ) | ||||
| $ | (446 | ) | $ | (4,717 | ) | |||
Included in the accompanying consolidated balance sheets under the following captions: | ||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | $ | - | $ | 267 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts | (446 | ) | (4,984 | ) | ||||
| $ | (446 | ) | $ | (4,717 | ) | |||
The balances in billings in excess of costs and estimated earnings on uncompleted contracts at December 31, 20102013 and December 31, 2009, were $446 and $4,984, respectively, and2012 consisted of significantunearned milestone billings primarily related to a large fabrication project, plus several smaller contracts. In connection with the contribution of net assets and liabilities of Flotation to CFT, $2,972 in billings in excess of costs and estimated earnings on uncompleted contracts was contributed at December 31, 2010. See further discussion in Note 4 “Investment in Joint Venture.”
NOTE 3: INVESTMENT IN JOINT VENTURE
Effective December 31, 2010, we engaged in a transaction in which all of the Companyoperating assets and its wholly-owned subsidiarysubstantially all of the liabilities of Flotation entered intowere contributed, along with other contributions we made, to the CFT joint venture in return for a Contribution Agreement by and among the Company, Flotation, Cuming Flotation Technologies, LLC,20 percent common unit ownership interest.
On October 7, 2011, CFT consummated a Delaware limited liability company (“CFT”), and Flotation Investor, LLC, a Delaware operating limited liability company (“Holdings”),transaction pursuant to which Flotation contributed all of its assets and liabilities (except for one intercompany corporate overhead payable) to CFT in exchange for common units of CFT. Pursuant to the Contribution Agreement, we contributed to CFT $1,400 in cash and all of our rights and obligations under that certain Stock Purchase Agreement dated May 3, 2010, as amended (the “Cuming SPA”“Purchase Agreement”), by and amongbetween CFT and a Houston-based company (“Buyer”) pursuant to which Buyer purchased from CFT (i) all of the Company,issued and outstanding shares of capital stock of Cuming Corporation (“Cuming”), the principal operating subsidiary of CFT, (ii) the shares of 230 Bodwell Corporation, a Massachusetts corporation (“Cuming”), and the stockholderssubsidiary of Cuming, in exchangeand (iii) certain assets that, immediately prior to closing, were acquired by Cuming, for common units of CFT. Concurrently with the closing of the transactions described above, CFT contributed the assets and liabilities it acquired from Flotation to Flotation Tech, LLC, a Delaware limited liability company and wholly-owned subsidiary of CFT.
The components of its initial capital contribution. The preferred units have no voting rights. Pursuant to the terms of the JV LLC Agreement, we and Flotation collectively have the right to appoint one director to CFT’s board of directors and Holdings has the right to appoint the other 4 directors. The JV LLC Agreement provides that, without the prior approval of Deep Down and Flotation, certain actions cannot be taken by CFT, including: increasing the number of members of CFT’s board of directors; amending the JV LLC Agreement or the certificate of formation of CFTour Investment in a manner that disproportionately adversely affects Deep Down or Flotation; engaging in activities other than the business of CFT; declaring or paying dividends or distributions not in accordance with the JV LLC Agreement; repurchasing or redeeming CFT units; causing a material change in the nature of CFT’s business; engaging in activity that disproportionately affects Deep Down or Flotation as holders of units of CFT; liquidating, dissolving or effecting a recapitalization or reorganization of CFT; prior to November 2, 2012, authorizing or issuing any equity securities or other securities with equity features or convertible into equity securities except with regard to incentive plans for management; making loans, advancements, guarantees or investments except under certain circumstances; granting an exclusive license in all or substantially all of the intellectual property rights of CFT; amending any provision of, or entering into a resolution of any dispute with the parties under the Cuming SPA; entering into a transaction with an officer, director or other person who is an affiliate of CFT; incurring any funded indebtedness other than for the purpose of retiring CFT’s indebtedness to Holdings until such time as such indebtedness is fully repaid; or agreeing or committing or causing any subsidiary to agree to or commit to any of the above.
| Investment in joint venture, December 31, 2011 | $ | 1,163 | ||
| Equity in net loss of CFT for the year ended December 31, 2012 | (179 | ) | ||
| Investment in joint venture, December 31, 2012 | $ | 984 | ||
| Equity in net loss of CFT for the year ended December 31, 2013 | (16 | ) | ||
| Cash distribution from CFT for the year ended December 31, 2013 | (500 | ) | ||
| Investment in joint venture, December 31, 2013 | $ | 468 |
Notes to Consolidated Financial Statements for the Years ended December 31, 20102013 and 2009
(Amounts in thousands except per share amounts)
Below is a summaryare unaudited condensed statements of operations data of CFT for the net assets contributed to CFT as ofyears ended December 31, 2010:
| December 31, 2010 | ||||
| Cash and cash equivalents | $ | 1 | ||
| Accounts receivable | 403 | |||
| Inventory | 594 | |||
| Prepaid expenses and other current assets | 25 | |||
| Property, plant and equipment, net | 8,405 | |||
| Intangibles, net | 8,035 | |||
| Other assets | 23 | |||
| Total assets contributed | $ | 17,486 | ||
| Accounts payable and accrued expenses | 277 | |||
| Billings in excess of costs on uncompleted contracts | 2,972 | |||
| Deferred revenue | 1 | |||
| Long term debt | 2,117 | |||
| Total liabilities contributed | $ | 5,367 | ||
| Net assets contributed | $ | 12,119 | ||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Revenues | $ | – | $ | 2,744 | ||||
| Gross profit | $ | – | $ | 518 | ||||
| Net loss | $ | (80 | ) | $ | (895 | ) | ||
Below is anare unaudited condensed consolidated balance sheetsheets of CFT as of December 31, 2010:
| December 31, 2010 | ||||
| Current assets | $ | 53,784 | ||
| Property, plant & equipment | 17,896 | |||
| Intangible assets | 14,719 | |||
| Other assets | 60 | |||
| Total assets | $ | 86,459 | ||
| Current liabilities | $ | 59,962 | ||
| Long-term debt | 2,019 | |||
| Preferred units - Holdings | 8,750 | |||
| Common units - Holdings | 13,600 | |||
| Common units - DDI/Flotation | 3,400 | |||
| Accumulated deficit | (1,272 | ) | ||
| Total liabilities and equity | $ | 86,459 | ||
| December 31, 2010 | ||||
| Book value of Flotation net assets | $ | 12,119 | ||
| Cash contribution by Deep Down to CFT | 1,400 | |||
| Total book value of contributions to CFT | 13,519 | |||
| Less: Fair value of Investment in CFT | (3,400 | ) | ||
| Loss on contribution of Flotation | (10,119 | ) | ||
| December 31, 2010 | ||||
| Contribution to CFT | $ | 3,400 | ||
| Equity in net loss of CFT for the year ended December 31, 2010 | (254 | ) | ||
| Investment in joint venture | $ | 3,146 | ||
| December 31, 2013 | December 31, 2012 | |||||||
| Current assets | $ | 863 | $ | 5,749 | ||||
| Property, plant and equipment, net | 1,527 | 1,675 | ||||||
| Total assets | $ | 2,390 | $ | 7,424 | ||||
| Current liabilities | $ | 51 | $ | 2,500 | ||||
| Equity | 2,339 | 4,924 | ||||||
| Total liabilities and equity | $ | 2,390 | $ | 7,424 | ||||
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of December 31, 20102013 and 2009:
| December 31, 2010 | December 31, 2009 | Range of Asset Lives | ||||||||||
| Land | $ | 1,492 | $ | 1,954 | - | |||||||
| Buildings and improvements | 1,540 | 5,458 | 7 - 36 years | |||||||||
| Leasehold improvements | 221 | 313 | 2 - 5 years | |||||||||
| Equipment | 9,709 | 13,773 | 2 - 15 years | |||||||||
| Furniture, computers and office equipment | 930 | 1,154 | 2 - 8 years | |||||||||
| Construction in progress | 1,605 | 954 | - | |||||||||
| Total property, plant and equipment | 15,497 | 23,606 | ||||||||||
| Less: Accumulated depreciation | (3,821 | ) | (3,595 | ) | ||||||||
| Property, plant and equipment, net | $ | 11,676 | $ | 20,011 | ||||||||
| December 31, 2013 | December 31, 2012 | Range of Asset Lives | ||||||||||
| Land | $ | 1,582 | $ | 1,582 | – | |||||||
| Buildings and improvements | 1,571 | 1,555 | 7 - 36 years | |||||||||
| Leasehold improvements | 602 | 221 | 2 - 5 years | |||||||||
| Equipment | 17,840 | 14,251 | 2 - 30 years | |||||||||
| Furniture, computers and office equipment | 1,329 | 1,248 | 2 - 8 years | |||||||||
| Construction in progress | 189 | 487 | – | |||||||||
| Total property, plant and equipment | 23,113 | 19,344 | ||||||||||
| Less: Accumulated depreciation and amortization | (7,718 | ) | (6,241 | ) | ||||||||
| Property, plant and equipment, net | $ | 15,395 | $ | 13,103 | ||||||||
Included in property, plant and equipment are assets under capital lease of $870$253 and $648$1,493 at December 31, 20102013 and 2009,2012, respectively, with related accumulated depreciationamortization of $332$55 and $230$133 at December 31, 20102013 and 2009,2012, respectively.
Depreciation expense excluded from “Costcost of sales”sales in the accompanying consolidated statements of operations was $329$139 and $343$140 for the years ended December 31, 20102013 and 2009,2012, respectively. Depreciation expense included in “Costcost of sales”sales in the accompanying consolidated statements of operations was $2,327$1,425 and $1,616$1,317 for the years ended December 31, 20102013 and 2009, respectively. Net property, plant and equipment totaling $8,405 was contributed to CFT by Flotation effective December 31, 2010 as discussed in Note 4 “Investment in Joint Venture.”
At December 31, 20102013 and 2009,2012, construction in progress represents assets that are not ready for service or are in the construction stage. We will begin depreciating these assets once they are placed in service. The 2009 balance included approximately $954 for equipment in progress that was placed in service in 2010.
Notes to Consolidated Financial Statements for the Years ended December 31, 20102013 and 2009
(Amounts in thousands except per share amounts)
NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses.
| Carrying amount as of December 31, 2008 | $ | 15,024 | ||
| Adjustments to previously reporting purchase price | (58 | ) | ||
| Goodwill impairment | (5,537 | ) | ||
| Carrying amount as of December 31, 2009 | $ | 9,429 | ||
| Goodwill impairment | (4,513 | ) | ||
| Carrying amount as of December 31, 2010 | $ | 4,916 |
At December 31, 20102013 and 2009,2012, our management completed the annual impairment test of goodwill. There was no impairment indicated at December 31, 2010. Management’s calculations indicated as of December 31, 2009, due to a number of factors, including the global economic environment, increased costs of capital and the decrease in our market capitalization, that the calculations for the reporting units of Deep Down Delaware, Mako and Flotation each indicated their respective net book value exceeded its fair value and, accordingly, we estimated the implied fair value of the goodwill for each reporting unit. We used the estimated fair value of each reporting unit from the first step as the purchase price in a hypothetical acquisition of the respective reporting unit. We recognized a goodwill impairment of $3,056 for Deep Down Delaware, $2,481 for Mako and $0 for Flotation reporting units for the year ended December 31, 2009. After adjusting the Flotation carrying value of intangible assets to fair value, there was no goodwill impairment for that reporting unit. See detailed discussion of intangible asset below. The impairment was recorded in operating expenses in the consolidated statement of operations for the year ended December 31, 2009. This non-cash charge did not impact our liquidity position, debt covenants2013 or cash flows.
Other Intangible Assets
Identifiable intangible assets acquired in business combinations are recorded based upon fair market value at the date of acquisition.
Amounts allocated to intangible assets are amortized on a straight-line basis over their estimated useful lives. Estimated intangible asset values, net of| December 31, 2010 | December 31, 2009 | ||||||||||||||||||||||||
Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Customer relationship | 6 Years | $ | 2,845 | $ | (1,092 | ) | $ | 1,753 | $ | 3,515 | $ | (786 | ) | $ | 2,729 | ||||||||||
| Non-compete covenant | 5 Years | 455 | (415 | ) | 40 | 1,334 | (893 | ) | 441 | ||||||||||||||||
| Trademarks and other | 17-25 Years | 1,247 | (132 | ) | 1,115 | 3,286 | (174 | ) | 3,112 | ||||||||||||||||
| Technology | - | - | - | 11,209 | (5,149 | ) | 6,060 | ||||||||||||||||||
| Total | $ | 4,547 | $ | (1,639 | ) | $ | 2,908 | $ | 19,344 | $ | (7,002 | ) | $ | 12,342 | |||||||||||
| December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||||
| Estimated | Gross Carrying | Accumulated | Net Carrying | Gross Carrying | Accumulated | Net Carrying | ||||||||||||||||||||
| Useful Life | Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||
| Patents | 17 Years | 138 | (19 | ) | 119 | 138 | (12 | ) | 126 | |||||||||||||||||
| Total | $ | 138 | $ | (19 | ) | $ | 119 | $ | 138 | $ | (12 | ) | $ | 126 | ||||||||||||
In August 2012, we closed down our office in Morgan City, Louisiana, and consolidated the market conditionsoperations of Mako into Deep Down Delaware in Channelview, Texas. In November 2012, we evaluated Mako’s customer lists, trademarks and concluded, asnon-compete covenants in light of September 30, 2010, that a triggering event had occurred that required an impairment analysis of long-lived intangible assets. For the nine months ended September 30, 2010, the analysisconsolidation and determined that there was no impairment ofthese long-lived assets as of September 30, 2010. Fair values for technology and customer relationships were based upon an excess earnings methodology. Fair value for non-compete agreements was based on the expected differential cash flow of the reporting unit between “with non-compete agreements” and “without” non-compete agreements scenarios.
Amortization expense on the statementis estimated to be an average of operations. Additionally, we reduced the estimated useful lives of the following intangible assets based upon current market trends and estimated future cash flows: customer lists from a range of eight to twenty-five years to a range of six to fourteen years, and technology from twenty-five to ten years. The estimated amortization expense below reflects the adjusted carrying values and useful lives.
| Years ended December 31,: | ||||
| 2011 | $ | 414 | ||
| 2012 | 414 | |||
| 2013 | 414 | |||
| 2014 | 414 | |||
| 2015 | 404 | |||
| Thereafter | 848 | |||
| $ | 2,908 |
NOTE 6: LONG-TERM DEBT
Long-term debt consisted of the following:
| December 31, 2013 | December 31, 2012 | |||||||
| Secured credit agreement - Whitney Bank | $ | 1,917 | $ | 2,909 | ||||
| Note payable | 2,906 | – | ||||||
| Capital lease obligations | 111 | 707 | ||||||
| Total long-term debt | 4,934 | 3,616 | ||||||
| Less: Current portion of long-term debt | (1,716 | ) | (680 | ) | ||||
| Long-term debt, net of current portion | $ | 3,218 | $ | 2,936 | ||||
Notes to Consolidated Financial Statements for the Years ended December 31, 20102013 and 2009
(Amounts in thousands except per share amounts)
Whitney Credit Agreement
Since 2008, we have maintained a credit facility (the “Facility”) with Whitney Bank, a state chartered bank (“Whitney”). The Facility has been amended and restated several times, most recently on March 5, 2013. The current relevant terms of the Facility include:
| · | a committed amount under the revolving credit facility (“Revolving Credit Facility”) of $5,000, at an interest rate of 4.0 percent annum, maturing April 15, 2014; |
| · | a real estate term facility (“RE Term Facility”) of $2,000, at an interest rate of 4.0 percent annum, maturing April 15, 2018, with the Company obligated to make monthly increasing repayments of principal (along with accrued and unpaid interest thereon) starting at $8, beginning April 1, 2013; and |
| · | outstanding balances under the Facility are secured by all of the Company’s assets. |
As of December 31, 20102013, the Company’s indebtedness under the Revolving Credit Facility and 2009 long-term debt consistedthe RE Term Facility was $0 and $1,917, respectively. We are currently in negotiations with Whitney for an extension of the following:
| December 31, 2010 | December 31, 2009 | |||||||
| Secured credit agreement - Whitney Bank | $ | 2,917 | $ | 3,694 | ||||
| Secured credit agreement - TD Bank | - | 2,125 | ||||||
| Other bank loans | - | 63 | ||||||
| Total bank debt | 2,917 | 5,882 | ||||||
| 6% Subordinated debenture | 500 | 500 | ||||||
| Capital lease obligations | 635 | 494 | ||||||
| Total debt | 4,052 | 6,876 | ||||||
| Less: Current portion of long-term debt | (1,609 | ) | (1,497 | ) | ||||
| Long-term debt, net of current portion | $ | 2,443 | $ | 5,379 | ||||
Our credit agreement with Whitney obligates us to comply with the following financial covenants:
| · | Leverage Ratio - The ratio of total debt to consolidated EBITDA must be less than 3.0 to 1.0; actual Leverage Ratio as of December 31, 2013: 2.78 to 1.0. |
| · | Fixed Charge Coverage Ratio -The ratio of consolidated EBITDA to consolidated net interest expense, plus principal payments on total debt, must be greater than 1.5 to 1.0; actual Fixed Charge Coverage Ratio as of December 31, 2013: 1.51 to 1.0. |
| · | Tangible Net Worth - Our consolidated net worth, after deducting other assets as are properly classified as “intangible assets,” plus 50 percent of net income, after provision for taxes, must be in excess of $13,000; actual Tangible Net Worth as of December 31, 2013: $25,344. |
| · | Moreover, we continue to have obligations for other covenants, including, among others, limitations on issuance of common stock, liens, transactions with affiliates, additional indebtedness and permitted investments. |
As of December 31, 2013 and 2012, we were in November 2008. The credit agreement originally provided a commitment to lend to us the lesser of $2,000 or 80 percent of eligible receivables. All of this commitment was also available for Whitney to issue letters of credit (“L/C”) for our benefit. In December 2008, we then entered into an amendmentcompliance with all of the credit agreement that provided for us to receive a term loan in the principal amount of $1,150. Then, in May 2009, we entered into another amendment to the credit agreement providing for us to receive another term loan in the principal amount of $2,100. We used the proceeds from the December 2008 term loan to purchase a piece of equipment (a remotely operated vehicle) and we used the proceeds of the May 2009 term loan to purchase real property in Channelview, Texas. There was $850 outstanding under the revolving credit line available on December 31, 2009. We also used the credit agreement to have Whitney issue an irrevocable transferable standby L/C in the ordinary course of business, with an annual commission rate of 2.4 percent for $1,107 during the year ended December 31, 2009 (which such L/C related to a large contract we expect to have completed during 2011). The Restated Credit Agreement does not obligate Whitney to issue new L/Cs. However on September 1, 2010, Whitney did renew the aforementioned L/C under the same terms for a period of one year to expire on August 31, 2011. We paid the annual commission in advance, and the L/C will remain in effect until it expires.
Other Debt
On April 14, 2011,November 5, 2013, we entered into a Second AmendmentPurchase and Sale Agreement (“PSA”) with a customer to the Restated Credit Agreement with Whitney, pursuantbuy back a 3.5 metric ton portable umbilical carousel, which we had fabricated specifically for this customer. The PSA calls for purchase price of $3,293 to which Whitney extended the maturity dates of the respective term loans and the letter of credit facility under the Restated Credit Agreement to April 15, 2012.
Notes to Consolidated Financial Statements for the Years ended December 31, 20102013 and 2009
(Amounts in thousands except per share amounts)
Debt Maturities
Maturities of our assets to secure the outstanding indebtedness under the Restated Credit Agreement. Furthermore, each of our subsidiaries has guaranteed our obligations under the Restated Credit Agreement, and as such, our obligations in connection with the Restated Credit Agreement are generally secured by a first priority lien on all of our subsidiaries’ assets. With regard to the Channelview Property purchased with the proceeds of the May 2009 term loan, we also entered into a Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing, creating a lien on such property.
| Debt Maturities | ||||
| Years ending December 31,: | ||||
| 2014 | $ | 1,716 | ||
| 2015 | 1,510 | |||
| 2016 | 111 | |||
| 2017 | 116 | |||
| 2018 | 1,481 | |||
| $ | 4,934 | |||
NOTE 7: EARNINGS OR LOSS PER COMMON SHARE
The following is a reconciliation of the Restated Credit Agreement, as amendednumber of shares used in the basic and restated, beginning with the quarter ended June 30, 2010, and for each quarter thereafter, we have been obligated to comply with the following financial covenants: (i) total debt to consolidateddiluted net earnings before interest, taxes, depreciation and amortization (“EBITDA”) of not greater than 3.0 to 1.0 (“Leverage Ratio”), consolidated EBITDA to consolidated net interest expense and principal payments on the total debt greater than 1.5 to 1.0 (“Fixed Charge Coverage Ratio”), and consolidated net worth after deducting other assets as are properly classified as “Intangible Assets”, plus 50 percent of net income, after provision for taxes (“Tangible Net Worth”) in excess of $15,000. The calculation of EBITDA, with regards to the Leverage Ratio and Fixed Charge Coverage Ratio, allows us to deduct certain non-cash items, specifically asset impairment charges as ofor loss per common share calculation:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Numerator: | ||||||||
| Net loss | $ | (595 | ) | $ | (2,454 | ) | ||
| Denominator: | ||||||||
| Weighted average number of common shares outstanding | 11,858 | 10,185 | ||||||
| Effect of dilutive securities | 2 | – | ||||||
| Denominator for diluted earnings per share | 11,860 | 10,185 | ||||||
| Net (loss) income per common share outstanding, basic and diluted | $ | (0.05 | ) | $ | (0.24 | ) | ||
At December 31, 20092013 and going forward. As of both September 30, 20102012, there were outstanding warrants convertible to 0 and December 31, 2010, we were not in compliance with the Leverage Ratio and the Fixed Charge Coverage Ratio and, as noted above, such circumstance entitles Whitney at its option to accelerate and immediately require all amounts outstanding under the Restated Credit Agreement to become immediately due. Under the Restated Credit Agreement, we continue to have obligations for other covenants, including limitations on issuance6 shares of common stock, liens, transactions with affiliates, additional indebtedness and permitted investments, among others.
NOTE 8: Share-Based Compensation
We have a share-based compensation plan, the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”). Share based compensation is recognized as provided under the applicable authoritative guidance which requires all share-based payments to employees, including grantsAwards of employee stock options to be recognized as compensation expense over the requisite service period (generally the vesting period) in the financial statements based on their fair values. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity. The optionsstock granted under the Plan have vesting periods that range from immediate vesting to vesting over five years, and the contract terms of thethree years. Some awards of stock have performance criteria as an additional condition of vesting. Once vested, stock options granted aremay be exercised for up to tenfive years. Share-based compensation expense related to awards is based on the fair value at the date of grant, and is recognized over the vesting periods, net of estimated forfeitures. The value of performance-based awards is recognized as expense only when it is considered probable that the performance criteria will be met. Under the Plan, the total number of options permitted is 15 percent of issued and outstanding common shares.
Notes to Consolidated Financial Statements for the yearYears ended December 31, 2010,2013 and 2012
(Amounts in thousands except per share amounts)
Summary of Shares of Restricted Stock
For the years ended December 31, 2013 and 2012, we granted 2,250 optionsrecognized a total of $460 and 2,000 shares$213, respectively, of share-based compensation expense related to restricted stock awards, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The unamortized estimated fair value of restricted stock awards was $980 at December 31, 2013.
The following table summarizes the activity of our restricted stock for the years ended December 31, 2013 and cancelled or forfeited 6,133 options under2012. The aggregate intrinsic value is based upon the Plan. closing price of $2.06 of our common stock on December 31, 2013.
| Restricted Shares | Weighted-Average Grant-Date Fair Value | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at December 31, 2011 | 400 | $ | 1.80 | $ | 400 | |||||||||
| Forfeited | (17 | ) | 1.80 | |||||||||||
| Vested | (8 | ) | 1.80 | |||||||||||
| Outstanding at December 31, 2012 | 375 | $ | 1.80 | $ | 488 | |||||||||
| Granted | 730 | 2.03 | ||||||||||||
| Forfeited | (33 | ) | 1.80 | |||||||||||
| Vested | (17 | ) | 1.80 | |||||||||||
| Outstanding at December 31, 2013 | 1,055 | $ | 1.96 | $ | 2,173 | |||||||||
Summary of Stock Options
Based on the shares of common stock outstanding at December 31, 2010,2013, there were approximately 11,468 options available for grant under the Plan as of that date.
| Restricted Shares | Weighted- Average Fair Value Grant Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding at December 31, 2008 | 1,200 | $ | 0.42 | |||||||||
| Vested | (1,200 | ) | 0.21 | |||||||||
| Granted | 3,100 | 0.12 | ||||||||||
| Outstanding at December 31, 2009 | 3,100 | $ | 0.20 | $ | 37 | |||||||
| Vested | (1,600 | ) | 0.27 | |||||||||
| Granted | 2,000 | 0.09 | ||||||||||
| Outstanding at December 31, 2010 | 3,500 | $ | 0.23 | $ | - | |||||||
For the years ended December 31, 20102013 and 2009 was $5452012, we recognized a total of $150 and $372, respectively. As$341, respectively, of December 31, 2010,share-based compensation expense related to outstanding stock option awards, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The unamortized portion of the estimated fair value of outstanding stock options was $689.
Notes to Consolidated Financial Statements for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share amounts)
The following table summarizes our stock option activity for the years ended December 31, 20092013 and 2010. 2012:
| In thousands, except per share amounts | Shares Underlying Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | |||||||||
| Outstanding at December 31, 2011 | 1,063 | $ | 2.00 | 2.4 | ||||||||
| Cancellations & Forfeitures | (55 | ) | 2.19 | |||||||||
| Outstanding at December 31, 2012 | 1,008 | $ | 2.00 | 2.4 | ||||||||
| Cancellations & Forfeitures | (63 | ) | 1.93 | |||||||||
| Outstanding at December 31, 2013 | 945 | $ | 1.98 | 1.3 | ||||||||
| Exercisable at December 31, 2013 | 837 | $ | 2.01 | 1.2 | ||||||||
The aggregate intrinsic value is based on the closing price of $0.08$2.06 on December 31, 2010.
| Shares Underlying Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (In-The-Money) | |||||||||||||
| Outstanding at December 31, 2008 | 8,067 | $ | 0.96 | 2.3 | $ | - | ||||||||||
| Grants | 14,475 | 0.11 | ||||||||||||||
| Cancellations & Forfeitures | (2,517 | ) | 0.90 | |||||||||||||
| Outstanding at December 31, 2009 | 20,025 | $ | 0.35 | 2.5 | $ | 323 | ||||||||||
| Grants | 2,250 | 0.10 | ||||||||||||||
| Cancellations & Forfeitures | (6,133 | ) | 0.83 | |||||||||||||
| Outstanding at December 31, 2010 | 16,142 | $ | 0.13 | 2.9 | $ | - | ||||||||||
| Exerciseable at December 31, 2010 | 4,817 | $ | 0.17 | 2.1 | $ | - | ||||||||||
| Exercise Price | Shares Underlying Options | |||
| $1.80 | 325 | |||
| $2.00 | 500 | |||
| $2.40 | 120 | |||
| 945 | ||||
NOTE 9: Warrants
We have issued warrants related to various transactions in previous years; a summary of warrant transactions follows.follows for the year ended December 31, 2013. The aggregate intrinsic value is based on the closing price of $0.08$2.06 on December 31, 2010.
| Shares Underlying Warrants | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (In-The-Money) | |||||||||||||
Outstanding and exercisable at December 31, 2009 | 639 | $ | 0.78 | 2.3 | $ | - | ||||||||||
Outstanding and exercisable at December 31, 2010 | 639 | $ | 0.78 | 1.3 | $ | - | ||||||||||
| Exercise Price | Shares Underlying Warrants | ||||
| $ 0.70 - 0.99 | 520 | ||||
| $ 1.01 | 119 | ||||
| 639 | |||||
| Shares Underlying Warrants | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (In-The-Money) | |||||||||||||
| Outstanding and exercisable at December 31, 2012 | 6 | $ | 20.20 | – | $ | – | ||||||||||
| Outstanding and exercisable at December 31, 2013 | – | $ | – | – | $ | – | ||||||||||
Notes to Consolidated Financial Statements for the Years ended December 31, 20102013 and 2009
(Amounts in thousands except per share amounts)
NOTE 10: COMMON STOCK
On July 17, 2012, we filed a Certificate of Change with the Nevada Secretary of State for the purposes of reducing the number of authorized and outstanding shares of the Company’s common stock, on a basis of one share of common stock for each twenty shares of common stock outstanding (the “Reverse Stock Split”). The change was effective as of July 18, 2012.
During the third quarter of 2013, we issued an additional 4,444 shares of common stock resulting in net cash proceeds of $7,628.
NOTE 11: Income Taxes
The provision for income taxes on income from continuing operations is comprised of the following for the years ended December 31, 20102013 and 2009. 2012.
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Federal: | ||||||||
| Current | $ | (4) | $ | 15 | ||||
| Deferred | (36 | ) | (520 | ) | ||||
| Total | $ | (40 | ) | $ | (505 | ) | ||
| State: | ||||||||
| Current | $ | (14 | ) | $ | 37 | |||
| Deferred | 36 | 520 | ||||||
| Total | $ | 22 | $ | 557 | ||||
| Total income tax expense (benefit) | $ | (18 | ) | $ | 52 | |||
The provision for income taxes differs from the amount computed by applying the U.S. statutory income tax rate to income from continuing operations before income taxes for the reasons set forth below for the years ended December 31, 20102013 and 2009.
| December 31, 2010 | December 31, 2009 | |||||||
| Federal: | ||||||||
| Current | $ | - | $ | 603 | ||||
| Deferred | - | (1,474 | ) | |||||
| Total Federal | $ | - | $ | (871 | ) | |||
| State: | ||||||||
| Current | $ | 175 | $ | 50 | ||||
| Deferred | - | (205 | ) | |||||
| Total State | $ | 175 | $ | (155 | ) | |||
| Total income tax benefit | $ | 175 | $ | (1,026 | ) | |||
| Year ended | ||||||||
| December 31, 2010 | December 31, 2009 | |||||||
| Income tax expense at federal statutory rate | 34.00% | 34.00% | ||||||
| State taxes, net of federal expense | -0.41% | 0.98% | ||||||
| Goodwill impairment | -4.72% | -10.27% | ||||||
| Valuation allowance | -32.32% | -15.44% | ||||||
| State rate differential | 2.10% | - | ||||||
| Permanent differences | -0.28% | -2.50% | ||||||
| Other, net | 0.63% | -0.79% | ||||||
| Total effective rate | -1.00% | 5.98% | ||||||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Income tax expense at federal statutory rate | 34.00% | 34.00% | ||||||
| State taxes, net of federal expense | (4.32)% | (21.53)% | ||||||
| Return to provision adjustments | 47.30% | 24.30% | ||||||
| Valuation allowance | (67.93)% | (36.39)% | ||||||
| Permanent differences | (6.03)% | (2.57)% | ||||||
| Total effective rate | 3.02% | (2.19)% | ||||||
Notes to Consolidated Financial Statements for the yearYears ended December 31, 2010 compared to benefit of $1,026 for the year ended December 31, 2009.
(Amounts in thousands except per share amounts)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carry forwards. The tax effects of the temporary differences and carry forwards are as follow at December 31, 20102013 and 2009:
| December 31, 2010 | December 31, 2009 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for bad debt | $ | 85 | $ | 106 | ||||
| Net operating loss | 4,091 | 4,034 | ||||||
| Stock based compensation | 121 | 546 | ||||||
| Section 263 (A) adjustment | - | 52 | ||||||
| Investment in joint venture | 7,200 | - | ||||||
| Intangible amortization | - | 314 | ||||||
| Other | 15 | 48 | ||||||
| Total deferred tax assets | $ | 11,512 | $ | 5,100 | ||||
| Deferred tax liabilities: | ||||||||
| Depreciation on property and equipment | $ | (1,649 | ) | $ | (1,874 | ) | ||
| Intangible amortization | (984 | ) | - | |||||
| Total deferred tax liabilities | $ | (2,633 | ) | $ | (1,874 | ) | ||
| Less: valuation allowance | (8,879 | ) | (3,226 | ) | ||||
| Net deferred tax liabilities | $ | - | $ | - | ||||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful accounts | $ | 198 | $ | 353 | ||||
| Net operating loss | 5,258 | 4,249 | ||||||
| Share-based compensation | 1,140 | 990 | ||||||
| Investment in joint venture | 4,599 | 4,700 | ||||||
| Other | 90 | 122 | ||||||
| Total deferred tax assets | $ | 11,285 | $ | 10,414 | ||||
| Deferred tax liabilities: | ||||||||
| Depreciation and amortization on property, plant and equipment | $ | (2,797 | ) | $ | (2,360 | ) | ||
| Amortization of intangibles | (59 | ) | (41 | ) | ||||
| Total deferred tax liabilities | $ | (2,856 | ) | $ | (2,401 | ) | ||
| Less: valuation allowance | (8,429 | ) | (8,013 | ) | ||||
| Net deferred tax position | $ | – | $ | – | ||||
We have $11,390$15,444 in net operating loss (“NOL”) carry forwards available to offset future or prior taxable income. These federal NOL’s will expire inat various dates through 2028. We have no uncertain tax positions at December 31, 2010.
NOTE 12: COMMITMENTS AND CONTINGENCIES
Litigation
We are from time to time involved in legal proceedings arising from the normal course of business. As of the date of this Report, we are not currently involved in any material legal proceedings.
Operating Leases
We lease certain offices, facilities, equipment and vehicles under non-cancellable operating and capital leases expiring at various dates through 2016.
At December 31, 2013, future minimum contractual lease obligations were as follows:
| Years ending December 31,: | Capital Leases | Operating Leases | ||||||
| 2014 | $ | 63 | $ | 1,346 | ||||
| 2015 | 58 | 1,348 | ||||||
| 2016 | – | 1,246 | ||||||
| 2017 | – | 1,080 | ||||||
| 2018 | – | 1,080 | ||||||
| Thereafter | – | 4,770 | ||||||
| Total minimum lease payments | $ | 121 | $ | 10,870 | ||||
| Residual principal balance | – | |||||||
| Amount representing interest | (10 | ) | ||||||
| Present value of minimum lease payments | $ | 111 | ||||||
| Less current maturities of capital lease obligations | (55 | ) | ||||||
| Long-term contractual obligations | $ | 56 | ||||||
Rent expense for the years ended December 31, 2013 and 2012 was $1,007 and $498, respectively.
Notes to Consolidated Financial Statements for the Years ended December 31, 20102013 and 2009
(Amounts in thousands except per share amounts)
Letters of Deep Down and Eugene Butler, Executive Chairman, CFO and DirectorCredit
Certain customers could require us to issue standby letters of Deep Down, were investors in Ship and Sail, Inc. (“Ship and Sail”), a former vendor of Deep Down. During the year ended December 31, 2010, we made payments of $10 to Ship and Sail, and we expensed the prepaid balance of $38 as of December 31, 2009 during the first quarter of 2010. The payments and expense to Ship and Sail related to services provided by that entity for the support of the development of marine technology which is currently being marketed. Ship and Sail discontinued operations in mid-2010, thus there is no longer a related party relationship. As disclosedcredit in the 2009 Form 10-K, we madenormal course of business to ensure performance under terms of contracts or as a depositform of product warranty. The beneficiary of a letter of credit could demand payment from the issuing bank for a boat in the amount of $100,the outstanding letter of credit. Letters of credit outstanding at December 31, 2013 and 2012 under the Fifth Amendment with Whitney are as follows:
| Type | December 31, 2013 | December 31, 2012 | ||||||
| Performance | $ | – | $ | 235 | ||||
| Warranty | 415 | 592 | ||||||
| Total | $ | 415 | $ | 827 | ||||
Employment Agreements
Certain of our Executives are employed under employment agreements containing severance provisions. In the event of termination of an Executive’s employment for any reason, the Executive will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which was written offthe Executive is entitled or vested under the terms of all employee benefit and compensation plans, agreements and arrangements in connection withwhich the discontinued operationsExecutive is a participant as of Ship and Sail.
In January 2010, we loaned South Texas Yacht Services,addition, subject to executing a vendorgeneral release in favor of Deep Down, $100. The owner of South Texas Yacht Services was in a business alliance with Ship and Sail. The note receivable, included in other assets on the consolidated balance sheet, bears interest at a rate of 5.5 percent per annum and monthly principal and interestCompany, the Executive will be entitled to receive certain severance payments in the amount of $2 commencedevent his employment is terminated by the Company “other than for cause” or by the Executive with “good reason.” These severance payments include: (i) a lump sum in April 2010. The final principal and interest payment is due March 24, 2015. As of March 31, 2011,cash equal to one to three times the payments on this note were current. Additionally, as of September 30, 2010, South Texas Yacht Services is no longerExecutive’s annual base salary; ii) a related party as they are no longerlump sum in a business alliance with Ship and Sail.
NOTE 13: CommitmentsRELATED PARTY TRANSACTIONS
We have a fabrication facility located in Cleveland, Texas on property currently owned by one of our employees (and who is not one of our “named executive officers”). In October 2012, we reached an understanding with the owner of the property to purchase the property for aggregate consideration of $500. The property includes 15 acres of land, and Contingencies
Although the transaction had yet to be consummated, we took possession of business. Asthe property in October 2012, and had paid the full purchase price of $500 by December 31, 2013. These payments have been accounted for in our financial statements as purchase deposits. We hope to consummate the transaction within sixty days of the date of this Report, we are not currently involved in any material legal proceedings.Report.
| F-21 |
| Years ended December 31,: | Capital Leases | Operating Leases | ||||||
| 2011 | $ | 195 | $ | 295 | ||||
| 2012 | 180 | 231 | ||||||
| 2013 | 172 | 194 | ||||||
| 2014 | 82 | 150 | ||||||
| 2015 | 58 | 150 | ||||||
| Thereafter | - | 25 | ||||||
| Total minimum lease payments | $ | 687 | $ | 1,045 | ||||
| Residual principal balance | 105 | |||||||
| Amount representing interest | (158 | ) | ||||||
| Present value of minimum lease payments | $ | 634 | ||||||
| Less current maturities of capital lease obligations | 129 | |||||||
| Long-term contractal obligations | $ | 505 | ||||||