The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
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.
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 primary and
potential sources of liquidity include cash on hand, cash from operating activities, and proceeds from opportunistic sales of
property, plant and equipment (“PP&E”). The Company’s cash as of September 30, 2019 and December 31,
2018 was $1,782 and $2,015, respectively. The decrease 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.
The Company’s plans to mitigate
its limited liquidity include: closely monitoring capital expenditures planned for the remainder of 2019 and beyond to
conserve capital, potential opportunistic sales of PP&E, further reducing administrative costs, and potentially pursuing
a line of credit to further supplement our operating requirements.
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-owned subsidiary. All intercompany transactions
and balances have been eliminated.
Segments
For the nine months ended September 30,
2019 and 2018, we had one operating and reporting segment, Deep Down Delaware.
Recently Issued Accounting Standards
Not Yet Adopted
In June 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standard Update (“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 to Topic 326, Financial Instruments-Credit Losses.” The 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 disclosures 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.
NOTE 2:
|
LEASES: ADOPTION OF ASU 842, “LEASES”
|
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 for leases greater than twelve
months and disclose key information about leasing arrangements. We adopted the standard on January 1, 2019 using the modified retrospective
method and used 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 the right to use the underlying asset and require lease payments
for the lease term. The Company’s lease portfolio consists of operating leases, which expire at various dates through 2023.
The new standard provides a number of optional
practical expedients for transition. We elected the package of practical expedients under the transition guidance which permitted
us not to reassess under the new standard our prior conclusions for lease identification and lease classification on expired or
existing contracts and whether 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 for existing leases.
The new standard also provides practical
expedients and recognition exemptions for an entity’s ongoing accounting policy elections. 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 determining the lease term, and associated payments are excluded from future minimum lease payments.
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, 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, we do not have any finance lease assets
or liabilities, nor do we have any subleases.
The following tables present information about our operating 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
|
|
The components of our lease expense were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
Operating lease expense included in Cost of sales
|
|
$
|
312
|
|
|
$
|
926
|
|
Operating lease expense included in SG&A
|
|
|
55
|
|
|
|
185
|
|
Short term lease expense
|
|
|
41
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
Total lease expense
|
|
$
|
408
|
|
|
$
|
1,389
|
|
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%
|
|
During the third quarter, we 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
|
|
NOTE 3:
|
REVENUES: ADOPTION OF ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS”
|
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.
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 our 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
|
|
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 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 other
fixed price contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses
or by our 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.
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.
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 Balances
Costs and estimated earnings in excess
of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis but cannot be invoiced
under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. 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, 2019 and December 31, 2018, we had no contracts whose
term extended beyond one year.
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.”
|
|
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
|
|
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, plant and equipment,
net are summarized below:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Range of
Asset Lives
|
|
|
|
|
|
|
|
|
|
Buildings and improvements
|
|
$
|
285
|
|
|
$
|
285
|
|
|
7 - 36 years
|
Leasehold improvements
|
|
|
896
|
|
|
|
908
|
|
|
2 - 5 years
|
Equipment
|
|
|
18,670
|
|
|
|
18,640
|
|
|
2 - 30 years
|
Furniture, computers and office equipment
|
|
|
902
|
|
|
|
1,166
|
|
|
2 - 8 years
|
Construction in progress
|
|
|
76
|
|
|
|
158
|
|
|
|
Total property, plant and equipment
|
|
|
20,829
|
|
|
|
21,157
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(12,168
|
)
|
|
|
(11,466
|
)
|
|
|
Property, plant and equipment, net
|
|
$
|
8,661
|
|
|
$
|
9,691
|
|
|
|
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 6:
|
SHARE-BASED COMPENSATION
|
On July 27, 2018, we granted 300
shares of restricted stock to our Chief Financial Officer (“CFO”) who is now our current Chief Executive Officer
(“CEO”) after our former officer resigned effective August 31, 2019. These shares had 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 the CFO, subject to continued service as an officer of
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 the related share-based compensation of $237 over the three-year requisite service
period.
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, 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.
On September 23, 2019, we granted 200 shares
of restricted stock to our Chief Operating Officer (“COO”). These shares had 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 COO. We recognized $33 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.
On September 24, 2019,
we granted our new CEO an option to purchase 150 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 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 the related share based compensation of $59 over the two-year
requisite service period as the shares vest.
Summary of Shares of Restricted Stock
For the three months ended September
30, 2019 and 2018, we recognized a total of $55 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 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 unvested shares of restricted
stock was $168 at September 30, 2019 and $222 at December 31, 2018. These costs are expected to be recognized as expense over
a weighted-average period of 1.80 years.
Summary of Stock Options
For the three and nine months ended
September 30, 2019, we recognized $17 in compensation expense related to outstanding stock option awards. 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. The estimated fair value of non-vested stock options was $108 at September 30, 2019 and
$0 as of December 31, 2018. This cost is expected to be recognized as an expense over the period ending September 24, 2021.
On March 26, 2018, the Board authorized
the repurchase of up to $1,000 of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase
Program was funded from cash on hand. During the three months ended March 31, 2019, 228 shares of our outstanding common 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 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.
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, 2019 and December 31, 2018 management has recorded a full deferred tax asset
valuation allowance.
NOTE 9:
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COMMITMENTS AND CONTINGENCIES
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From time to time we are involved in legal
proceedings arising from the normal course of business. We expense or accrue legal costs as we incur them. A summary of our material
legal proceedings is as follows:
On August 6, 2018, GE Oil and Gas UK Ltd
(“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR. The
dispute involves alleged delays and defects in products manufactured by the Company for GE dating back to 2013. Mediation took
place on November 28, 2018, but no resolution was reached. The original amount in dispute was $2,630, but as of GE’s latest
filing with the ICC, the amount in dispute has been reduced to $2,252. The parties are in the process of filing preliminary submissions,
and the arbitration is currently set for April 2020. 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 recorded a liability related to this matter.
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-claim 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. At this point in the legal process, we do
not believe a loss to us is probable, therefore we have not recorded a liability related to this matter.
NOTE 10:
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EARNINGS PER COMMON SHARE
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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 three and nine months ended September
30, 2019 and 2018 there were no potentially dilutive securities that were included in the computation of diluted earnings per share
because their effect would be anti-dilutive.
NOTE 11:
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RELATED PARTY TRANSACTIONS
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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 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 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 provides 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.
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.