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 (“US 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, 2016, filed on March 31, 2017 with the Commission.
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.
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
For the quarters ended March 31, 2017 and
2016, we had one operating and reporting segment, Deep Down Delaware.
Recently Issued Accounting Standards
Not Yet Adopted
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standard Update (“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 provides for different application methods during adoption. We are
currently in the process of evaluating the potential impact this new pronouncement will have on our financial statements and will
not be exercising early adoption. We are reviewing our existing contracts to identify any that may be impacted by this standard,
and evaluating new contracts we are negotiating to ensure compliance with this standard. We have not completed our full evaluation
and therefore cannot conclude whether the pronouncement will have a significant impact on our financial statements at this time,
but we expect requirements of this standard to significantly enhance our revenue disclosures. We currently anticipate that we will
utilize the modified retrospective method of adoption, however, this expectation may change following the completion of our evaluation
of the impact of this pronouncement on our financial statements.
In February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842) (“ASU 2016-02”)”. 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 do not anticipate the adoption of ASU 2016-02 will have a material effect on our results of
operations and are still evaluating the impact on our financial position.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
In October 2016, the FASB issued ASU No.
2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” This update requires that income tax consequences
are recognized on an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU
are effective for us on January 1, 2018. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-01, “Business Combinations.” This new ASU clarified the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. The new standard is effective for us January 1, 2018 and will be applied prospectively. We are currently evaluating
the impact of our pending adoption of the new standard, but do not expect it to have a material impact on our consolidated financial
position or results of operations.
In February 2017, the FASB issued ASU
No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets” (“ASU
2017-05”). This update clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets
to exclude all businesses and nonprofit activities. ASU 2017-05 also provides a definition for in-substance nonfinancial
assets and additional guidance on partial sales of nonfinancial assets. We are currently evaluating the effect of ASU No.
2017-05 on our consolidated financial statements and will adopt ASU 2017-05 in conjunction with ASU 2014-09 on January 1,
2018.
NOTE 2: BILLINGS, COSTS AND
ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The components of billings, costs and estimated earnings on
uncompleted contracts are summarized below:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Costs incurred on uncompleted contracts
|
|
$
|
9,811
|
|
|
$
|
8,858
|
|
Estimated earnings on uncompleted contracts
|
|
|
7,884
|
|
|
|
6,777
|
|
|
|
|
17,695
|
|
|
|
15,635
|
|
Less: Billings to date on uncompleted contracts
|
|
|
(18,288
|
)
|
|
|
(17,907
|
)
|
|
|
$
|
(593
|
)
|
|
$
|
(2,272
|
)
|
|
|
|
|
|
|
|
|
|
Included in the accompanying condensed consolidated balance sheets under the following
captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
1,021
|
|
|
$
|
1,077
|
|
|
|
|
|
|
|
|
|
|
Billings in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(1,614
|
)
|
|
|
(3,349
|
)
|
|
|
$
|
(593
|
)
|
|
$
|
(2,272
|
)
|
The balance in costs and estimated earnings
in excess of billings on uncompleted contracts at March 31, 2017 and December 31, 2016 consisted primarily of earned but unbilled
revenues related to fixed-price projects.
The balance in billings in excess of costs
and estimated earnings on uncompleted contracts at March 31, 2017 and December 31, 2016 consisted primarily of unearned billings
related to fixed-price projects.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The components of net property, plant and
equipment are summarized below:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
Range of Asset Lives
|
|
Buildings and improvements
|
|
$
|
5
|
|
|
$
|
5
|
|
|
|
7 - 36 years
|
|
Leasehold improvements
|
|
|
908
|
|
|
|
908
|
|
|
|
2 - 5 years
|
|
Equipment
|
|
|
16,556
|
|
|
|
16,360
|
|
|
|
2 - 30 years
|
|
Furniture, computers and office equipment
|
|
|
1,274
|
|
|
|
1,274
|
|
|
|
2 - 8 years
|
|
Construction in progress
|
|
|
846
|
|
|
|
586
|
|
|
|
–
|
|
Total property, plant and equipment
|
|
|
19,589
|
|
|
|
19,133
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(11,574
|
)
|
|
|
(11,195
|
)
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
8,015
|
|
|
$
|
7,938
|
|
|
|
|
|
NOTE 4: LONG-TERM DEBT
Credit Facility
From 2008 through June 30, 2016, we maintained
a credit facility (the “Facility”) with Whitney Bank.
In March 2016, we paid all borrowings under
the Facility with proceeds received from the sale of our Channelview location.
Following the expiration
of the Facility on June 30, 2016, we no longer have any credit facilities available to us.
NOTE 5: 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 total number of options permitted is 15 percent of issued and outstanding common shares.
Summary of Nonvested Shares of Restricted
Stock
For the three months ended March 31, 2017
and 2016, we recognized a total of $34 and $155, 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. There were no new stock grants during the three months ended March 31, 2017. The unamortized estimated
fair value of nonvested shares of restricted stock awards was $105 at March 31, 2017. These costs are expected to be recognized
as expense over a weighted average period of 0.58 years.
NOTE 6: 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 was scheduled to expire as of the close of business on March
31, 2017. As of March 31, 2017, we have purchased approximately 658 shares at a total cost of $650 under this Repurchase Program.
The average price per share of treasury stock through March 31, 2017 was $0.99. Treasury shares are accounted for using the cost
method.
On March 29, 2017, our Board of Directors
authorized a renewal and extension of the Repurchase Program for an additional $1,000 until March 31, 2018.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
NOTE 7: 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. 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 March 31, 2017 and December 31, 2016 management
has recorded a full deferred tax asset valuation allowance.
NOTE 8:
COMMITMENTS
AND CONTINGENCIES
Litigation
From time to time we are involved
in legal proceedings arising from the normal course of business. As of March 31, 2017, we were engaged in one previously
disclosed material legal dispute which has been resolved. See Note 10 below.
Operating Leases
We lease certain offices, facilities, equipment
and vehicles under non-cancellable operating and capital leases expiring at various dates through 2023.
NOTE 9: 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.
At March 31, 2017 and 2016, there were
no potentially dilutive securities outstanding.
NOTE 10: SUBSEQUENT EVENTS
We have evaluated subsequent events through
the date the unaudited condensed consolidated financial statements in this Report were filed with the Securities and Exchange
Commission. After March 31, 2017, but prior to the filing date of this Report, we settled a previously disclosed legal dispute.
In
December 2014 we delivered a carousel to our customer on a lease or purchase arrangement. 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. The customer disputed the invoices. An arbitration proceeding was filed. The
parties agreed to settle the dispute.