UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019March 31, 2020
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 000-30351
DEEP DOWN, INC.
(Exact name of registrant as specified in its charter)
Nevada | 75-2263732 | |
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |
18511 Beaumont Highway, Houston, Texas | 77049 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code:(281) 517-5000
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.þYes¨No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YesþNo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ | Accelerated filer¨ | ||
Non-accelerated filer | Smaller reporting companyþ | ||
Emerging growth company¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Noþ
At November 12, 2019,May 11, 2020, there were 13,290,68012,391,365 shares outstanding of Common Stock, par value $0.001 per share.
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Unless otherwise indicated, references to “we,” “us,” and “our” in this Quarterly Report on Form 10-Q (“Report”) refer collectively to Deep Down, Inc., a Nevada corporation (“Deep Down”), and its wholly-owned subsidiary Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”). Our current operations are primarily conducted under Deep Down Delaware.
Readers should consider the following information as they review this Report:
Forward-Looking Statements
The statements contained or incorporated by reference in this Report that are not historical facts 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 “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements. The forward-looking statements contained herein are based on current expectations that involve a number ofseveral risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expect,” “may,” “will,” “should,” “intend,” “plan,” “could,” “estimate,” or “anticipate,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.
Given the risks and uncertainties relating to forward-looking statements, investors should not place undue reliance on such statements. Forward-looking statements included in this Report speak only as of the date of this Report and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to be incorrect. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. The risks and uncertainties mentioned previously relate to, among other matters, the following:
• | Economic uncertainty and financial market conditions may impact our customer base, suppliers and backlog; | |
• | Our backlog is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future earnings; | |
• | ||
• | Our use of percentage-of-completion accounting could result in volatility in our results of operations; | |
• | A portion of our contracts may contain terms with penalty provisions; | |
• | Fluctuations in the price and supply of raw materials used to manufacture our products may reduce our profits and could materially impact our ability to meet commitments to our customers; | |
• | Our operations could be adversely impacted by the continuing effects of government regulations; | |
• | International and political events may adversely affect our operations; |
i |
• | Our operating results may vary significantly from quarter to quarter; | |
• | We may be unsuccessful at generating profitable internal growth; | |
• | The departure of key personnel could disrupt our business; | |
• | Our business requires skilled labor, and we may be unable to attract and retain qualified employees; | |
• | Unfavorable legal outcomes could have a negative impact on our |
• | The impact of global health crises, including epidemics and pandemics. |
Document Summaries
Descriptions of documents and agreements contained in this Report are provided in summary form only, and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to our Annual Report on Form 10-K for the year ended December 31, 2018,2019, other periodic and current reports we have filed with the SEC, or this Report.
Access to Filings
Access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments thereto, filed with or furnished to the SEC pursuant to Section 13(a) of the Exchange Act, as well as reports filed by our executive officers and directors pursuant to Section 16(a) of the Exchange Act, may be obtained through our website (http://(www.deepdowninc.comwww.deepdowninc.com)) as soon as reasonably practicable after we, or our executive officers and directors, have filed or furnished such material with the SEC. The contents of our website are not, and shall not be deemed to be, incorporated into this Report.
ii |
iii |
PART I.I – FINANCIAL INFORMATION
DEEP DOWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)(UNAUDITED)
(In thousands, except share and par value amounts)
September 30, 2019 | December 31, 2018 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 1,782 | $ | 2,015 | ||||
Short term investment (certificate of deposit) | – | 1,035 | ||||||
Accounts receivable, net of allowance of $10 and $10, respectively | 6,722 | 4,388 | ||||||
Contract assets | 1,041 | 1,931 | ||||||
Prepaid expenses and other current assets | 163 | 621 | ||||||
Total current assets | 9,708 | 9,990 | ||||||
Property, plant and equipment, net | 8,661 | 9,691 | ||||||
Intangibles, net | 52 | 56 | ||||||
Right-of-use operating lease assets | 4,626 | – | ||||||
Other assets | 388 | 383 | ||||||
Total assets | $ | 23,435 | $ | 20,120 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 1,439 | $ | 1,982 | ||||
Contract liabilities | 530 | 973 | ||||||
Current lease liabilities | 1,167 | – | ||||||
Current portion of long-term debt | – | 9 | ||||||
Total current liabilities | 3,136 | 2,964 | ||||||
Non-current lease liabilities | 3,481 | – | ||||||
Long-term debt (Auto loan) | – | 47 | ||||||
Total long- term liabilities | 3,481 | 47 | ||||||
Total liabilities | 6,617 | 3,011 | ||||||
Commitments and contingencies (Note 9) | — | — | ||||||
Stockholders' equity: | ||||||||
Common stock, $0.001 par value, 24,500,000 shares authorized, 15,906,010 and 15,706,010 shares issued, respectively | 16 | 16 | ||||||
Additional paid-in capital | 73,471 | 73,271 | ||||||
Treasury stock, 2,615,330 and 2,027,217 shares, respectively, at cost | (2,280 | ) | (2,062 | ) | ||||
Accumulated deficit | (54,389 | ) | (54,116 | ) | ||||
Total stockholders' equity | 16,818 | 17,109 | ||||||
Total liabilities and stockholders' equity | $ | 23,435 | $ | 20,120 |
March 31, 2020 | December 31, 2019 | |||||||
(In thousands, except share data) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 3,033 | $ | 3,523 | ||||
Accounts receivable, net of allowance of $50 and $50, respectively | 4,635 | 4,454 | ||||||
Contract assets | 544 | 814 | ||||||
Prepaid expenses and other current assets | 120 | 156 | ||||||
Total current assets | 8,332 | 8,947 | ||||||
Property, plant and equipment, net | 7,734 | 7,964 | ||||||
Intangibles, net | 49 | 50 | ||||||
Right-of-use operating lease assets | 4,039 | 4,334 | ||||||
Other assets | 340 | 256 | ||||||
Total assets | $ | 20,494 | $ | 21,551 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 2,271 | $ | 2,204 | ||||
Contract liabilities | 900 | 623 | ||||||
Current lease liabilities | 1,196 | 1,181 | ||||||
Total current liabilities | 4,367 | 4,008 | ||||||
Operating lease liability, long-term | 2,875 | 3,180 | ||||||
Total liabilities | 7,242 | 7,188 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders' equity: | ||||||||
Common stock, $0.001 par value, 24,500,000 shares authorized, 15,906,010 and 15,906,010 shares issued, respectively | 16 | 16 | ||||||
Additional paid-in capital | 73,571 | 73,521 | ||||||
Treasury stock, 3,364,645 and 2,620,830 shares, respectively, at cost | (2,808 | ) | (2,284 | ) | ||||
Accumulated deficit | (57,527 | ) | (56,890 | ) | ||||
Total stockholders' equity | 13,252 | 14,363 | ||||||
Total liabilities and stockholders' equity | $ | 20,494 | $ | 21,551 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
1 |
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended | ||||||||||||||||||||||||
March 31, | ||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | 2020 | 2019 | |||||||||||||||||||||
September 30, | September 30, | (In thousands, except share data) | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||
Revenues | $ | 4,397 | $ | 3,912 | $ | 15,966 | $ | 11,722 | $ | 3,605 | $ | 6,300 | ||||||||||||
Cost of sales: | ||||||||||||||||||||||||
Cost of sales | 2,274 | 2,089 | 9,061 | 6,518 | 2,241 | 3,765 | ||||||||||||||||||
Depreciation expense | 278 | 275 | 837 | 871 | 241 | 277 | ||||||||||||||||||
Total cost of sales | 2,552 | 2,364 | 9,898 | 7,389 | 2,482 | 4,042 | ||||||||||||||||||
Gross profit | 1,845 | 1,548 | 6,068 | 4,333 | 1,123 | 2,258 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Selling, general and administrative | 2,136 | 2,145 | 6,137 | 5,804 | 1,693 | 1,995 | ||||||||||||||||||
Depreciation and amortization | 70 | 57 | 209 | 188 | 61 | 68 | ||||||||||||||||||
Total operating expenses | 2,206 | 2,202 | 6,346 | 5,992 | 1,754 | 2,063 | ||||||||||||||||||
Operating loss | (361 | ) | (654 | ) | (278 | ) | (1,659 | ) | ||||||||||||||||
Other (loss) income: | ||||||||||||||||||||||||
Interest income, net | – | 10 | 12 | 28 | ||||||||||||||||||||
(Loss) Gain on sale of property, plant and equipment | (7 | ) | – | 8 | 439 | |||||||||||||||||||
Total (loss) other income | (7 | ) | 10 | 20 | 467 | |||||||||||||||||||
Loss before income taxes | (368 | ) | (644 | ) | (258 | ) | (1,192 | ) | ||||||||||||||||
Operating income (loss) | (631 | ) | 195 | |||||||||||||||||||||
Other income: | ||||||||||||||||||||||||
Interest (expense) income, net | (1 | ) | 7 | |||||||||||||||||||||
Gain on sale of property, plant and equipment | – | 15 | ||||||||||||||||||||||
Total other income (expense) | (1 | ) | 22 | |||||||||||||||||||||
Income (loss) before income taxes | (632 | ) | 217 | |||||||||||||||||||||
Income tax expense | (5 | ) | (5 | ) | (15 | ) | (15 | ) | 5 | 5 | ||||||||||||||
Net loss | $ | (373 | ) | $ | (649 | ) | $ | (273 | ) | $ | (1,207 | ) | ||||||||||||
Net income (loss) | $ | (637 | ) | $ | 212 | |||||||||||||||||||
Net loss per share: | ||||||||||||||||||||||||
Net income (loss) per share: | ||||||||||||||||||||||||
Basic | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.05 | ) | $ | 0.02 | |||||||
Fully diluted | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.05 | ) | $ | 0.02 | |||||||
Weighted-average shares outstanding: | ||||||||||||||||||||||||
Basic | 13,330 | 13,648 | 13,417 | 13,507 | 12,710 | 13,511 | ||||||||||||||||||
Fully diluted | 13,330 | 13,648 | 13,417 | 13,507 | 12,710 | 13,511 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
2 |
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE-MONTH ENDED September 30, 2019 and 2018(UNAUDITED)
(Unaudited)
(In thousands)
Additional | Additional | |||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Treasury | Accumulated | Common Stock | Paid-in | Treasury | Accumulated | |||||||||||||||||||||||||||||||||||||||||
Shares (#) | Amount ($) | Capital | Stock | Deficit | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | 15,438 | $ | 15 | $ | 73,246 | $ | (2,040 | ) | $ | (49,374 | ) | $ | 21,847 | |||||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | (850 | ) | (850 | ) | ||||||||||||||||||||||||||||||||||||||||
Share-based compensation | – | – | 5 | – | – | 5 | ||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2018 | 15,438 | $ | 15 | $ | 73,251 | $ | (2,040 | ) | $ | (50,224 | ) | $ | 21,002 | |||||||||||||||||||||||||||||||||||
Net income | – | – | – | – | 292 | 292 | ||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | – | – | 5 | – | – | 5 | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2018 | 15,438 | $ | 15 | $ | 73,256 | $ | (2,040 | ) | $ | (49,932 | ) | $ | 21,299 | |||||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | (649 | ) | (649 | ) | ||||||||||||||||||||||||||||||||||||||||
Share-based compensation | – | – | 5 | – | – | 5 | ||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 | 15,438 | $ | 15 | $ | 73,261 | $ | (2,040 | ) | $ | (50,581 | ) | $ | 20,655 | |||||||||||||||||||||||||||||||||||
(In thousands) | Shares (#) | Amount ($) | Capital | Stock | Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 15,706 | 16 | 73,271 | (2,062 | ) | (54,116 | ) | 17,109 | 15,706 | $ | 16 | $ | 73,271 | $ | (2,062 | ) | $ | (54,116 | ) | $ | 17,109 | |||||||||||||||||||||||||||
Net income | – | – | – | – | 212 | 212 | – | – | – | – | 212 | 212 | ||||||||||||||||||||||||||||||||||||
Treasury shares purchased | – | – | – | (170 | ) | – | (170 | ) | – | – | – | (170 | ) | – | (170 | ) | ||||||||||||||||||||||||||||||||
Share-based compensation | – | – | 104 | – | – | 104 | – | – | 104 | – | – | 104 | ||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | 15,706 | $ | 16 | $ | 73,375 | $ | (2,232 | ) | $ | (53,904 | ) | $ | 17,255 | 15,706 | $ | 16 | $ | 73,375 | $ | (2,232 | ) | $ | (53,904 | ) | $ | 17,255 | ||||||||||||||||||||||
Balance at December 31, 2019 | 15,906 | $ | 16 | $ | 73,521 | $ | (2,284 | ) | $ | (56,890 | ) | $ | 14,363 | |||||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | (112 | ) | (112 | ) | – | – | – | – | (637 | ) | (637 | ) | ||||||||||||||||||||||||||||||||
Treasury shares purchased | – | – | – | (48 | ) | – | (48 | ) | – | – | – | (524 | ) | – | (524 | ) | ||||||||||||||||||||||||||||||||
Share-based compensation | – | – | 24 | – | – | 24 | – | – | 50 | – | – | 50 | ||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 15,706 | $ | 16 | $ | 73,399 | $ | (2,280 | ) | $ | (54,016 | ) | $ | 17,119 | |||||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | (373 | ) | $ | (373 | ) | |||||||||||||||||||||||||||||||||||||||
Restricted stock awards | 200 | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | – | – | 72 | – | – | 72 | ||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 15,906 | $ | 16 | $ | 73,471 | $ | (2,280 | ) | $ | (54,389 | ) | $ | 16,818 | |||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 15,906 | $ | 16 | $ | 73,571 | $ | (2,808 | ) | $ | (57,527 | ) | $ | 13,252 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3 |
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(UNAUDITED)
(In thousands)
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(In thousands) | ||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (273 | ) | $ | (1,207 | ) | ||||||||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||||||
Net income (loss) | $ | (637 | ) | $ | 212 | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||
Share-based compensation | 200 | 15 | 50 | 104 | ||||||||||||
Depreciation and amortization | 1,046 | 1,059 | 302 | 345 | ||||||||||||
Gain on sale of property, plant and equipment | (8 | ) | (439 | ) | – | (15 | ) | |||||||||
Non-cash lease expense | 22 | – | 5 | 9 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (2,334 | ) | 931 | (181 | ) | (2,566 | ) | |||||||||
Contract assets | 890 | (249 | ) | 270 | 1,104 | |||||||||||
Prepaid expenses and other current assets | (57 | ) | 180 | 32 | (34 | ) | ||||||||||
Other assets | (31 | ) | 102 | (94 | ) | 21 | ||||||||||
Accounts payable and accrued liabilities | (543 | ) | (299 | ) | 67 | 173 | ||||||||||
Contract liabilities | (443 | ) | (104 | ) | 277 | 64 | ||||||||||
Net cash used in operating activities | (1,531 | ) | (11 | ) | ||||||||||||
Net cash provided by (used in) operating activities | 91 | (583 | ) | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Proceeds from sale of property, plant and equipment | 88 | 538 | – | 15 | ||||||||||||
Purchases of property, plant and equipment | (66 | ) | (759 | ) | (61 | ) | – | |||||||||
Repayments on note receivable(included in Prepaid expenses and other current assets) | 515 | 12 | ||||||||||||||
Short term investment (certificate of deposit) | 1,035 | (15 | ) | |||||||||||||
Payments received on note receivable(included in Prepaid expenses and other current assets) | 4 | 507 | ||||||||||||||
Short term investment - (certificate of deposit) | – | (5 | ) | |||||||||||||
Net cash provided by (used in) investing activities | 1,572 | (224 | ) | (57 | ) | 517 | ||||||||||
Cash flows from financing activities: | ||||||||||||||||
Principal payment on long-term debt | (56 | ) | (7 | ) | – | (3 | ) | |||||||||
Cash paid for treasury shares purchased | (218 | ) | – | |||||||||||||
Repurchase of common shares | (524 | ) | (170 | ) | ||||||||||||
Net cash used in financing activities | (274 | ) | (7 | ) | (524 | ) | (173 | ) | ||||||||
Change in cash | (233 | ) | (242 | ) | (490 | ) | (239 | ) | ||||||||
Cash, beginning of period | 2,015 | 3,939 | 3,523 | 2,015 | ||||||||||||
Cash, end of period | $ | 1,782 | $ | 3,697 | $ | 3,033 | $ | 1,776 | ||||||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||||||||||
Addition of property, plant and equipment (non-cash) | $ | – | $ | 277 | ||||||||||||
Property, plant and equipment sold in accounts receivable | $ | – | $ | 27 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and shares in thousands except per share amounts)
NOTE 1: | BASIS OF PRESENTATION |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Deep Down, Inc. and its wholly-owned subsidiary (“Deep Down,” “we,” “us” or the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q. As permitted under those rules, certain notes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosed amounts of contingent assets and liabilities, and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Liquidity
The Company’s primarycash on hand was $3,033 and potential sourcesworking capital was $3,965 as of liquidity includeMarch 31, 2020. As of December 31, 2019, cash on hand and working capital was $3,523 and $4,939, respectively. The Company does not have a credit facility in place and depends on cash on hand, cash flows from operating activities,operations, and proceeds fromthe potential opportunistic sales of property, plant and equipment (“PP&E”). to meet its liquidity needs.
Given the abrupt decline in oil prices and global economic activity caused by COVID-19, the Company cannot predict with certainty the overall impact on the Company’s operations and cash flows. The Company’s cash asCompany has taken steps to mitigate the challenges presented by the current macro environment, including workforce reductions, wage reductions, rent abatement, and limiting capital expenditures and R&D efforts to only critical items. The Company continues to seek further cost reduction opportunities to preserve liquidity.
Additionally, the Company applied for a loan under the Small Business Administration’s Paycheck Protection Program. On April 29, 2020, the Company received a loan in the amount of September 30, 2019$1,111, which will be used to finance payroll, rent, and December 31, 2018 was $1,782utilities over the balance of the second quarter of 2020. The loan principal and $2,015, respectively. The decreaserelated interest accrued may be forgivable, partially or in cash was largely the result of prolonged payment terms by some of our customers, which resulted in a $2,334 increase in our accounts receivable as of September 30, 2019 compared to December 31, 2018. As of September 30, 2019, our working capital was $6,572 compared to $7,026 as of December 31, 2018.full, if certain conditions are met.
The Company’s plansCompany believes it will have adequate liquidity to mitigatemeet its limited liquidity include: closely monitoringfuture operating requirements through a combination of cash on hand, cash expected to be generated from operations, current working capital, expenditures planned for the remainder of 2019 and beyond to conserve capital, potential opportunistic sales of PP&E further reducing administrative costs, and potentiallyin addition to pursuing a line of creditdisciplined approach to further supplement our operating requirements.making capital investments.
5 |
The Company’s operations are influenced by a number of factors that are beyond its control, including general conditions of the offshore energy sector, oil and gas operators’ willingness to spend development capital, and other factors that could adversely affect the Company’s financial position, results of operations and liquidity.
Principles of Consolidation
The unaudited condensed consolidated financial statements presented herein include the accounts of Deep Down, Inc. and its wholly-ownedwholly owned subsidiary. All intercompany transactions and balances have been eliminated.
Segments
For the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, we had one operating and reporting segment, Deep Down Delaware.
NOTE 2: | LEASES |
Recently Issued Accounting Standards Not Yet Adopted
In JuneFebruary 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard UpdateASU 2016-02, Leases (“ASU”) No. 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments,” as modified by subsequently issued ASU No. 2018-19, “Codification Improvements toASC Topic 326, Financial Instruments-Credit Losses.” The842”). Under this guidance, introduces a new credit reserving model known as the Current Expected Credit Loss (“CECL”) model, which is based on expected losses, and differs significantly from the incurred loss approach used today. The CECL model requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. These ASUs affect an entity to varying degrees depending on the credit quality for the assets held by the entity, their duration and how the entity applies current US GAAP. These ASUs will become effective for us beginning January 1, 2020. We do not expect these ASUs to have a material impact on our financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which modifies the disclosure requirements of fair value measurements. ASU 2018-13 is effective for us beginning January 1, 2020. Certain disclosureslessees are required to be applied on a retrospective basis and others on a prospective basis. We do not expect ASU 2018-13 to have a material impact on our financial statement disclosures.
All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated to determine if they will have a material impact on our financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and subsequent amendments, which replaced existing lease guidance in US GAAP and requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet a lease liability and a right-of-use (“ROU”) asset for all leases, greater thanexcept for short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make lease payments arising from a lease and disclose key information about leasing arrangements. We adoptedwill be measured as the standard on January 1, 2019 usingpresent value of the modified retrospective method and usedlease payments. The ROU asset represents the effective date as our date of initial application. Financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. There were no adjustments to opening retained earnings on adoption.
The Company leases certain properties, buildings and equipment under various arrangements that provide thelessee’s right to use the underlyinga specified asset and require lease payments for the lease term. The Company’sterm, and will be measured at the lease portfolio consists of operating leases, which expire at various dates through 2023.liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs.
The new standardPractical Expedients
ASC Topic 842 provides a number of optionalfor certain practical expedients for transition. Wewhen adopting the guidance. The Company elected the package of practical expedients underallowing the transition guidance which permitted usCompany, for all leases that commenced prior to the adoption date, to not to reassess under the new standard our prior conclusions for lease identification and lease classification onwhether any expired or existing contracts and whetherare, or contain, leases, the lease classification for any expired or existing leases or initial direct costs previously capitalized would qualify for capitalization under Topic 842. We also elected the practical expedient related to land easements, which allowed us not to reassess our current accounting treatment for existing agreements on land easements, which are not accounted for as leases. We did not elect the hindsight practical expedient to determine the reasonably certain lease term forany expired or existing leases.
The new standard also providesCompany utilizes the land easements practical expedients and recognition exemptionsexpedient allowing the Company to not assess whether any expired or existing land easements are, or contain, leases if they were not previously accounted for as leases under the existing leasing guidance. Instead, the Company will continue to apply its existing accounting policies to historical land easements. The Company elects to apply the short-term lease exception; therefore, the Company will not record an entity’s ongoing accounting policy elections. ForROU asset or corresponding lease liability for leases with an initial term of twelve months or less a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities and instead recognize lease expense for such leases generally on a straight line basis over the lease term. We elected this short-term lease recognition exemption for all leases that qualify. We do not separate lease and non-lease components. Some of our agreements contain variable payment provisions (other than those that depend on an index or a rate, such as CPI) which are not included in our future minimum lease payments. These variable lease agreements include usage-based payments for equipment under service contracts and other properties.
Our long-term lease agreements do not contain any material restrictive covenants. Our equipment leases have remaining terms of between 1 year and 3 years, and property leases have remaining terms of between 1 year and 5 years. Some of these leases may include options to extend the leases, and some may include options to terminate the leases within 30 days. When we are not reasonably certain to exercise these options, the options are not considered in determiningof being renewed and instead will recognize a single lease cost allocated over the lease term, generally on a straight-line basis. The Company elects to apply the practical expedient to not separate lease components from non-lease components and associated payments are excluded from future minimuminstead account for both as a single lease payments.component for all asset classes.
The Company elects to not capitalize any lease in which the estimated value of the underlying asset at the commencement date is less than the Company’s capitalization threshold. A lease would need to qualify for the low value exception based on various criteria.
ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and a portion is recorded in cost of sales, and the remainder is recorded in selling, general and administrative expenses.
The accounting for some of our leases may require significant judgement,judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rate to utilize in our net present value calculation of lease payments for lease agreements which do not provide an implicit rate and assessing the likelihood of renewal or termination options.
During the third quarter ended September 30, 2019, we derecognized $164 in lease liabilities and ROU assets associated with a related party lease that was on a month-to-month basis.
As of September 30, 2019,March 31, 2020, we do not have any finance lease assets or liabilities, nor do we have any subleases.
6 |
The following tables present information about our operating leases.leases:
September 30, 2019 | January 1, 2019 | |||||||
Assets: | ||||||||
Right-of-use operating lease assets | $ | 4,626 | $ | 5,707 | ||||
Liabilities: | ||||||||
Current lease liabilities | 1,167 | 1,215 | ||||||
Non-current lease liabilities | 3,481 | 4,492 | ||||||
Total lease liabilities | $ | 4,648 | $ | 5,707 |
March 31, 2020 | December 31, 2019 | |||||||
Assets: | (In thousands) | |||||||
Right-of-use assets | $ | 4,039 | $ | 4,334 | ||||
Liabilities: | ||||||||
Current lease liabilities | 1,196 | 1,181 | ||||||
Non-current lease liabilities | 2,875 | 3,180 | ||||||
Total lease liabilities | $ | 4,071 | $ | 4,361 |
The components of our lease expense were as follows:
Three Months Ended | ||||||||||||||||
Three Months Ended | Nine Months Ended | March 31, | ||||||||||||||
September 30, 2019 | September 30, 2019 | 2020 | 2019 | |||||||||||||
(In thousands) | ||||||||||||||||
Operating lease expense included in Cost of sales | $ | 312 | $ | 926 | $ | 308 | $ | 306 | ||||||||
Operating lease expense included in SG&A | 55 | 185 | 60 | 73 | ||||||||||||
Short term lease expense | 41 | 278 | 34 | 65 | ||||||||||||
Total lease expense | $ | 408 | $ | 1,389 | $ | 402 | $ | 444 |
As of September 30, 2019, we do not have any finance lease assets or liabilities, nor do we have any subleases.
Nine Months Ended | ||||||||
September 30, 2019 | ||||||||
Other information related to operating leases were as follows: | ||||||||
Operating cash flows from operating leases | $ | (1,111 | ) |
Lease Term and Discount Rate: | September 30, 2019 | January 1, 2019 | ||||||
Weighted-average remaining lease terms (years) on operating leases | 3.69 | 4.5 | ||||||
Weighted-average discount rates on operating leases | 5.374% | 5.374% |
Lease term and discount rate:
March 31, 2020 | December 31, 2019 | |||||||
Weighted-average remaining lease terms on operating leases (yrs.) | 3.12 | 3.28 | ||||||
Weighted-average discount rates on operating leases | 5.374 | % | 5.374 | % |
During the third quarter weended March 31, 2020, the Company did not have any sale/leaseback transactions.
Future minimum lease payments under non cancellable operating leases were as follows: | 12 Months ending | ||||
September 30, | |||||
2020 | $ | 1,385 | |||
2021 | 1,387 | ||||
2022 | 1,403 | ||||
2023 | 942 | ||||
Thereafter | – | ||||
Total lease payments | 5,117 | ||||
Less: Interest | (469 | ) | |||
Present value of lease liabilities | $ | 4,648 |
Present value of lease liabilities:
Twelve months ending March 31, | Operating Leases | |||
(In thousands) | ||||
2021 | $ | 1,381 | ||
2022 | 1,395 | |||
2023 | 1,411 | |||
2024 | 236 | |||
Thereafter | – | |||
Total lease payments | 4,423 | |||
Less: Interest | (352 | ) | ||
Present value of lease liabilities | $ | 4,071 |
On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. There was no significant impact on the Company’s results of operations or financial position upon the adoption of ASC 606. We did not record any adjustments to opening retained earnings as of January 1, 2018 because the Company’s revenue recognition methodologies for both fixed price contracts (over time using cost to cost as an input measure of performance) and for service contracts (over time as services are performed) do not materially change by the adoption of the new standard.
7 |
NOTE 3: REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenues are recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. To determine the proper revenue recognition method for our customer contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.
For most of our fixed price contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation.
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Disaggregation of Revenue
The following table presents ourthe Company’s revenues disaggregated by revenue sources of fixed price and service contracts. Sales taxes are excluded from revenues.
Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018
September 30, 2019 | September 30, 2018 | |||||||
Fixed Price Contracts | $ | 3,012 | $ | 2,115 | ||||
Service Contracts | 1,385 | 1,797 | ||||||
Total | $ | 4,397 | $ | 3,912 |
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(In thousands) | ||||||||
Fixed Price Contracts | $ | 1,744 | $ | 3,531 | ||||
Service Contracts | 1,861 | 2,769 | ||||||
Total | $ | 3,605 | $ | 6,300 |
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
September 30, 2019 | September 30, 2018 | |||||||
Fixed Price Contracts | $ | 9,422 | $ | 5,048 | ||||
Service Contracts | 6,544 | 6,674 | ||||||
Total | $ | 15,966 | $ | 11,722 |
Fixed Price Contractsprice contracts
For fixed price contracts, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Additionally, in otherIn our fixed price contracts, the customer typicallyeither controls the work in process as evidenced either by contractual termination clauses or by ourwe deliver products with no alternative use to the Company and have rights to payment for work performed to date plus a reasonable profit in connection with delivery of products or services that do not have an alternative use to the Company.as evidenced by contractual termination clauses.
Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.
8 |
Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
We have a company-wide standard and disciplined quarterly estimate at completion process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred exceed total estimates of revenue to be earned on a performance obligation related to fixed price contracts, a provision for the entire loss on the performance obligation is recognized in the period the loss is estimated.
Service Contracts
We recognize revenue for service contracts measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred over time when the services are rendered to the customer on a daily basis. Specifically, we recognize revenue as the services are provided as we have the right to invoice the customer for the services performed. Services are billed and are generally required to be paid on a monthly basis. Payment terms for services are usually 30 days from invoice receipt, but during the recent downturn in the industry, some of our customers have begun instituting new payment terms of up to 60 days from invoice receipt.
Contract Balancesbalances
Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded based on a percentage-of-completion basisthe extent of progress towards completion but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual 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 risk of loss has passed to the customer.
Assets 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. At September 30, 2019March 31, 2020 and December 31, 2018, we had2019, there were no contracts whose termwith terms that extended beyond one year.
9 |
The following table summarizes our contract assets, which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts.”contracts”.
September 30, 2019 | December 31, 2018 | |||||||
Costs incurred on uncompleted contracts | $ | 1,342 | $ | 9,697 | ||||
Estimated earnings on uncompleted contracts | 2,159 | 10,787 | ||||||
3,501 | 20,484 | |||||||
Less: Billings to date on uncompleted contracts | (2,990 | ) | (19,526 | ) | ||||
$ | 511 | $ | 958 | |||||
Included in the accompanying unaudited condensed consolidated balance sheets under the following captions: | ||||||||
Contract assets | $ | 1,041 | $ | 1,931 | ||||
Contract liabilities | (530 | ) | (973 | ) | ||||
$ | 511 | $ | 958 |
March 31, 2020 | December 31, 2019 | |||||||
(In thousands) | ||||||||
Costs incurred on uncompleted contracts | $ | 1,716 | $ | 1,687 | ||||
Estimated earnings on uncompleted contracts | 2,659 | 2,294 | ||||||
4,375 | 3,981 | |||||||
Less: Billings to date on uncompleted contracts | (4,731 | ) | (3,790 | ) | ||||
$ | (356 | ) | $ | 191 | ||||
Included in the accompanying unaudited condensed consolidated balance sheets under the following captions: | ||||||||
Contract assets | $ | 544 | $ | 814 | ||||
Contract liabilities | (900 | ) | (623 | ) | ||||
$ | (356 | ) | $ | 191 |
The contract asset and liability balances at March 31, 2020 and December 31, 2019 consisted primarily of revenue related to fixed-price projects.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and excludes unexercised contract options, and potential orders, and also any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of ASC 606.
At September 30, 2019 and December 31, 2018, all of our fixed price contracts are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.
Many of our services contracts are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
Additionally, our payment terms are short-term in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Further, in many of our service contracts, we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided). For those contracts, we have utilized the practical expedient in ASC 606-10-55-18, which allows us to recognize revenue in the amount for which we have the right to invoice.
Accordingly, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
NOTE 4: | PROPERTY, PLANT AND EQUIPMENT |
The components of property,Property, plant and equipment net are summarized below:consisted of the following:
September 30, 2019 | December 31, 2018 | Range of Asset Lives | March 31, 2020 | December 31, 2019 | Range of Asset Lives | |||||||||||||||||
(In thousands) | ||||||||||||||||||||||
Buildings and improvements | $ | 285 | $ | 285 | 7 - 36 years | $ | 285 | $ | 285 | 7 - 36 years | ||||||||||||
Leasehold improvements | 896 | 908 | 2 - 5 years | 896 | 896 | 2 - 5 years | ||||||||||||||||
Equipment | 18,670 | 18,640 | 2 - 30 years | 17,896 | 17,887 | 2 - 30 years | ||||||||||||||||
Furniture, computers and office equipment | 902 | 1,166 | 2 - 8 years | 901 | 901 | 2 - 8 years | ||||||||||||||||
Construction in progress | 76 | 158 | 116 | 64 | – | |||||||||||||||||
Total property, plant and equipment | 20,829 | 21,157 | 20,094 | 20,033 | ||||||||||||||||||
Less: Accumulated depreciation and amortization | (12,168 | ) | (11,466 | ) | (12,360 | ) | (12,069 | ) | ||||||||||||||
Property, plant and equipment, net | $ | 8,661 | $ | 9,691 | $ | 7,734 | $ | 7,964 |
In January 2018, we financed a new Company vehicle. The financed amount was $67 and was for a term of six years with an interest rate of 0.9%, with monthly payments of $1. During the quarter ended September 30, 2019, the Company vehicle was sold to our former Chief Executive Officer and the outstanding balance of the debt was paid. The sale of the vehicle resulted in a $7 loss.
NOTE | SHARE-BASED COMPENSATION |
On May 2, 2017, the Company granted 30 shares of restricted stock to the current Chairman of the Board (“Chairman”). These shares have a fair value grant price of $1.15 per share, based on the closing price of our common stock on that day. These shares vest over three years in equal tranches on the anniversary date of the grant subject to continued service to the Company. The related share-based compensation of $35 is being amortized over the three-year requisite service period, and the Company recognized $3 in compensation expense for the quarter ended March 31, 2020.
On July 27, 2018, wethe Company granted 300 shares of restricted stock to our Chief Financial Officer (“CFO”) who is now ourthe current Chief Executive Officer (“CEO”) after our former officer resigned effective August 31, 2019.and Chief Financial Officer (“CFO”). These shares hadhave a fair value grant price of $0.79 per share, based on the closing price of our common stock on that day. These shares vest over three years in equal tranches on the anniversary date of his appointment to the role of theas CFO, subject to continued service as an officer ofto the Company. For the three months ended September 30, 2019 and 2018, we recognized share based compensation expense of $20 and $14, respectively. We are amortizing theThe related share-based compensation of $237 is being amortized over the three-year requisite service period.period, and the Company recognized $20 in compensation expense for the quarter ended March 31, 2020.
On June 24, 2019, the three non-employee members of the Board of Directors (the “Board”) were each granted an option to purchase 50 shares of our common stock at a price of $0.75 per share. Fair value of these stock options was $0.44 per share at the date of grant. The options vested 25% on August 31, 2019, 25% on November 30, 2019, 25% on February 29, 2020, and the remainder is scheduled to vest in three tranches on November 30, 2019, February 29, 2020 and May 31, 2020, subject to the recipient’s continued service on the Board. Once vested, the options are exercisable until June 24, 2024. The related share-based compensation of $66 is being amortized over the requisite service period, and the Company recognized $16 in compensation expense for the quarter ended March 31, 2020.
On September 23, 2019, wethe Company granted 200 shares of restricted stock to ourthe former Chief Operating Officer (“COO”). These shares hadhave a fair value grant price of $0.65 per share, based on the closing price of our common stock on that day. One fourth of the shares vested immediately, andbut the remaining shares are scheduled towill not vest over three years in equal tranches onas the anniversary dateposition of his appointment toCOO was eliminated by the role, subject to continued service as our COO. WeCompany following March 31, 2020. The Company recognized $33$11 in compensation expense for the quarter ended September 30, 2019 and we are amortizing the remaining share-based compensation of $64 over the three-year requisite service period as the shares vest.March 31, 2020.
On September 24, 2019, wethe Company granted our new CEO an option to purchase 150 shares of our common stock to the CEO at a price of $0.65 per share. Fair value of these stock options was $0.39 per share at the date of grant. The options are scheduled to vest in two equal tranches on the first and second anniversaries of the grant subject to his continued service as our CEO. We recognized $0 in compensation expense for the quarter ended September 30, 2019 and we are amortizing theThe related share basedshare-based compensation of $59 will be amortized over the two-year requisite service period as the shares vest.vest, and the compensation expense for the quarter ended March 31, 2020 was immaterial.
11 |
On January 20, 2020, the Company granted an option to purchase 50 shares of our common stock to the VP of Finance at a price of $0.76 per share. Fair value of these stock options was $0.31 per share at the date of grant. The options are scheduled to vest in two equal tranches on the first and second anniversaries of the grant subject to his continued service to the Company. The related share-based compensation of $16 will be amortized over the two-year requisite service period as the shares vest, and the compensation expense for the quarter ended March 31, 2020 was immaterial.
Summary of Shares of Restricted Stock and Stock Options
For the three months ended September 30,March 31, 2020 and 2019, and 2018, we recognized a total of $55$50 and $5 respectively, of share based compensation related to restricted stock awards. For the nine months ended September 30, 2019 and 2018, we recognized a total of $183 and $15$104, respectively, of share-based compensation expense related to restricted stock awards and stock options, which is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
The number of unvested shares of restricted stock was 210 and 360 at March 31, 2020 and December 31, 2019, respectively. The unamortized estimated fair value of unvested shares of restricted stock was $168$101 and $134 at September 30, 2019March 31, 2020 and $222 at December 31, 2018.2019, respectively. These costs are expected to be recognized as expense over a weighted-average period of 1.801.81 years.
SummaryThe number of Stock Options
For the threeunvested of stock options was 238 and nine months ended September 30,225 at March 31, 2020 and December 31, 2019, we recognized $17 in compensation expense related to outstanding stock option awards.respectively. The share-based compensation expense is recognized over the vesting period and is included in selling, general and administrative expenses in the condensed consolidated statements of operations. Theunamortized estimated fair value of non-vestedunvested stock options was $108$107 and $91 at September 30, 2019March 31, 2020 and $0 as of December 31, 2018. This cost is expected to be recognized as an expense over the period ending September 24, 2021.2019, respectively.
NOTE | TREASURY STOCK |
On March 26, 2018,December 23, 2019, the Board authorized the repurchase of up to $1,000500 shares of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Program was funded from cash on hand.hand and cash provided by operating activities. The Board separately authorized the repurchase of additional shares during the quarter ended March 31, 2020, in a privately negotiated transaction. During the three months ended March 31, 2019, 2282020, 744 shares of our outstanding common stock were purchased at the pricefor an aggregate amount of $0.75 under the Repurchase Program. The Repurchase Program expired on$524. As of March 31, 2019.2020, the repurchase program has been exhausted.
On May 2, 2019,Treasury shares are accounted for using the Company repurchased 60 shares from a former member of the Board. The shares were repurchased at the price of $0.80 per share, which was the average closing price for the ten trading days prior to the date of repurchase.
On September 1, 2019, the Company received 300 shares of common stock from our former CEO in exchange for certain previously impaired Company equipment ($0 carrying value at the time of exchange). No value was recorded to treasury stock because the assets had approximately $0 fair value at the time of the exchange.cost method.
NOTE | INCOME TAXES |
Income tax expense during interim periods is based on applying the estimated annual effective income tax rate to interim period operations. The estimated annual effective income tax rate may vary from the statutory rate due to the impact of permanent items relative to our pre-tax income, as well as by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized. At September 30, 2019March 31, 2020 and December 31, 20182019, management has recorded a full deferred tax asset valuation allowance.
NOTE | COMMITMENTS AND CONTINGENCIES |
Employment Agreements
The Company’s CEO and COO (the “Executives”) are employed under employment agreements containing severance provisions. In the event of termination of the Executives’ 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 the Executives are entitled or vested under the terms of all employee benefit and compensation plans, agreements and arrangements in which the Executives are participants as of the date of termination.
12 |
In addition, subject to executing a general release in favor of the Company, the Executive will be entitled to receive certain severance payments in the event of termination of the Executive’s employment by the Company “other than for cause” or by the Executive with “good reason.” These severance payments include: (i) a lump sum in cash equal to one to two times the Executive’s annual base salary; (ii) a lump sum in cash equal to one 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 the Company’s annual incentive bonus arrangement, but no less than fifty percent of Executive’s annual base salary; and (iv) if the Executive’s termination occurs prior to the date that is twelve months following a change of control, then each and every share option, restricted share award and other equity-based award that is outstanding and held by the Executive shall immediately vest and become exercisable.
Subsequent to March 31, 2020, the Company eliminated the position of COO and relieved the COO of his duties pursuant to the terms of his employment agreement, and placed him on garden leave for the remainder of his employment through May 31, 2020. In addition to payment of accrued and unpaid salary, vacation time, and other benefits referred to above, and subject to execution of a release of claims by the COO, the Company is required to pay him one time his current annual base salary of $245,000, payable over 12 months.
Litigation
From time to time, we are involved inthe Company is party to various legal proceedings arising fromin the normalordinary course of business. We expenseThe Company expenses or accrueaccrues legal costs as we incur them.incurred. A summary of ourthe Company’s material legal proceedings is as follows:
On August 6, 2018, GE Oil and Gas UK LtdLtd. (“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR.ADR (“ICC”). The dispute involvesinvolved alleged delays and defects in products manufactured by the Company for GE dating back to 2013. The Company disputed GE’s allegations and vigorously defended itself against these allegations. Mediation took place on November 28, 2018 but no resolution was reached.not resolved. On February 22, 2019, GE initiated arbitration proceedings with the ICC. The originaltotal amount in dispute was originally $2,630 but as of GE’s latest filing with the ICC, the amount in dispute has beenwas later reduced to $2,252. TheOn February 26, 2020, the parties agreed in principle to settle the dispute, and the parties are inworking toward finalizing the processterms of filing preliminary submissions, and the arbitration is currently set for April 2020.a definitive settlement agreement. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. At this point in the legal process, we do not believe a loss to us is probable, therefore we have not recordedaccrued a liability related to this matter.matter in the amount of $750 for the year ended December 31, 2019.
In November 2011, the Company delivered equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270 alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required. The Company repeatedly attempted to collect on the receivable, and ultimately filed suit on November 16, 2012, in the Harris County District Court. Aker subsequently filed a counter-claimcounterclaim on March 20, 2013 in the aggregate amount of $1,000 for reimbursement of insurance payments allegedly made for repairs. Trial is scheduled for April 2020.The parties have not reached a resolution on this matter. At this point, init is not clear as to whether an unfavorable outcome is either probable or remote, and the legal process, we do not believe aCompany is unable to determine the likelihood of an unfavorable outcome or the amount or range of potential loss to us is probable, therefore we have not recorded a liability related to this matter.if the outcome should be unfavorable.
NOTE | EARNINGS PER COMMON SHARE |
Basic earnings per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents (warrants, nonvested stock awards and stock options) outstanding during the period. Diluted EPS reflects the potential dilution that could occur if options to purchase common stock were exercised for shares of common stock and all nonvested stock awards vest.
For the threeAt March 31, 2020 and nine months ended September 30, 2019, and 2018 thereall such securities were no potentially dilutive securities that were included in the computation of diluted earnings per share because their effect would be anti-dilutive.
13 |
NOTE | RELATED PARTY TRANSACTIONS |
On August 15, 2019, Mr. Ronald E. Smith, the Company's Founder, resigned as Chief Executive Officer and as a member of the Board, effective as of August 31, 2019.
In connection with Mr. Smith's resignation, the Company and Mr. Smith entered into a Transition Agreement, with him, effective as of September 1, 2019 (the “Transition Agreement”). The Transition Agreement provides for Mr. Smith to serve as an independent consultant to the Company from September 1, 2019 through December 31, 2021. The Company agreed to pay Mr. Smith $42 per month, from September 1, 2019 through December 31, 2019, and $15 per month, from January 1, 2020 through December 31, 2021, in exchange for his future services.
Under the terms of The Company therefore recorded consulting expenses related to the Transition Agreement the Company agreed to pay Mr. Smith a severance payment of $250, which was fully accrued during the nine-month period ended September 30, 2019, and is payable in structured payments through December 31, 2019.
Additionally, under the terms of the Transition Agreement, the Company accepted 300 of Mr. Smith's shares of the Company’s common stock in exchange for certain previously impaired Company equipment ($0 carrying value at the time of the exchange). Because the assets had an approximate fair value of $0 at the time of the exchange no value was recorded to treasury stock. The Transition Agreement also providestotaling $45 for the Company to transfer a Company truck to Mr. Smith with the associated liability assumed by Mr. Smith. We recognized a $7 loss on this transaction.quarter ended March 31, 2020.
In addition to the other payments provided for under the Transition Agreement, the Company also agreed to pay Mr. Smith 1.5% of the net sale or lease value of two carousels owned by Company, if such sale or lease occurs prior to December 31, 2021, unless those assets are sold or leased in conjunction with a sale of all or substantially all of the assets or stock of Deep Down, in which case no commission is due.
As part of the Transition Agreement, Mr. Smith is bound by certain non-disclosure and confidentiality provisions, and a non-compete and non-hire agreement.
NOTE 11. | SUBSEQUENT EVENTS |
We have evaluated subsequent events through the date the condensed consolidated financial statements included in this Report were filed with the Securities and Exchange Commission.
As a result of the abrupt decline in oil prices and global economic activity caused by COVID-19, the Company applied for a loan under the Small Business Administration’s Paycheck Protection Program, and on April 29, 2020, the Company received a loan in the amount of $1,111, which will be used to finance payroll, rent, and utilities over the balance of the second quarter of 2020. The loan principal and related interest accrued may be forgivable, partially or in full, if certain conditions are met.
Also, on April 6, 2020, the Company signed a Letter of Understanding for Landlord to Temporarily and Partially Abate Rent (the “Abatement Letter”) provided by the Company’s landlord of our corporate office and facility. According to the Abatement Letter, our landlord agreed to reduce rent payments over a four-month period beginning with the April 2020 payment. Over this four-month period, the Company’s rent will be lowered by a total of $253. In exchange for the rent abatement, the Company agreed to extend the lease by two months.
14 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis providesprovide information that management believes is relevant for an assessment and understanding of our results of operations and financial condition. This information should be read in conjunction with our audited historical consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, and our unaudited condensed consolidated financial statements, and notes thereto, included with this Quarterly Report on Form 10-Q (“Report”) in Part I. Item 1. “Financial Statements,” and is available on the SEC’s website. Dollar and share amounts are in thousands, except backlog amount.
General
We areDeep Down is an oilfield productsproduct and services company specializing in complex deepwater and ultra-deepwater oilsupport services and gassubsea distribution products used between the production systems, servingfacility and the worldwide offshore exploration and production industry.wellhead. Our core services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, buoyancy products and services, remotely operated vehicles (“ROVs”) and toolings. Werelated services. Additionally, our highly experienced, specialized service teams can support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions.located anywhere in the world.
Industry and Executive Outlook
WhileThe dual challenges of the global coronavirus pandemic and the oil prices are not yet perceivedprice crash continue to be at levels ideal for large scale offshore development, we are pleased withimpact our abilitybusiness and that of our customers. Our service business is particularly dependent on our personnel being able to generate almost as much revenuetravel domestically and internationally, and travel restrictions imposed by various governments partially contributed to reduced revenues during the first nine monthsquarter of 2019 as we generated during2020.
While revenues of $3,605 for the entire year of 2018. Our cost rationalization efforts also continue to bear fruit, as evidencedquarter ended March 31, 2020 declined by reductions in our operating expenses, not including certain transaction costs incurred related to the resignation of the Company’s Founder,$2,695 compared to the same periodquarter ended March 31, 2019, revenues for the first quarter of 2020 increased by $651 compared to the quarter ended December 31, 2019. The year-over-year decline in 2018.revenues was primarily driven by a lower proportion of fixed-price contract activity during the first quarter of 2020.
Following
We could potentially experience additional headwinds as our customers continue to adjust their operations based on the conclusioncurrent oil price environment. This includes customers delaying new purchase orders, extending timelines for existing purchase orders, and delaying the payment of outstanding invoices. To help navigate these headwinds, the Company applied for a loan under the Small Business Administration’s Paycheck Protection Program, and on April 29, 2020, the Company received a loan in the amount of $1,111, which will be used to finance payroll, rent, and utilities over the balance of the second quarter of 2020. The loan principal and related interest accrued may be forgivable, partially or in full, if certain conditions are met.
In August of 2019, we announced a change in leadership and subsequently made some additions to our strategic review process, our Company Founder and former Chief Executive Officer resigned as an officer and as a member of our board of directors, effective August 31, 2019management team to pursue interests outsidefocus on growth. However, considering recent developments in the oil and gas industry.industry, the Company adjusted its strategy to prepare for a longer cycle of lower oil prices while maintaining adequate support for existing projects. This strategy includes maintaining a disciplined capital structure, workforce reductions, wage reductions, rent abatement, and limiting capital expenditures and R&D efforts to only critical items. The Company continues to seek further cost reduction opportunities to preserve liquidity.
His departure coincided with a renewed focus on our core business, providingAs we look to the opportunity for him to purchase non-core assets fromfuture, we currently project the Company in exchange for some of his shares of the Company’s common stock. Consequently, we also streamlined our workforce to better align our human resources with our areas of focus. Our personnel changes also included the addition of a Chief Operating Officer, a new role for our organization.
These changes have also provided the opportunity to engage our employees, customers, and shareholders, in soliciting their feedback on our Company, to ensure our areas of focus are better aligned with their objectives. The feedback has been overwhelmingly positive, with our stakeholders being supportiveservice side of our renewed focus on our core business.
Our strategy for the future will center around strategic sales efforts, product and service excellence, and financial discipline. Whilebusiness to recover first as we expect our solid reputationcustomers to continue generating incoming requests from customers, we plan to enhance our front end activities to strategically targetbe focused on extending the life of existing assets, rather than sanctioning new opportunities. To better serve our customers,projects. Therefore, we are also performing a deep dive intodetermined to further position ourselves as the full portfolioservice provider of our products, services, and rental equipment, to streamline our project execution and increase our competitivenesschoice in the market. While there are various opportunities we could pursue in different areas, we intend to primarily pursue opportunities which align with our core competencies, and where we see a clear path to financial success.
As a result, while we will continue to pursue select international prospects, our immediate focus will be on opportunities we can successfully execute out of our Houston facility, and wesuch an environment. We expect to scale backexecute this strategy while remaining laser-focused on managing our plans for expansion into the West Africancash flows and Southeast Asian markets.
In light of increased bidding activity, a committed backlog of approximately $12 million and working capital of $6.6 million, we remain cautiously optimistic of our ability to createmaximizing value for our stakeholders.shareholders.
15 |
Results of Operations
Three Months Ended September 30, 2019March 31, 2020 Compared to Three Months Ended September 30, 2018March 31, 2019
Revenues. Revenues for the three months ended September 30, 2019March 31, 2020 were $4,397$3,605 compared to revenues of $3,912$6,300 for the three months ended SeptemberMarch 30, 2018.2019. The $485,$2,695, or 1243 percent, increasedecrease from the same period in 2019 was primarily the result of moreless fixed-price projects duringin process, COVID-19 related travel restrictions, and the three months ended September 30, 2019, compared torecent developments in the three months ended September 30, 2018.global oil markets.
Gross profit.Cost of Sales. Gross profitCost of sales decreased by $1,560, or 39 percent, to $2,482 for the three months ended September 30, 2019March 31, 2020 from $4,042 for the same period in 2019. The decrease in cost of sales was $1,845, or 42 percentprimarily driven by the decrease in revenues. Our cost of sales as a percentage of revenues comparedincreased primarily due to $1,548,the lower absorption of fixed costs reported under cost of sales.
Selling, general and administrative expenses.Selling, general and administrative (“SG&A”) expenses were $1,693, or 4047 percent of revenues, for the three months ended September 30, 2018. The $297 increase in gross profit was due primarily to increased revenues during the three months ended September 30, 2019,March 31, 2020 compared to the three months ended September 30, 2018.
Selling, general and administrative expenses (“SG&A”). SG&A expenses were $2,136,$1,995, or 4932 percent of revenues, for the three months ended September 30, 2019, which included $349March 31, 2019. The $302, or 15 percent, decrease in one-time expenses incurred in relation toSG&A is a result of cost reduction initiatives implemented by the resignationCompany as a result of a renewed focus on the Company’s Founder.core business. The increase in SG&A expenses were $2,145, or 55 percentexpense as a percentage of revenues forwas due to lower revenues during the three months ended September 30, 2018. Excluding the one-time charges, SG&A expenses forMarch 31, 2020 as compared to the three months ended September 30, 2019 were $1,787, or 41 percent of revenues. The $358 decrease in regular SG&A expense included a $243 decrease in legal fees, as well as other expense reductions resulting from the Company’s continuous efforts to reduce operating expenses.March 31, 2019.
Modified EBITDA. Our management evaluates our performance based on a non-US GAAP measure which consists of earnings (net income or loss) available to common shareholders before net interest income, income taxes, depreciation and amortization, non-cash share-based compensation expense, non-cash impairments, depreciation and amortization,non-cash gains or losses on the sale of PP&E, other non-cash items and one-time 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 US GAAP. The measure should not be considered in isolation or as a substitute for operating income or loss, net income or loss, cash flows provided by operating, investing or financing activities, or other cash flow data prepared in accordance with US GAAP. The amounts included in the Modified EBITDA calculation, however, are derived from amounts included in the accompanying unaudited condensed consolidated statements of operations.
We believe Modified EBITDA is useful to investors in evaluating our operating performance because it is widely used to measure a company’s operating performance, 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. 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); asset base (primarily depreciation and amortization); one-time events; and actions that do not affect liquidity (share-based compensation expense from our operating results);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.
16 |
The following is a reconciliation of net lossincome (loss) to Modified EBITDA (EBITDA loss)(loss) for the three months ended September 30, 2019March 31, 2020 and 2018:2019:
Three Months Ended | ||||||||
September 30, | ||||||||
2019 | 2018 | |||||||
Net loss | $ | (373 | ) | $ | (649 | ) | ||
Deduct interest income, net | – | (10 | ) | |||||
Add loss on sale of property, plant and equipment | 7 | – | ||||||
Add one-time charges related to Founder’s resignation | 349 | – | ||||||
Add depreciation and amortization | 348 | 332 | ||||||
Add income tax expense | 5 | 5 | ||||||
Add share-based compensation | 72 | 5 | ||||||
Modified EBITDA (EBITDA loss) | $ | 408 | $ | (317 | ) |
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(In thousands) | ||||||||
Net income (loss) | $ | (637 | ) | $ | 212 | |||
Add: Interest expense (income), net | 1 | (7 | ) | |||||
Add: Income tax expense | 5 | 5 | ||||||
Add: Depreciation and amortization | 302 | 345 | ||||||
Add: Share-based compensation | 50 | 104 | ||||||
Deduct: Gain on sale of asset | – | (15 | ) | |||||
Modified EBITDA (loss) | $ | (279 | ) | $ | 644 |
The $725 increase$923 decrease in Modified EBITDA was due primarily to the increasedecrease in revenues and the resulting increasedecrease in gross profit and the reduction in SG&A expense during the three months ended September 30, 2019March 31, 2020 as compared to the three months ended September 30, 2018.
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
Revenues. Revenues for the nine months ended September 30, 2019 were $15,966 compared to revenues of $11,722 for the nine months ended September 30, 2018. The $4,244, or 36 percent, increase was primarily the result of more projects during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018.
Gross profit. Gross profit for the nine months ended September 30, 2019 was $6,068, or 38 percent of revenues, compared to $4,333, or 37 percent of revenues, for the nine months ended September 30, 2018. The $1,735 increase in gross profit was primarily due to increased revenues resulting from a larger number of projects during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.
Selling, general and administrative expenses (“SG&A”). SG&A expenses were $6,137, or 38 percent of revenues, for the nine months ended September 30, 2019, which included $349 in one-time expenses incurred in relation to the resignation of the Company’s Founder. SG&A expenses were $5,804, or 50 percent of revenues for the nine months ended September 30, 2018. Excluding the one-time charges, SG&A expenses for the nine months ended September 30, 2019 were $5,788, or 36 percent of revenues. The $16, or 14 percent of revenues, decrease in regular SG&A expense resulted from the Company’s continuous efforts to reduce operating expenses.
Modified EBITDA.
The following is a reconciliation of net loss to Modified EBITDA (EBITDA loss) for the nine months ended September 30, 2019 and 2018:
Nine Months Ended | ||||||||
September 30, | ||||||||
2019 | 2018 | |||||||
Net loss | $ | (273 | ) | $ | (1,207 | ) | ||
Deduct gain on sale of property, plant and equipment | (8 | ) | (439 | ) | ||||
Deduct interest income, net | (12 | ) | (28 | ) | ||||
Add one-time charges related to Founder’s resignation | 349 | – | ||||||
Add depreciation and amortization | 1,046 | 1,059 | ||||||
Add income tax expense | 15 | 15 | ||||||
Add share-based compensation | 200 | 15 | ||||||
Modified EBITDA (EBITDA loss) | $ | 1,317 | $ | (585 | ) |
The $1,902 increase in Modified EBITDA was due primarily to the increase in revenues and the resulting increase in gross profit during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.March 31, 2019.
Liquidity and Capital Resources
During the nine months ended September 30, 2019 and September 30, 2018, we primarily financed ourThe Company believes it will have adequate liquidity to meet its future operating and capital needsrequirements through cash on hand.
During the nine months ended September 30, 2019 we used $1,805 to fund our operating and financing activities. We used $1,531 in our operating activities, primarily due to an increase of $2,334 in accounts receivable and $543 decrease in accounts payable. We also used $274 in financing activities, primarily for repurchases of our outstanding stock. We generated $1,572 from our investing activities, primarily due to maturity of our $1,035 certificate of deposit and receipt of $515 in repayments on a note receivable.
The increase in accounts receivable was the result of prolonged payment terms by some of our customers. Following the end of the quarter ended September 30, 2019, during October 2019 we collected $3,193 from our customers.
Through a combination of our current working capital of $6,572,cash on hand, cash expected to be generated from operations, working capital of $3,965 as of March 31, 2020, and potential opportunistic sales of property, plantPP&E in addition to pursuing a disciplined approach to making capital investments.
Given the abrupt decline in oil prices and equipmentglobal economic activity caused by COVID-19, the Company cannot predict with certainty the overall impact on the Company’s operations and cash flows. The Company has taken steps to mitigate the challenges presented by the current macro environment, including workforce reductions, wage reductions, rent abatement, and limiting capital expenditures and R&D efforts to only critical items. The Company continues to seek further cost reduction opportunities to preserve liquidity.
Additionally, the Company applied for a loan under the Small Business Administration’s Paycheck Protection Program, and on April 29, 2020, the Company received a loan in the future, reductionamount of $1,111, which will be used to finance payroll, rent, and utilities over the balance of the second quarter of 2020. The loan principal and related interest accrued may be forgivable, partially or in our capital budget, and continuous efforts to reduce our operating expenses, we believe we will have adequate liquidity to meet our future operating requirements.
Wefull, if certain conditions are met. The Company also continuecontinues to engage in discussions with differentseveral financial institutions in the event that we would needif a credit facilitiesfacility is needed to further supplement our operating requirements.support operations. There can be no assurance that wethe Company could obtain a credit facilities,facility, if needed.
During the three months ended March 31, 2020, the Company generated $91 in net cash provided by operating activities primarily due to improvements in cost containment measures. The Company used $57 of net cash provided by investing activities, which was primarily related to the purchase of PP&E. The Company also used $524 of net cash in financing activities for share repurchases, which resulted in a decrease of $490 in cash for the period.
During the three months ended March 31, 2019, the Company used $756 to fund its operating and financing activities. The Company used $583 of net cash in operating activities, which was primarily due to a $2,566 increase in accounts receivable, partially offset by net income and a decrease in contract assets. The Company generated $517 in net cash from investing activities, primarily due to receipt of $507 in repayments on a note receivable. The Company also used $173 of net cash in financing activities primarily for share repurchases.
Inflation and Seasonality
We doThe Company does not believe that ourits operations are significantly impacted by inflation. Ourinflation, and its business is not significantly seasonal in nature.
Off-Balance Sheet Arrangements
We haveThe Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on ourits financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates
The preparation of financial statements in conformity with US GAAP 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. The most significant estimates used in ourthe financial statements relate to revenue recognition where we measurethe Company measures progress towards completion on a cost-to-cost basis on ourfor fixed-price contracts, the allowance for doubtful accounts, and the valuation allowance for deferred income tax assets. These estimates require judgments, which we baseare based on historical experience and on various other assumptions, as well as specific circumstances. Estimates may change as new events occur, additional information becomes available or operating environments change.
Refer to Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 20182019 for a discussion of our critical accounting policies and estimates.
Recently Issued Accounting Standards
Except as set forth inRefer to Note 1 toin Part II. Item 8. “Financial Statements and Supplemental Data,” in our unaudited condensed consolidated financial statements, management has not yet determined whetherAnnual Report on Form 10-K for the year ended December 31, 2019 for a discussion of recently issued accounting standards, which are not yet effective, will have a material impact on our condensed consolidated financial statements upon adoption.standards.
Share RepurchasesRepurchase Program
On March 26, 2018,December 23, 2019, the Board of Directors (the “Board”) authorized the repurchase of up to $1,000500 shares of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Programstock. This repurchase program was funded from cash on hand.hand and cash provided by operating activities. The Board separately authorized the repurchase of additional shares during the quarter ended March 31, 2020, in a privately negotiated transaction. During the three months ended March 31, 2019, 2282020, 744 shares of our outstanding common stock were purchased at the pricefor an aggregate amount of $0.75 under the Repurchase Program. The Repurchase Program expired on$524. As of March 31, 2019.
On May 2, 2019,2020, the Company repurchased 60 shares from a former member of the Board. The shares were repurchased at the price of $0.80 per share, which was the average closing price for the ten trading days prior to the date of repurchase.repurchase program has been exhausted.
On September 1, 2019, the Company received 300 shares of common stock from our former Chief Executive Officer in exchange for certain previously impaired Company equipment ($0 carrying value at the time of exchange). No value was recorded to treasury stock because the assets had a fair value of approximately $0 at the time of the exchange.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance.
18 |
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 September 30, 2019,March 31, 2020, 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 September 30, 2019.March 31, 2020.
Management’s Report on Internal Control Over Financial Reporting.The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Although the internal controls over financial reporting were not audited, the Company’s management, including the principal executive and principal financial officer, assessed the effectiveness of internal controls over financial reporting as of September 30, 2019,March 31, 2020, based on criteria issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled“Internal Control-Integrated Framework.”Upon evaluation, the Company’s management has concluded that the Company’s internal controls over financial reporting were effective as of September 30, 2019.March 31, 2020.
Changes in Internal Control Over Financial Reporting.The Company’s management, with the participation of the principal executive and principal financial officer, have concluded there were no changes in internal control over financial reporting during the fiscal quarter ended September 30, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.March 31, 2020.
From time to time, we may be involved inthe Company is party to various legal proceedings arising in the normalordinary course of business. We expense or accrue legal costs as we incur them. A summary of ourthe Company’s material legal proceedings is as follows:
On August 6, 2018, GE Oil and Gas UK LtdLtd. (“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR.ADR (“ICC”). The dispute involvesinvolved alleged delays and defects in products manufactured by the Company for GE dating back to 2013. The Company disputed GE’s allegations and vigorously defended itself against these allegations. Mediation took place on November 28, 2018 but no resolution was reached.not resolved. On February 22, 2019, GE initiated arbitration proceedings with the ICC. The originaltotal amount in dispute was originally $2,630,000 but as of GE’s latest filing with the ICC, the amount in dispute has beenwas later reduced to $2,252,000. TheOn February 26, 2020, the parties agreed in principle to settle the dispute, and the parties are inworking toward finalizing the processterms of filing preliminary submissions, and the arbitration date is currently set for April 2020.a definitive settlement agreement. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. At this point in the legal process, we do not believe a loss to us is probable, therefore we have not recordedaccrued a liability related to this matter.matter in the amount of $750,000 for the year ended December 31, 2019.
In November 2011, the Company delivered equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270,000 alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required. The Company repeatedly attempted to collect on the receivable, and ultimately filed suit on November 16, 2012, in the Harris County District Court. Aker subsequently filed a counter-claimcounterclaim on March 20, 2013 in the aggregate amount of $1,000,000 for reimbursement of insurance payments allegedly made for repairs. Trial is scheduled for April 2020.The parties have not reached a resolution on this matter. At this point, init is not clear as to whether an unfavorable outcome is either probable or remote, and the legal process, we do not believe aCompany is unable to determine the likelihood of an unfavorable outcome or the amount or range of potential loss to us is probable, therefore we have not recorded a liability related to this matter.if the outcome should be unfavorable.
In July 2018, we announced that our Board of Directors (the “Board”) had initiated a process to explore and evaluate strategic alternatives to maximize stockholder value. During the review process, it was determined that it was in the Company’s best interest to reconstitute the Board, and renew our focus on our core business and on improving our profitability.Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered SalesThe table below summarizes information about our purchases of Equity Securities
On July 27, 2018, we granted 300,000 shares of restrictedcommon stock, to our Chief Financial Officer and current Chief Executive Officer. These shares have a fair value grant price of $0.79 per share, based on trade date, during the closing price of our common stock on that day. These shares vest over three years in equal tranches on the anniversary date of his appointment to the role, subject to continued service as an officer of the Company. We are amortizing the related share-based compensation of $237,000 over the three-year requisite service period. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act, which exempts issuances not involving a public offering.
quarter ended March 31, 2020:
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs | |||||||||||||
January 1 - January 31 | 743,815 | $ | 0.7000 | 494,500 | $ | – | ||||||||||
February 1 - February 28 | – | – | – | – | ||||||||||||
March 1 - March 31 | – | – | – | – | ||||||||||||
Total for the three months ended March 31, 2020 | 743,815 | $ | 0.7000 | 494,500 |
On June 24, 2019, the three non-employee members of the Board were each granted an option to purchase 50,000 shares of our common stock at a price of $0.75 per share. Fair value of these stock options was $0.44 per share at the grant date. The options vested 25 percent on August 31, 2019, and the remainder is scheduled to vest in three tranches on November 30, 2019, February 29, 2020 and May 31, 2020, subject to the recipient’s continued service on the Board. Once vested, the options are exercisable until June 24, 2024. We are amortizing the related share-based compensation of $66,000 over the one year requisite service period. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act, which exempts issuances not involving a public offering.
On SeptemberDecember 23, 2019, we granted 200,000 shares of restricted stock to our Chief Operating Officer. These shares have a fair value grant price of $0.65 per share, based on the closing price of our common stock on that day. One-fourth of the shares vested immediately and the remaining shares are scheduled to vest over three years in equal tranches on the anniversary date of his appointment to the role, subject to continued service as our Chief Operating Officer. We are amortizing the related share-based compensation of $97,500 over the three-year requisite service period as the shares vest. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act, which exempts issuances not involving a public offering.
On September 24, 2019, we granted our Chief Executive Officer an option to purchase 150,000 shares of our common stock at a price of $0.65 per share. Fair value of these stock options was $0.39 per share at the grant date. The options are scheduled to vest in two equal tranches on the first and second anniversaries of the grant, subject to his continued service as our Chief Executive Officer. We are amortizing the related share-based compensation of $58,500 over the two-year requisite service period as the shares vest. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act, which exempts issuances not involving a public offering.
Repurchases
On March 26, 2018, the Board authorized the repurchase of up to $1,000,000500,000 shares of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Programstock. This repurchase program was funded from cash on hand.hand and cash provided by operating activities. The Board separately authorized the repurchase of additional shares during the quarter ended March 31, 2020, in a privately negotiated transaction. During the three months ended March 31, 2019, 228,000 shares of our outstanding commons stock were purchased at the price of $0.75 under the Repurchase Program. The Repurchase Program expired on March 31, 2019.
On May 2, 2019, the Company repurchased 60,000 shares from a former member of the Board. The shares were repurchased at the price of $0.80 per share, which was the average closing price for the ten trading days prior to the date of repurchase.
On September 1, 2019, the Company received 300,0002020, 743,815 shares of common stock from our former Chief Executive Officer in exchangewere purchased for certain previously impaired Company equipment ($0 carrying value atan aggregate amount of $524,091. As of March 31, 2020, the time of exchange). No value was recorded to treasury stock because the assets had a fair value of approximately $0 at the time of the exchange.repurchase program has been exhausted.
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DEEP DOWN, INC. | ||
(Registrant) | ||
Date: | ||
By: | /s/ Charles K. Njuguna | |
Charles K. Njuguna | ||
President, Chief Executive Officer and Chief Financial Officer | ||
(Principal Executive | ||
By: | /s/ | |
(Principal Accounting Officer) | ||
31.1* | Certification of Charles K. Njuguna, President, Chief Executive Officer and Chief Financial Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
31.2* | Certification of Trevor L. Ashurst, Vice President of Finance, furnished pursuant to Rules 13a-14 and 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
32.1* | |
32.2* | Statement of Trevor L. Ashurst, VP of Finance, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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.