The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts 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 directly and
indirectly wholly-owned subsidiaries (“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 footnotes or other financial information that are normally required by United States generally accepted accounting
principles (“GAAP”) can be condensed or omitted. Therefore, these statements should be read in conjunction
with the audited consolidated financial statements, and footnotes thereto, included in our Annual Report on Form 10-K for the year
ended December 31, 2015, filed on March 29, 2016 with the Commission.
Preparation of financial
statements in conformity with
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.
Certain previously reported amounts have been
reclassified to conform to current period presentation.
Principles of Consolidation
The unaudited condensed consolidated financial
statements presented herein include the accounts of Deep Down, Inc. and
its directly and indirectly
wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.
Segments
We operate one principal
deepwater oilfield services business, which provides many solutions to our customers. For the
six months ended June 30,
2016 and 2015, we only had one reporting segment, Deep Down Delaware. All of the services and products we provide are interrelated,
performed for the same general customers and marketed as such.
In accordance with ASC Topic 280,
Segment
Reporting
, operating segments are defined as components of an enterprise for which separate financial information is available
that is evaluated regularly by the chief operating decision-maker (“CODM”) in deciding how to allocate resources and
in assessing performance. Our CODM primarily evaluates performance based on each project’s gross margin and net income.
In
determining the reportable segment, we concluded that all
services and products
have similar economic and other characteristics, including similar gross margin percentage, production processes, suppliers, regulatory
environments, customer type, and underlying demand and supply. Our services and products follow the same accounting policies and
are managed by our management team.
Recently Issued Accounting Standards Not
Yet Adopted
In August 2014, the Financial Accounting Standards
Board, (“FASB”) issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern” (“ASU 2014-15”). ASU 2014-15 provides guidance on management’s responsibility in evaluating
whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures.
For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial
doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are
issued. The amendments in ASU 2014-15 are effective for us beginning January 1, 2017. Early adoption is permitted. The Company
will adopt the methodologies prescribed by ASU 2014-15 by the date required, and does not anticipate the adoption of ASU 2014-15
will have a material effect on its financial position or results of operations.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers” (“ASU 2014-09”). This update provides a five-step approach to be
applied to all contracts with customers and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue
(and the related cash flows) arising from customer contracts, significant judgments and changes in judgments used in applying the
revenue model and the assets recognized from costs incurred to obtain or fulfill a contract. The effective date for this standard
was deferred in July 2015 and will now be effective for us beginning January 1, 2018. The standard permits the use of either the
retrospective or cumulative effect transition method; we are evaluating the effect that this new guidance will have on our consolidated
financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of
the standard on our ongoing financial reporting.
In July 2015, the FASB issued ASU No. 2015-11,
“Simplifying the Measurement of Inventory”
(“ASU 2015-11”). ASU 2015-11
requires in scope inventory to be measured at the lower of cost and net realizable value rather than at the lower of cost or market
under existing guidance. The amendments in this ASU are effective
for us beginning January 1, 2017
.
Early application is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
“Leases (Topic 842)”. The amendments in this update require, among other things, that lessees recognize the following
for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation
to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that
represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply
a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements. The amendments are effective for us beginning January 1, 2019. We are currently evaluating
the impacts of the amendments to our financial statements and accounting practices for leases.
In March 2016, the FASB issued ASU No. 2016-09,
“Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). Among other amendments, ASU
2016-09 requires that excess tax benefits or deficiencies are recognized as income tax expense or benefit in the income statement,
gives an entity the ability to elect to estimate the number of awards that are expected to vest or account for forfeitures as they
occur and permits withholding up to the maximum statutory tax rates as the threshold to qualify for equity classification. The
guidance will become effective for us beginning January 1, 2017. Early application is permitted. We are currently evaluating the
impact of this ASU on our consolidated financial statements.
NOTE 2: RESTATEMENT OF QUARTERLY INFORMATION
In December 2014, at the request of a customer,
we delivered a carousel to the customer on a lease or purchase arrangement. We honored this request in order to support its requirement
for a critical umbilical project. At the completion of our customer’s requirement, we were advised by the customer it was
not going to purchase the carousel, so we picked up the carousel and returned it to our facility. We then invoiced the customer
on a rental basis.
The customer has declined to pay the invoices.
We are pursuing collection through arbitration.
Under SEC Staff Accounting Bulletin No. 101
– Revenue Recognition in Financial Statements (SAB 101), “revenue should not be recognized until it is realized or
realizable and earned.” Also according to SAB 101, revenue generally is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered,
the seller's price to the buyer is fixed or determinable, and collectability is reasonably assured.
Based on the facts above and the guidelines
of SAB 101, we determined that the revenue in relation to this situation should not have been recognized in the quarter ended June
30, 2015. As a result, we have reversed the misstated revenue and related receivable from our unaudited consolidated financial
statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
The following table summarizes the impact of
the revenue reversal on our unaudited consolidated statement of operations:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2015
|
|
|
June 30, 2015
|
|
|
|
As Reported
|
|
|
Revenue Adjustment
|
|
|
As Restated
|
|
|
As Reported
|
|
|
Revenue Adjustment
|
|
|
As Restated
|
|
Revenues
|
|
|
6,771
|
|
|
|
(235
|
)
|
|
|
6,536
|
|
|
|
13,609
|
|
|
|
(1,240
|
)
|
|
|
12,369
|
|
Gross profit
|
|
|
2,242
|
|
|
|
(235
|
)
|
|
|
2,007
|
|
|
|
4,476
|
|
|
|
(1,240
|
)
|
|
|
3,236
|
|
Operating (loss) income
|
|
|
172
|
|
|
|
(235
|
)
|
|
|
(63
|
)
|
|
|
(58
|
)
|
|
|
(1,240
|
)
|
|
|
(1,298
|
)
|
Income (loss) before income taxes
|
|
|
214
|
|
|
|
(235
|
)
|
|
|
(21
|
)
|
|
|
(77
|
)
|
|
|
(1,240
|
)
|
|
|
(1,317
|
)
|
Net income (loss)
|
|
|
206
|
|
|
|
(235
|
)
|
|
|
(29
|
)
|
|
|
(91
|
)
|
|
|
(1,240
|
)
|
|
|
(1,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
|
0.01
|
|
|
|
(0.02
|
)
|
|
|
–
|
|
|
|
(0.01
|
)
|
|
|
(0.08
|
)
|
|
|
(0.09
|
)
|
Diluted earnings (loss) per common share
|
|
|
0.01
|
|
|
|
(0.02
|
)
|
|
|
–
|
|
|
|
(0.01
|
)
|
|
|
(0.08
|
)
|
|
|
(0.09
|
)
|
NOTE 3: INVENTORY
The finished goods inventory balance of $3,117
consists of a 3,500 MT portable umbilical carousel, which we fabricated and bought back from a customer in November 2013 and are
currently holding for sale.
NOTE 4:
BILLINGS, COSTS
AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The components of billings, costs and estimated earnings on uncompleted
contracts are summarized below:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Costs incurred on uncompleted contracts
|
|
$
|
6,378
|
|
|
$
|
3,220
|
|
Estimated earnings on uncompleted contracts
|
|
|
3,807
|
|
|
|
2,282
|
|
|
|
|
10,185
|
|
|
|
5,502
|
|
Less: Billings to date on uncompleted contracts
|
|
|
(11,175
|
)
|
|
|
(4,194
|
)
|
|
|
$
|
(990
|
)
|
|
$
|
1,308
|
|
|
|
|
|
|
|
|
|
|
Included in the accompanying consolidated balance sheets under the following captions:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted
contracts
|
|
$
|
2,274
|
|
|
$
|
1,354
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
(3,264
|
)
|
|
|
(46
|
)
|
|
|
$
|
(990
|
)
|
|
$
|
1,308
|
|
The balance in costs and estimated earnings
in excess of billings on uncompleted contracts at June 30, 2016 and December 31, 2015 consisted of earned but unbilled revenues
related to fixed-price and time and material projects.
The balance in billings in excess of costs
and estimated earnings on uncompleted contracts at June 30, 2016 and December 31, 2015 consisted of unearned billings related to
fixed-price and time and material projects.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
The components of net property, plant and equipment
are summarized below:
|
|
|
|
|
|
|
|
Range of
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Asset Lives
|
|
Land
|
|
$
|
–
|
|
|
$
|
1,582
|
|
|
|
–
|
|
Buildings and improvements
|
|
|
5
|
|
|
|
1,447
|
|
|
|
7 - 36 years
|
|
Leasehold improvements
|
|
|
825
|
|
|
|
825
|
|
|
|
2 - 5 years
|
|
Equipment
|
|
|
15,435
|
|
|
|
15,435
|
|
|
|
2 - 30 years
|
|
Furniture, computers and office equipment
|
|
|
1,362
|
|
|
|
1,468
|
|
|
|
2 - 8 years
|
|
Construction in progress
|
|
|
1,140
|
|
|
|
341
|
|
|
|
–
|
|
Total property, plant and equipment
|
|
|
18,767
|
|
|
|
21,098
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(10,715
|
)
|
|
|
(10,336
|
)
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
8,052
|
|
|
$
|
10,762
|
|
|
|
|
|
The reduction in our net property, plant and equipment was due to
the sale of our Channelview location in March 2016.
NOTE 6: LONG-TERM DEBT
Credit Facility
Since 2008, we have maintained a credit facility
(the “Facility”) with Whitney Bank. The Facility has been amended and restated several times, most recently effective
June 30, 2015 when we entered into the eighth amendment (“Eighth Amendment”).
The relevant terms of the Eighth Amendment
included:
|
·
|
an extension of the maturity date of the
revolving credit facility (“Revolving Credit Facility”) to June 30, 2016;
|
|
·
|
a modification of the interest rate with
respect to the Revolving Credit Facility to 4.0 percent per annum;
|
|
·
|
a modification of certain financial covenants;
and
|
|
·
|
a requirement that we maintain a compensating
balance of $3,900 in our existing interest-bearing account at Whitney, to continue until such time as we have regained compliance
with all of our covenants under the Facility for two consecutive quarters commencing with the quarter ended June 30, 2015.
|
Due to the expiration of our credit facility
on June 30, 2016, we no longer have the requirement of a compensating balance and the $3,900 is now available for use. As of June
30, 2016, we no longer have these credit facilities available to us.
Other terms of the Facility included:
|
·
|
a real estate term facility (“RE
Term Facility”) of $2,000, at an interest rate of 4.0 percent per annum, maturing April 15, 2018, with the Company being
obligated to make monthly increasing repayments of principal (along with accrued and unpaid interest thereon) at an amount of $9,
beginning April 1, 2013, while there is any amount outstanding;
|
|
·
|
a carousel term facility (“Carousel
Term Facility”) of $2,200, at an interest rate of 3.5 percent per annum, maturing October 15, 2016, with the Company being
obligated to make monthly repayments of principal of $65 (along with accrued and unpaid interest thereon) beginning July 1, 2014,
while there is any amount outstanding; and
|
|
·
|
outstanding balances under the Facility
are secured by all of the Company’s assets.
|
In March 2016, we paid off the RE Term Facility
and the Carousel Term Facility with proceeds received from the sale of our Channelview location.
As of June 30, 2016, the Company’s indebtedness
under the Facility was $0.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
NOTE 7: SHARE-BASED COMPENSATION
We have a share-based compensation plan, the
“2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”).
Awards of common stock and options to purchase common stock granted under the Plan have vesting periods of three years and options
are exercisable for two years once fully vested. Share-based compensation expense related to awards is based on the fair value
at the date of grant, and is recognized over the requisite expected service period, net of estimated forfeitures. Under the Plan,
the maximum number of shares issued pursuant to options is 15 percent of issued and outstanding common shares.
Summary of Nonvested Shares of Restricted
Stock
On May 27, 2016, we granted 30 shares of restricted
stock to an independent director, par value $0.001 per share. These shares have a fair value grant price of $1.02 per share, based
on the closing price of Deep Down’s stock on that day. These shares vest over three years in equal tranches on the grant
date anniversary, with continued service on our Board of Directors; we are amortizing the related share-based compensation of $31
over the three-year requisite service period.
During
the
six months ended June 30, 2016
, we withheld 168 shares of our common stock from the vesting of nonvested
shares granted to employees to satisfy tax withholding obligations. Once withheld, the shares were canceled and removed from the
number of outstanding shares. We subsequently remitted the amount withheld to the tax authority.
For the six months ended June 30, 2016 and
2015, we recognized a total of $274 and $253, respectively, of share-based compensation expense related to restricted stock awards,
which is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements
of operations. The unamortized estimated fair value of nonvested shares of restricted stock awards was $208 at June 30, 2016. These
costs are expected to be recognized as expense over a weighted average period of 1.12 years.
Summary of Stock Options
For the six months ended June 30, 2016 and
2015, we did not recognize share-based compensation expense related to outstanding stock option awards. There was no unamortized
estimated fair value of non-vested stock options
at June 30, 2016.
NOTE 8: TREASURY STOCK
On May 23, 2016, our Board of Directors authorized
a repurchase program (the “Repurchase Program”) under which we may repurchase up to $1,000 of our outstanding stock.
The purchases may be made from time to time in the open market, through privately negotiated transactions and Rule 10b5-1 trading
plans in accordance with applicable laws, rules and regulations. The Repurchase Program will be funded from cash on hand and cash
provided by operating activities. The Repurchase Program will expire as of the close of business on March 31, 2017. As of June
30, 2016, we have purchased 4 shares at cost of $4 under this Repurchase Program. The average price per share of treasury stock
through June 30, 2016 has been $0.93. Treasury shares are accounted for using the cost method.
NOTE 9: 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 loss, 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. Although our future projections indicate that we may be able to realize some of these
deferred tax assets, due to the degree of uncertainty of these projections, at June 30, 2016 and December 31, 2015 management has
recorded a full deferred tax asset valuation allowance.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
NOTE 10:
COMMITMENTS
AND CONTINGENCIES
Litigation
From time to time we are involved in legal
proceedings arising from the normal course of business. As of the date of this Report, we are engaged in one material legal dispute,
arising from the non-payment of equipment rental and services by one of our customers. Refer to Note 12 of the Notes to Consolidated
Financial Statements in Part II. Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015.
Operating Leases
We lease certain offices, facilities, equipment
and vehicles under non-cancellable operating and capital leases expiring at various dates through 2023.
Letters of Credit
Certain of our customers could require us to
issue a standby letter of credit (“LC”) in the ordinary course of business to ensure performance under terms of a contract
or as a form of product warranty. The beneficiary could demand payment from the issuing bank for the amount of the outstanding
letter of credit. There was $0 in LC’s outstanding at June 30, 2016 and December 31, 2015.
NOTE 11: 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. Fully diluted
EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents
(warrants, stock awards and stock options) outstanding during the period. Fully diluted EPS reflects the potential dilution that
could occur if options to purchase common stock were exercised for shares of common stock.
At June 30, 2016 and 2015, there were no potentially dilutive securities
outstanding.