Table of Contents

 

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

 

For the quarterly period ended March 31, 2020

 

OR

 

¨ 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.  þ Yes   ¨ 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). Yes þ No ¨

 

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   þ Smaller reporting company   þ
   
  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 ¨ No  þ

 

At May 11, 2020, there were 12,391,365 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 several 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;
     
  The volatility of oil and natural gas prices;
     
  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;

 

 

 

 

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  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 business; and
     
  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, 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 (www.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.

 

 

 

 

 

 

 

 

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TABLE OF CONTENTS

 

    Page No.
     
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements 1
  Unaudited Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 1
  Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 2
  Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 3
  Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 4
  Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
   
PART II. OTHER INFORMATION
   
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 6. Exhibits 20
     
Signatures 21
Exhibit Index 22

 

 

 

 

 

 

 

 

 

 

 

 

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PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

DEEP DOWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

   

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.

 

 

 

 

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DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

    Three Months Ended
    March 31,
    2020   2019
    (In thousands, except share data)
         
Revenues   $ 3,605     $ 6,300  
Cost of sales:                
Cost of sales     2,241       3,765  
Depreciation expense     241       277  
Total cost of sales     2,482       4,042  
Gross profit     1,123       2,258  
Operating expenses:                
Selling, general and administrative     1,693       1,995  
Depreciation and amortization     61       68  
Total operating expenses     1,754       2,063  
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  
Net income (loss)   $ (637 )   $ 212  
                 
Net income (loss) per share:                
Basic   $ (0.05 )   $ 0.02  
Fully diluted   $ (0.05 )   $ 0.02  
                 
Weighted-average shares outstanding:                
Basic     12,710       13,511  
Fully diluted     12,710       13,511  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 

 

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DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED) 

 

 

            Additional            
    Common Stock   Paid-in   Treasury   Accumulated    
(In thousands)   Shares (#)   Amount ($)   Capital   Stock   Deficit   Total
                         
Balance at December 31, 2018     15,706     $ 16     $ 73,271     $ (2,062 )   $ (54,116 )   $ 17,109  
                                                 
Net income                             212       212  
Treasury shares purchased                       (170 )           (170 )
Share-based compensation                 104                   104  
                                                 
Balance at March 31, 2019     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                             (637 )     (637 )
Treasury shares purchased                       (524 )           (524 )
Share-based compensation                 50                   50  
                                                 
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.

 

 

 

 

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DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED) 

 

 

    Three Months Ended
    March 31,
    2020   2019
    (In thousands)
Cash flows from 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     50       104  
Depreciation and amortization     302       345  
Gain on sale of property, plant and equipment           (15 )
Non-cash lease expense     5       9  
Changes in operating assets and liabilities:                
Accounts receivable, net     (181 )     (2,566 )
Contract assets     270       1,104  
Prepaid expenses and other current assets     32       (34 )
Other assets     (94 )     21  
Accounts payable and accrued liabilities     67       173  
Contract liabilities     277       64  
Net cash provided by (used in) operating activities     91       (583 )
                 
Cash flows from investing activities:                
Proceeds from sale of property, plant and equipment           15  
Purchases of property, plant and equipment     (61 )      
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     (57 )     517  
                 
Cash flows from financing activities:                
Principal payment on long-term debt           (3 )
Repurchase of common shares     (524 )     (170 )
Net cash used in financing activities     (524 )     (173 )
Change in cash     (490 )     (239 )
Cash, beginning of period     3,523       2,015  
Cash, end of period   $ 3,033     $ 1,776  
                 
Supplemental schedule of non-cash investing and financing activities:                
Property, plant and equipment sold in accounts receivable   $     $ 27  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 

 

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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 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, 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 cash on hand was $3,033 and working capital was $3,965 as of March 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 operations, and the 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 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 $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.

 

The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of cash on hand, cash expected to be generated from operations, current working capital, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital investments.

 

 

 

 

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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 three months ended March 31, 2020 and 2019, we had one operating and reporting segment, Deep Down Delaware.

 

NOTE 2:

LEASES

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (“ASC Topic 842”). Under this guidance, lessees are required to recognize on the balance sheet a lease liability and a right-of-use (“ROU”) asset for all leases, except 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 will be measured as the present value of the lease payments. The ROU asset represents the lessee’s right to use a specified asset for the lease term, and will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs.

 

Practical Expedients

 

ASC Topic 842 provides for certain practical expedients when adopting the guidance. The Company elected the package of practical expedients allowing the Company, for all leases that commenced prior to the adoption date, to not reassess whether any expired or existing contracts are, or contain, leases, the lease classification for any expired or existing leases or initial direct costs for any expired or existing leases.

 

The Company utilizes the land easements practical expedient 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 ROU asset or corresponding lease liability for leases with an initial term of twelve months or less that are not reasonably certain of 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 instead account for both as a single lease 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 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.

 

As of March 31, 2020, we do not have any finance lease assets or liabilities, nor do we have any subleases.

 

 

 

 

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The following tables present information about our operating leases:

 

    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
    March 31,
    2020   2019
    (In thousands)
Operating lease expense included in Cost of sales   $ 308     $ 306  
Operating lease expense included in SG&A     60       73  
Short term lease expense     34       65  
Total lease expense   $ 402     $ 444  

 

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 quarter ended March 31, 2020, the Company did not have any sale/leaseback transactions.

 

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  

 

 

 

 

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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 the Company’s revenues disaggregated by fixed price and service contracts. Sales taxes are excluded from revenues.

 

    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  

 

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. In our fixed price contracts, the customer either controls the work in process or we deliver products with no alternative use to the Company and have rights to payment for work performed to date plus a reasonable profit 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.

 

 

 

 

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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 paid on a monthly basis. Payment terms for services are usually 30 days from invoice receipt.

 

Contract balances

 

Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded based on the 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 March 31, 2020 and December 31, 2019, there were no contracts with terms that extended beyond one year.

 

 

 

 

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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”.

 

    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, potential orders, and 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.

  

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.

 

 

 

 

  10  

 

 

NOTE 4: PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

    March 31, 2020   December 31, 2019   Range of Asset Lives
    (In thousands)    
Buildings and improvements   $ 285     $ 285       7 - 36 years  
Leasehold improvements     896       896       2 - 5 years  
Equipment     17,896       17,887       2 - 30 years  
Furniture, computers and office equipment     901       901       2 - 8 years  
Construction in progress     116       64        
Total property, plant and equipment     20,094       20,033          
Less: Accumulated depreciation and amortization     (12,360 )     (12,069 )        
Property, plant and equipment, net   $ 7,734     $ 7,964          

 

NOTE 5: 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, the Company granted 300 shares of restricted stock to the current Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). These shares have 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 as CFO, subject to continued service to the Company. The related share-based compensation of $237 is being amortized over the three-year requisite service 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 on 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, the Company granted 200 shares of restricted stock to the former Chief Operating Officer (“COO”). 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, but the remaining shares will not vest as the position of COO was eliminated by the Company following March 31, 2020. The Company recognized $11 in compensation expense for the quarter ended March 31, 2020.

 

On September 24, 2019, the Company granted 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 CEO. The related share-based compensation of $59 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.

 

 

 

 

  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 Restricted Stock and Stock Options

 

For the three months ended March 31, 2020 and 2019, we recognized a total of $50 and $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 $101 and $134 at March 31, 2020 and December 31, 2019, respectively. These costs are expected to be recognized as expense over a weighted-average period of 1.81 years.

 

The number of unvested of stock options was 238 and 225 at March 31, 2020 and December 31, 2019, respectively. The unamortized estimated fair value of unvested stock options was $107 and $91 at March 31, 2020 and December 31, 2019, respectively.

 

NOTE 6: TREASURY STOCK

 

On December 23, 2019, the Board authorized the repurchase of up to 500 shares of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Program was funded from cash on 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, 2020, 744 shares of common stock were purchased for an aggregate amount of $524. As of March 31, 2020, the repurchase program has been exhausted.

 

Treasury shares are accounted for using the cost method.

 

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. At March 31, 2020 and December 31, 2019, management has recorded a full deferred tax asset valuation allowance.

 

NOTE 8: 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, the Company is party to various legal proceedings arising in the ordinary course of business. The Company expenses or accrues legal costs as incurred. A summary of the Company’s 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 (“ICC”). The dispute involved 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 was not resolved. On February 22, 2019, GE initiated arbitration proceedings with the ICC. The total amount in dispute was originally $2,630 but was later reduced to $2,252. On February 26, 2020, the parties agreed in principle to settle the dispute, and the parties are working toward finalizing the terms of a definitive settlement agreement. The Company therefore accrued a liability related to this 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 counterclaim on March 20, 2013 in the aggregate amount of $1,000 for reimbursement of insurance payments allegedly made for repairs. The parties have not reached a resolution on this matter. At this point, it is not clear as to whether an unfavorable outcome is either probable or remote, and the Company is unable to determine the likelihood of an unfavorable outcome or the amount or range of potential loss if the outcome should be unfavorable.

 

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, 2020 and 2019, all such securities were anti-dilutive.

 

 

 

 

  13  

 

 

NOTE 10: 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, 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 $15 per month, from January 1, 2020 through December 31, 2021, in exchange for his future services. The Company therefore recorded consulting expenses related to the Transition Agreement totaling $45 for the 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.

 

 

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis provide 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, 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 amounts are in thousands, except backlog amount.

 

General

 

Deep Down is an oilfield product and services company specializing in complex deepwater and ultra-deepwater support services and subsea distribution products used between the production facility and the wellhead. Our core services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, and related services.  Additionally, our highly experienced, specialized service teams can support subsea engineering, installation, commissioning, and maintenance projects located anywhere in the world.  

 

Industry and Executive Outlook

 

The dual challenges of the global coronavirus pandemic and the oil price crash continue to impact our business and that of our customers. Our service business is particularly dependent on our personnel being able to travel domestically and internationally, and travel restrictions imposed by various governments partially contributed to reduced revenues during the first quarter of 2020.

 

While revenues of $3,605 for the quarter ended March 31, 2020 declined by $2,695 compared to the quarter 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 revenues was primarily driven by a lower proportion of fixed-price contract activity during the first quarter of 2020.

 

We could potentially experience additional headwinds as our customers continue to adjust their operations based on the current 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 management team to focus on growth. However, considering recent developments in the oil and gas 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.

 

As we look to the future, we currently project the service side of our business to recover first as we expect our customers to be focused on extending the life of existing assets, rather than sanctioning new projects. Therefore, we are determined to further position ourselves as the service provider of choice in such an environment. We expect to execute this strategy while remaining laser-focused on managing our cash flows and maximizing value for our shareholders.

 

 

 

 

  15  

 

 

Results of Operations

 

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

 

Revenues. Revenues for the three months ended March 31, 2020 were $3,605 compared to revenues of $6,300 for the three months ended March 30, 2019. The $2,695, or 43 percent, decrease from the same period in 2019 was primarily the result of less fixed-price projects in process, COVID-19 related travel restrictions, and the recent developments in the global oil markets.

 

Cost of Sales. Cost of sales decreased by $1,560, or 39 percent, to $2,482 for the three months ended March 31, 2020 from $4,042 for the same period in 2019. The decrease in cost of sales was primarily driven by the decrease in revenues. Our cost of sales as a percentage of revenues increased primarily due to 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 47 percent of revenues, for the three months ended March 31, 2020 compared to $1,995, or 32 percent of revenues, for the three months ended March 31, 2019. The $302, or 15 percent, decrease in SG&A is a result of cost reduction initiatives implemented by the Company as a result of a renewed focus on the Company’s core business. The increase in SG&A expense as a percentage of revenues was due to lower revenues during the three months ended March 31, 2020 as compared to the three months ended 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, 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); and actions that do not affect liquidity (share-based compensation expense from our operating results; and it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase or acquisition in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.

 

 

 

 

  16  

 

 

The following is a reconciliation of net income (loss) to Modified EBITDA (loss) for the three months ended March 31, 2020 and 2019:

 

    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 $923 decrease in Modified EBITDA was due primarily to the decrease in revenues and the resulting decrease in gross profit during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

 

Liquidity and Capital Resources

 

The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of 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 PP&E in addition to pursuing a disciplined approach to making capital investments.

 

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 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 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. The Company also continues to engage in discussions with several financial institutions if a credit facility is needed to further support operations. There can be no assurance that the Company could obtain a credit 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.

 

 

 

 

  17  

 

 

Inflation and Seasonality

 

The Company does not believe that its operations are significantly impacted by inflation, and its business is not significantly seasonal in nature.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its 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 the financial statements relate to revenue recognition where the Company measures progress towards completion on a cost-to-cost basis for fixed-price contracts, the allowance for doubtful accounts, and the valuation allowance for deferred income tax assets. These estimates require judgments, which are 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, 2019 for a discussion of our critical accounting policies and estimates.

 

Recently Issued Accounting Standards

 

Refer to Note 1 in Part II. Item 8. “Financial Statements and Supplemental Data,” in our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of recently issued accounting standards.

 

Share Repurchase Program

 

On December 23, 2019, the Board authorized the repurchase of up to 500 shares of the Company’s outstanding common stock. This repurchase program was funded from cash on 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, 2020, 744 shares of common stock were purchased for an aggregate amount of $524. As of March 31, 2020, the repurchase program has been exhausted.

 

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 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 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 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 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 March 31, 2020. 

 

 

 

 

 

 

 

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PART II. – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, the Company is party to various legal proceedings arising in the ordinary course of business. A summary of the Company’s 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 (“ICC”). The dispute involved 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 was not resolved. On February 22, 2019, GE initiated arbitration proceedings with the ICC. The total amount in dispute was originally $2,630,000 but was later reduced to $2,252,000. On February 26, 2020, the parties agreed in principle to settle the dispute, and the parties are working toward finalizing the terms of a definitive settlement agreement. The Company therefore accrued a liability related to this 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 counterclaim on March 20, 2013 in the aggregate amount of $1,000,000 for reimbursement of insurance payments allegedly made for repairs. The parties have not reached a resolution on this matter. At this point, it is not clear as to whether an unfavorable outcome is either probable or remote, and the Company is unable to determine the likelihood of an unfavorable outcome or the amount or range of potential loss if the outcome should be unfavorable.

 

ITEM 1A. RISK FACTORS

 

Not applicable

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The table below summarizes information about our purchases of common stock, based on trade date, during the 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 December 23, 2019, the Board authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock. This repurchase program was funded from cash on 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, 2020, 743,815 shares of common stock were purchased for an aggregate amount of $524,091. As of March 31, 2020, the repurchase program has been exhausted.

 

ITEM 6. EXHIBITS

 

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. 

 

 

 

 

  20  

 

 

SIGNATURES

 

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: May 11, 2020    
  By: /s/ Charles K. Njuguna
    Charles K. Njuguna
    President, Chief Executive Officer and Chief Financial Officer
    (Principal Executive Officer)
     
  By: /s/ Trevor L. Ashurst
    Trevor L. Ashurst
    Vice President of Finance
    (Principal Accounting Officer)
     
     
     
     

 

 

 

 

 

 

 

 

 

 

  21  

 

 

INDEX TO EXHIBITS

 

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* Statement of Charles K. Njuguna, President, Chief Executive Officer and Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
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.

 

 

 

  22  

 

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