The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
NOTE 1:
|
BASIS OF PRESENTATION
|
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements of Deep Down, Inc. and its directly and indirectly wholly-owned subsidiaries (“Deep Down,” “we,”
“us” or the “Company”) were prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions
to Form 10-Q. As permitted under those rules, certain footnotes or other financial information that are normally required by United
States generally accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements
should be read in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report
on Form 10-K for the year ended December 31, 2017, filed on March 28, 2018 with the Commission.
Preparation of financial statements in
conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
the disclosed amounts of contingent assets and liabilities and the reported amounts of revenues and expenses. If the underlying
estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ
from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Liquidity
The Company’s primary and potential
sources of liquidity include cash and cash equivalents on hand, cash from operating activities, and proceeds from opportunistic
sales of non-core equipment. The Company’s cash as of March 31, 2018 and December 31, 2017 was $1,906 and $3,939, respectively.
Significant reduction in cash was caused by cash used in operating activities of $1,759 primarily because of our net loss of $850
and an increase of $1,368 in accounts receivable during the quarter ended March 31, 2018.
The Company’s plans to mitigate its
limited liquidity include: closely monitoring capital expenditures planned for the remainder of 2018 and beyond to conserve
capital; possibly selling certain non-core equipment; further reducing administrative costs, if necessary; and potentially establishing
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 directly and indirectly wholly-owned subsidiaries.
All intercompany transactions and balances have been eliminated.
Segments
For the quarters ended March 31, 2018 and
2017, we had one operating and reporting segment, Deep Down Delaware.
Recently Issued Accounting Standards
Not Yet Adopted
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”
(“ASU 2016-02”). The amendments in this update require, among other things, that lessees recognize the following for
all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation
to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that
represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply
a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements. The amendments are effective for us beginning January 1, 2019. We do not anticipate
the adoption of ASU 2016-02 will have a material effect on our results of operations or financial position, but we are still evaluating
the impact on both.
All other new accounting pronouncements
that have been issued but not yet effective are currently being evaluated to determine whether or not we anticipate that they
will have a material impact on our financial position or results of operations.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
NOTE 2:
|
REVENUES: ADOPTION OF ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS”
|
On January 1, 2018, we adopted ASC Topic
606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of
January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period
amounts are not adjusted and continue to be reported in accordance with our historic accounting methods under ASC Topic 605, “Revenue
Recognition.”
There was no significant impact 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 incurred) 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.
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Fixed Price Contracts
|
|
$
|
1,843
|
|
|
$
|
1,671
|
|
Service Contracts
|
|
|
1,863
|
|
|
|
3,938
|
|
Total
|
|
$
|
3,706
|
|
|
$
|
5,609
|
|
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 to deliver 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.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
We have a companywide standard and disciplined
quarterly estimate at completion (EAC) 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 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. As of March 31, 2018, we had no contracts with terms extending
beyond one year.
The following table summarizes our contract
assets, which we classify as “Costs and estimated earnings in excess of billings on uncompleted contracts” and our
contract liabilities, which we classify as “Billings in excess of costs and estimated earnings on uncompleted contracts”.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Costs incurred on uncompleted contracts
|
|
$
|
343
|
|
|
$
|
9,564
|
|
Estimated earnings on uncompleted contracts
|
|
|
407
|
|
|
|
10,741
|
|
|
|
|
750
|
|
|
|
20,305
|
|
Less: Billings to date on uncompleted contracts
|
|
|
(598
|
)
|
|
|
(19,992
|
)
|
|
|
$
|
152
|
|
|
$
|
313
|
|
Included in the accompanying unaudited condensed consolidated balance sheets under the following captions:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
259
|
|
|
$
|
925
|
|
Billings in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(107
|
)
|
|
|
(612
|
)
|
|
|
$
|
152
|
|
|
$
|
313
|
|
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
The balance in costs and estimated earnings
in excess of billings on uncompleted contracts at March 31, 2018 and December 31, 2017 consisted primarily of earned but unbilled
revenues related to fixed-price contracts.
The balance in billings in excess of costs
and estimated earnings on uncompleted contracts at March 31, 2018 and December 31, 2017 consisted primarily of unearned billings
related to fixed-price contracts.
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.
As of March 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.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
NOTE 3:
|
PROPERTY, PLANT AND EQUIPMENT
|
The components of property, plant and equipment,
net are summarized below:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
Range of Asset Lives
|
|
Buildings and improvements
|
|
|
285
|
|
|
|
285
|
|
|
|
7 - 36 years
|
|
Leasehold improvements
|
|
|
908
|
|
|
|
908
|
|
|
|
2 - 5 years
|
|
Equipment
|
|
|
18,920
|
|
|
|
18,933
|
|
|
|
2 - 30 years
|
|
Furniture, computers and office equipment
|
|
|
1,320
|
|
|
|
1,245
|
|
|
|
2 - 8 years
|
|
Construction in progress
|
|
|
2,409
|
|
|
|
2,127
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
23,842
|
|
|
|
23,498
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(11,575
|
)
|
|
|
(11,146
|
)
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
12,267
|
|
|
$
|
12,352
|
|
|
|
|
|
In January 2018, we financed a new Company
vehicle. The financed amount was $67 and is for a term of six years with an interest rate of 0.9%, with monthly payments of $1.
The financing company will hold a lien on the vehicle until all payments have been made.
NOTE 5:
|
SHARE-BASED COMPENSATION
|
Share-based Compensation Plan
We have a share-based compensation plan,
the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”).
Awards of common stock and options to purchase common stock granted under the Plan have vesting periods of three years and options
are exercisable for two years once fully vested. Share-based compensation expense related to awards is based on the fair value
at the date of grant, and is recognized over the requisite expected service period, net of estimated forfeitures. Under the Plan,
the total number of options permitted is 15 percent of issued and outstanding common shares.
Summary of Nonvested Shares of Restricted
Stock
On May 2, 2017, we granted 30 shares of
restricted stock to an independent director. 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 grant date anniversary, subject
to continued service on our Board of Directors. We are amortizing the related share-based compensation of $34.50 over the three-year
requisite service period.
For the three months ended March 31, 2018
and 2017, we recognized a total of $4 and $34, respectively, of share-based compensation expense related to restricted stock awards,
which is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements
of operations. The unamortized estimated fair value of nonvested shares of restricted stock awards was $35 at March 31, 2018. These
costs are expected to be recognized as expense over a weighted-average period of 1.62 years.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
On March 26, 2018, the Board of Directors
authorized the repurchase of up to $1,000 of the Company’s outstanding common stock (the “Repurchase Program”).
The Repurchase Program will be funded from cash on hand and cash provided by operating activities.
The time of the purchases and amount of
stock purchased will be determined at the discretion of management subject to market conditions, business opportunities and other
appropriate factors and may include purchases through one or more broker-assisted plans and methods, including, but not limited
to, open-market purchases, privately negotiated transactions and Rule 10b5-1 trading plans. The Repurchase Program will expire
on March 31, 2019.
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, 2018 and December 31, 2017 management has recorded a full deferred tax asset valuation
allowance.
NOTE 8:
|
COMMITMENTS AND CONTINGENCIES
|
Litigation
From time to time we are involved in legal
proceedings arising from the normal course of business. As of the date of this Report, we were not involved in any material legal
proceedings.
Operating Leases
We lease certain offices, facilities, equipment
and vehicles under non-cancellable operating and capital leases expiring at various dates through 2023.
NOTE 9:
|
EARNINGS PER COMMON SHARE
|
Basic earnings per share (“EPS”)
is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents
(warrants, nonvested stock awards and stock options) outstanding during the period. Diluted EPS reflects the potential dilution
that could occur if options to purchase common stock were exercised for shares of common stock and all nonvested stock awards vest.
At March 31, 2018 and 2017, there were
no potentially dilutive securities outstanding.