We have audited the accompanying consolidated
balance sheets of Deep Down, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related
consolidated statements of operations, changes in shareholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Deep Down, Inc. and subsidiaries
as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
We were not engaged to examine management’s
assertion about the effectiveness of Deep Down, Inc.’s internal control over financial reporting as of December 31, 2013
included in Item 9A of Part II in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and, accordingly,
we do not express an opinion thereon.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business
Deep Down, Inc., a Nevada corporation (“Deep
Down Nevada”), and its wholly-owned subsidiaries, Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”);
Mako Technologies, LLC, a Nevada limited-liability company (“Mako”) (operations consolidated into Deep Down Delaware
in August 2012); Flotation Technologies, Inc., a Maine corporation (dissolved in August 2012), Deep Down International Holdings,
LLC, a Nevada limited-liability company, and Deep Down Brasil, Ltda., a Brazil limited liability company (“Deep Down Brasil”),
(collectively referred to as “Deep Down”, “we”, “us” or the “Company”) is an oilfield
services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, serving
the worldwide offshore exploration and production industry. Our services and technological solutions include distribution system
installation support and engineering services, umbilical terminations, loose-tube steel flying leads, flotation and Remote Operated
Vehicles (“ROVs”) and related services. We support subsea engineering, installation, commissioning, and maintenance
projects through specialized, highly experienced service teams and engineered technological solutions. Deep Down’s primary
focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used
between the platform and the wellhead.
Additionally in August 2012, we consolidated
the operations of Mako in Morgan City, Louisiana into Deep Down Delaware in Channelview, Texas.
Liquidity
As a deepwater service provider, our revenues,
profitability, cash flows, and future rate of growth are substantially dependent on the condition of the global oil and gas industry
generally, and our customers’ ability to invest capital for offshore exploration, drilling and production and maintain or
increase levels of expenditures for maintenance of offshore drilling and production facilities. Oil and gas prices and the level
of offshore drilling and production activity have historically been characterized by significant volatility. We enter into large,
fixed-price contracts which may require significant lead time and investment. A decline in offshore drilling and production activity
could result in lower contract volume or delays in significant contracts which could negatively impact our earnings and cash flows.
Our earnings and cash flows could also be negatively affected by delays in payments by significant customers or delays in completion
of our contracts for any reason. While our objective is to enter into contracts with our customers that are cash flow positive,
we may not always be able to achieve this objective. We are dependent on our cash flows from operations to fund our working capital
requirements and the uncertainties noted above create risks that we may not achieve our planned earnings or cash flow from operations,
which may require us to raise additional debt or equity capital. There can be no assurance that we could raise additional capital.
During the fiscal years ended December 31,
2013 and 2012, we supplemented the financing of our capital needs primarily through debt and equity financings. Since 2008, we
have maintained a credit facility with Whitney Bank, a state chartered bank (“Whitney”); see additional discussion
in Note 6, “Long-Term Debt”. During the third quarter of 2013, we issued an additional 4,444 shares of common stock
resulting in net cash proceeds of $7,628. As a result of our credit facility, the private placement and cash we expect to generate
from operations, we believe we will have adequate liquidity to meet our future operating requirements.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include
the accounts of Deep Down and its wholly-owned subsidiaries for the years ended December 31, 2013 and 2012. All intercompany transactions
and balances have been eliminated.
Reclassifications
Certain prior period amounts have been
reclassified to conform to the current period presentation. These reclassifications have not resulted in any changes to previously
reported net income (loss) or cash flows.
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates.
Segments
For the years ended December 31, 2013 and
2012, our operating segments, Deep Down Delaware and Mako have been aggregated into a single reporting segment. In August 2012,
we consolidated the operations of Mako in Morgan City, Louisiana into Deep Down Delaware in Channelview, Texas. While the operating
segments have different product lines, they are very similar. They are all service-based operations revolving around our personnel’s
expertise in the deepwater and ultra-deepwater industry, and any equipment is produced to a customer specified design and engineered
using Deep Down personnel’s expertise, with installation and project management as part of our service revenue to the customer.
Additionally, the operating segments have similar customers and distribution methods, and their economic characteristics are similar
with regard to their gross margin percentages. Our operations are located in the United States, although we occasionally generate
sales to international customers.
Cash and Cash Equivalents
We consider all highly liquid investments
with maturities from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash
on deposit with domestic banks and, at times, may exceed federally insured limits.
Fair Value of Financial Instruments
Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date. We utilize
a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring
fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets
that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Quoted prices in markets that are not active;
or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Prices or valuation techniques that require
inputs that are both significant to the fair value measurement and unobservable.
Our financial instruments consist primarily
of cash equivalents, trade receivables and payables, and debt instruments. The carrying values of cash equivalents and
trade receivables and payables approximated their fair values at December 31, 2013 and 2012 due to their short-term maturities.
We calculated the fair values of our debt instruments using time value of money principles, and determined their carrying values
at December 31, 2013 and 2012 also approximated their fair values.
Accounts Receivable
Trade receivables are uncollateralized
customer obligations due under normal trade terms. We provide an allowance for doubtful trade receivables based on a specific review
of each customer’s trade receivable balance with respect to their ability to make payments. When specific accounts are determined
to require an allowance, they are expensed by a provision for bad debts in that period. At December 31, 2013 and 2012, we
estimated the allowance for doubtful accounts requirement to be $1,006 and $1,211, respectively. Bad debt expense totaled $61 and
$1,134 for the years ended December 31, 2013 and 2012, respectively.
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
Concentration of Credit Risk
As of December 31, 2013, five of our customers
accounted for 31 percent, 14 percent, 14 percent, 12 percent and 9 percent of total trade accounts receivable. As of December 31,
2012, five of our customers accounted for 53 percent, 7 percent, 7 percent, 6 percent and 5 percent of total trade accounts receivable.
For the year ended December 31, 2013, our
five largest customers accounted for 38 percent, 13 percent, 11 percent, 8 percent and 7 percent of total revenues. For
the year ended December 31, 2012, our four largest customers accounted for 30 percent, 15 percent, 6 percent and 5 percent of total
revenues.
Inventory
Inventory, which consists of spare parts
and materials used in our operations, is stated at lower of cost (first-in, first out) or net realizable value.
Long-Lived Assets
Property, plant and equipment.
Property, plant and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization
is computed using the straight-line method over the estimated useful lives of the respective assets. Replacements and betterments
are capitalized, while maintenance and repairs are expensed as incurred. It is our policy to include amortization expense on assets
acquired under capital leases with depreciation expense on owned assets. Additionally, we record depreciation and amortization
expense related to revenue-generating assets as a component of cost of sales in the accompanying statements of operations.
Goodwill
. Goodwill is the excess of
cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination.
Goodwill is not subject to amortization, but is tested for impairment annually during the fourth quarter, or more frequently if
an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include an adverse
change in the business climate or a change in the assessment of future operations of a reporting unit.
The Company assesses whether a goodwill impairment
exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances
exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of
a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that
it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not
to perform a qualitative assessment, a quantitative assessment or two-step impairment test is performed to determine whether goodwill
impairment exists at the reporting unit.
The first step is to compare the estimated
fair value of each reporting unit with goodwill to its carrying amount, including goodwill. To determine fair value estimates,
the Company uses the income approach based on discounted cash flow analyses, combined with a market-based approach. The market-based
approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly
traded businesses operating in industries consistent with the reporting unit. If the fair value of a reporting unit is less than
its carrying amount, the second step of the impairment test is performed to determine the amount of impairment loss, if any. The
second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying
amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal
to that excess.
There was no impairment of goodwill for the
years ended December 31, 2013 and 2012. The quantitative assessment of goodwill we performed as of December 31, 2013 demonstrated
that our goodwill’s fair value exceeded its carrying value by $1,350. Not achieving the financial performance estimates used
in calculating the fair value may give rise to a future impairment.
Other intangible assets
. Our other
intangible assets generally consist of assets acquired related to previous business combinations and are primarily comprised of
customer lists, trademarks and non-compete covenants. We amortize intangible assets over their useful lives ranging
from six to twenty-five years on a straight-line basis. We make judgments and estimates in conjunction with the carrying value
of these assets, including amounts to be capitalized, amortization methods, useful lives and the valuation of acquired other intangible
assets. All the intangible assets of Flotation were contributed to CFT effective December 31, 2010; see additional discussion in
Note 3, “Investment in Joint Venture.”
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
We test for the impairment of other intangible
assets upon the occurrence of a triggering event. We base our evaluation on impairment indicators such as the nature of the assets,
the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions
or factors that may be present. If these impairment indicators are present or other factors exist that indicate the carrying amount
of an asset may not be recoverable, we determine whether an impairment has occurred through the use of an undiscounted cash flows
analysis of the asset at the lowest level for which identifiable cash flows exist. The undiscounted cash flow analysis consists
of estimating the future cash flows that are directly associated with and expected to arise from the use and eventual disposition
of the asset over its remaining useful life. These cash flows are inherently subjective and require significant estimates based
upon historical experience and future expectations reflected in our budgets and internal projections. If the undiscounted cash
flows do not exceed the carrying value of the long-lived asset, an impairment has occurred, and we recognize a loss for the difference
between the carrying amount and the estimated fair value of the asset. The fair value of the asset is measured using quoted market
prices or, in the absence of quoted market prices, is based on an estimate of discounted cash flows. Cash flows are generally discounted
at an interest rate commensurate with our weighted average cost of capital for a similar asset.
In August 2012, we closed down our office
in Morgan City, Louisiana, and consolidated the operations of Mako into Deep Down Delaware in Channelview, Texas. In November 2012,
we evaluated Mako’s customer lists, trademarks and non-compete covenants in light of the consolidation and determined that
these other intangible assets had no future economic benefit. As a result, in the year ended December 31, 2012, we recorded impairment
expense of $2,156 primarily to fully impair the remaining carrying value of the Mako intangibles.
Equity Method Investments
Equity method investments in joint
ventures are reported as investments in joint venture on the consolidated balance sheets, and our share of earnings or losses
in the joint venture is reported as equity in net income or loss of joint
venture in the consolidated statements of operations.
Lease Obligations
We lease land, buildings, vehicles
and certain equipment under non-cancellable operating leases. Since February 2009, we have leased our corporate
headquarters in Houston, Texas, under a non-cancellable operating lease. Deep Down Delaware leases indoor manufacturing space
and Mako leases office, warehouse and operating space in Morgan City, Louisiana, under a non-cancellable operating lease. As
a result of the consolidation of Mako’s operations into Deep Down Delaware in August 2012; in December 2012, we
sub-leased this space to a third party. We also lease certain office and other operating equipment under capital leases; the
related assets are included with property, plant and equipment on the consolidated balance sheets.
At the inception of a lease, we evaluate
the agreement to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used
for such an evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably
assured and failure to exercise such option would result in an economic penalty.
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
Revenue Recognition
We recognize revenue once the following
four criterion are met: (i) persuasive evidence of an arrangement exists; (ii) delivery of the equipment has occurred or services
have been rendered, (iii) the price of the equipment or service is fixed and determinable and (iv) collectability of the related
receivable is reasonably assured. Service revenue is recognized as the service is provided, and time and materials contracts are
billed on a bi-weekly or monthly basis as costs are incurred. Customer billings for shipping and handling charges are included
in revenue. Revenues are recorded net of sales taxes.
From time to time, we enter into fixed-price
contracts. The percentage-of-completion method is used as a basis for recognizing revenue on these contracts. We recognize revenue
as costs are incurred because we believe the incurrence of cost reasonably reflects progress made toward project completion.
Provisions for estimated losses on uncompleted
large fixed-price contracts (if any) are recorded in the period in which it is determined it is more likely than not a loss will
be incurred. Changes in job performance, job conditions, and total contract values may result in revisions to costs and income
and are recognized in the period in which the revisions are determined. Unapproved change orders are accounted for in revenue
and cost when it is probable that the costs will be recovered through a change in the contract price. In circumstances where recovery
is considered probable but the revenues cannot be reliably estimated, costs attributable to change orders are deferred pending
determination of contract price.
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 and liabilities 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.
Income Taxes
We follow the asset and liability method
of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment
of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that
includes the enactment date.
We record a valuation allowance to reduce
the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will
expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred
tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the future. This requires
management to use estimates and make assumptions regarding significant future events such as the taxability of entities operating
in the various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider all reasonably available
positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years
and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of
future state, and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and
prudent tax planning strategies. These assumptions require significant judgment. When the likelihood of the realization of existing
deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made,
either to income or goodwill, depending upon when that portion of the valuation allowance was originally created.
We record an estimated tax liability or
tax benefit for income and other taxes based on what we determine will likely be paid in the various tax jurisdictions in which
we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid
are dependent upon various matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to
the estimated liability would be recorded as a provision or benefit to income tax expense in the period in which it becomes probable
that the amount of the actual liability or benefit differs from the recorded amount.
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
Our future effective tax rates could be
adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations
thereof. If and when our deferred tax assets are no longer fully reserved, we will begin to provide for taxes at the full statutory
rate. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities.
We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision
for income taxes.
Share-Based Compensation
We record share-based payment awards exchanged
for employee service at fair value on the date of grant and expense the awards in the consolidated statements of operations over
the requisite employee service period. Share-based compensation expense includes an estimate for forfeitures and is
generally recognized over the expected term of the award on a straight-line basis. At December 31, 2013, we had two
types of share-based employee compensation: stock options and restricted stock. In addition to employee service, the restricted
stock awards also have a performance component.
Key assumptions used in the Black-Scholes
model for stock option valuations include (1) expected volatility (2) expected term (3) discount rate and (4) expected dividend
yield. Since we do not have a sufficient trading history to determine the volatility of our own stock, we based our estimates of
volatility on a representative peer group consisting of companies in the same industry, with similar market capitalizations and
similar stage of development. Additionally, we continue to use the simplified method related to employee option grants.
Earnings or Loss per Common Share
Basic earnings or loss per common share
(“EPS”) is calculated by dividing net earnings or loss by the weighted average number of common shares outstanding
for the period. Diluted EPS is calculated by dividing net earnings or loss by the weighted average number of common shares and dilutive common stock equivalents (stock options and warrants) outstanding during the period. Diluted
EPS reflects the potential dilution that could occur if stock options and warrants to purchase common stock were exercised for
shares of common stock. In periods where losses are reported, the weighted-average number of common shares outstanding excludes
common stock equivalents, because their inclusion would be anti-dilutive.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting
Standards Board issued accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward,
a similar tax loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit, or a portion of
an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating
loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction
to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable
jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose,
the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred
tax assets. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013,
which would be for our year ended December 31, 2014. This guidance should be applied prospectively to all unrecognized tax benefits
that exist at the effective date. Retrospective application is permitted. The adoption of this guidance is not expected to have
a significant impact on our consolidated financial position or results of operation.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
NOTE 2: COSTS, ESTIMATED EARNINGS
AND BILLINGS ON UNCOMPLETED CONTRACTS
Costs, estimated earnings and billings
on uncompleted contracts are summarized below:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Costs incurred on uncompleted contracts
|
|
$
|
14,496
|
|
|
$
|
9,915
|
|
Estimated earnings on uncompleted contracts
|
|
|
5,539
|
|
|
|
4,714
|
|
|
|
|
20,035
|
|
|
|
14,629
|
|
Less: Billings to date on uncompleted contracts
|
|
|
(14,389
|
)
|
|
|
(12,835
|
)
|
|
|
$
|
5,646
|
|
|
$
|
1,794
|
|
|
|
|
|
|
|
|
|
|
Included in the accompanying consolidated balance sheets
under the following captions:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
$
|
5,847
|
|
|
$
|
2,547
|
|
Billings in excess of costs and
estimated earnings on uncompleted contracts
|
|
|
(201
|
)
|
|
|
(753
|
)
|
|
|
$
|
5,646
|
|
|
$
|
1,794
|
|
The balances in costs in excess of billings
and estimated earnings on uncompleted contracts at December 31, 2013 and 2012 consisted of earned but unbilled revenues related
to fixed-price projects.
The balances in billings in excess of costs
and estimated earnings on uncompleted contracts at December 31, 2013 and 2012 consisted of unearned milestone billings related
to fixed-price projects.
NOTE 3: INVESTMENT IN JOINT VENTURE
Effective December 31, 2010, we engaged
in a transaction in which all of the operating assets and substantially all of the liabilities of Flotation were contributed, along
with other contributions we made, to the CFT joint venture in return for a 20 percent common unit ownership interest.
On October 7, 2011, CFT consummated a transaction
pursuant to that certain Stock Purchase Agreement (the “Purchase Agreement”), by and between CFT and a Houston-based
company (“Buyer”) pursuant to which Buyer purchased from CFT (i) all of the issued and outstanding shares
of capital stock of Cuming Corporation (“Cuming”), the principal operating subsidiary of CFT, (ii) the shares of 230
Bodwell Corporation, a Massachusetts corporation and subsidiary of Cuming, and (iii) certain assets that, immediately prior to
closing, were acquired by Cuming, for a purchase price of $60,000 (less certain debt and subject to purchase price adjustment for
working capital and potential earn-out payments). We are entitled to 20 percent of future earn-out proceeds from the
sale.
The components of our Investment
in joint venture are summarized below:
Investment in joint venture, December 31, 2011
|
|
$
|
1,163
|
|
Equity in net loss of CFT for the year ended December 31, 2012
|
|
|
(179
|
)
|
Investment in joint venture, December 31, 2012
|
|
$
|
984
|
|
Equity in net loss of CFT for the year ended December 31, 2013
|
|
|
(16
|
)
|
Cash distribution from CFT for the year ended December 31, 2013
|
|
|
(500
|
)
|
Investment in joint venture, December 31, 2013
|
|
$
|
468
|
|
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
Below are unaudited condensed statements of operations data
of CFT for the years ended December 31, 2013 and 2012:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
2,744
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
–
|
|
|
$
|
518
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(80
|
)
|
|
$
|
(895
|
)
|
Below are unaudited condensed consolidated balance sheets of
CFT as of December 31, 2013 and December 31, 2012:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Current assets
|
|
$
|
863
|
|
|
$
|
5,749
|
|
Property, plant and equipment, net
|
|
|
1,527
|
|
|
|
1,675
|
|
Total assets
|
|
$
|
2,390
|
|
|
$
|
7,424
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
51
|
|
|
$
|
2,500
|
|
Equity
|
|
|
2,339
|
|
|
|
4,924
|
|
Total liabilities and equity
|
|
$
|
2,390
|
|
|
$
|
7,424
|
|
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as
of December 31, 2013 and 2012:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
Range of Asset Lives
|
|
Land
|
|
$
|
1,582
|
|
|
$
|
1,582
|
|
|
|
–
|
|
Buildings and improvements
|
|
|
1,571
|
|
|
|
1,555
|
|
|
|
7 - 36 years
|
|
Leasehold improvements
|
|
|
602
|
|
|
|
221
|
|
|
|
2 - 5 years
|
|
Equipment
|
|
|
17,840
|
|
|
|
14,251
|
|
|
|
2 - 30 years
|
|
Furniture, computers and office equipment
|
|
|
1,329
|
|
|
|
1,248
|
|
|
|
2 - 8 years
|
|
Construction in progress
|
|
|
189
|
|
|
|
487
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
23,113
|
|
|
|
19,344
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(7,718
|
)
|
|
|
(6,241
|
)
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
15,395
|
|
|
$
|
13,103
|
|
|
|
|
|
Included in property, plant and equipment
are assets under capital lease of $253 and $1,493 at December 31, 2013 and 2012, respectively, with related accumulated amortization
of $55 and $133 at December 31, 2013 and 2012, respectively.
Depreciation expense excluded from cost
of sales in the accompanying consolidated statements of operations was $139 and $140 for the years ended December 31, 2013 and
2012, respectively. Depreciation expense included in cost of sales in the accompanying consolidated statements of operations was
$1,425 and $1,317 for the years ended December 31, 2013 and 2012, respectively.
At December 31, 2013 and 2012, construction
in progress represents assets that are not ready for service or are in the construction stage. We will begin depreciating these
assets once they are placed in service.
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the cost
over the net tangible and identifiable intangible assets of acquired businesses.
At December 31, 2013 and 2012, our management
completed the annual impairment test of goodwill. There was no impairment indicated at December 31, 2013 or 2012.
Other Intangible Assets
Identifiable intangible assets acquired
in business combinations are recorded based upon fair market value at the date of acquisition. Amounts allocated to intangible
assets are amortized on a straight-line basis over their estimated useful lives. Estimated intangible asset values, net of accumulated
amortization include the following:
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Estimated
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Useful Life
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Patents
|
|
17 Years
|
|
|
138
|
|
|
|
(19
|
)
|
|
|
119
|
|
|
|
138
|
|
|
|
(12
|
)
|
|
|
126
|
|
Total
|
|
|
|
$
|
138
|
|
|
$
|
(19
|
)
|
|
$
|
119
|
|
|
$
|
138
|
|
|
$
|
(12
|
)
|
|
$
|
126
|
|
In August 2012, we closed down our office
in Morgan City, Louisiana, and consolidated the operations of Mako into Deep Down Delaware in Channelview, Texas. In November 2012,
we evaluated Mako’s customer lists, trademarks and non-compete covenants in light of the consolidation and determined that
these long-lived assets had no future economic benefit. As a result, in the year ended December 31, 2012, we recorded impairment
expense of $2,156 primarily to fully impair the remaining carrying value of the Mako other intangibles. There was no impairment
of other intangible assets for the year ended December 31, 2013.
Amortization expense is estimated to be
an average of $6 over each of the next five years.
NOTE 6: LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Secured credit agreement - Whitney Bank
|
|
$
|
1,917
|
|
|
$
|
2,909
|
|
Note payable
|
|
|
2,906
|
|
|
|
–
|
|
Capital lease obligations
|
|
|
111
|
|
|
|
707
|
|
Total long-term debt
|
|
|
4,934
|
|
|
|
3,616
|
|
Less: Current portion of long-term debt
|
|
|
(1,716
|
)
|
|
|
(680
|
)
|
Long-term debt, net of current portion
|
|
$
|
3,218
|
|
|
$
|
2,936
|
|
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
Whitney Credit Agreement
Since 2008, we have maintained a credit facility
(the “Facility”) with Whitney Bank, a state chartered bank (“Whitney”). The Facility has been amended and
restated several times, most recently on March 5, 2013. The current relevant terms of the Facility include:
|
·
|
a committed amount under the revolving
credit facility (“Revolving Credit Facility”) of $5,000, at an interest rate of 4.0 percent annum, maturing April 15,
2014;
|
|
·
|
a real estate term facility (“RE
Term Facility”) of $2,000, at an interest rate of 4.0 percent annum, maturing April 15, 2018, with the Company obligated
to make monthly increasing repayments of principal (along with accrued and unpaid interest thereon) starting at $8, beginning April
1, 2013; and
|
|
·
|
outstanding balances under the Facility
are secured by all of the Company’s assets.
|
As of December 31, 2013, the Company’s
indebtedness under the Revolving Credit Facility and the RE Term Facility was $0 and $1,917, respectively. We are currently in
negotiations with Whitney for an extension of the Revolving Credit Facility beyond the current April 15, 2014 maturity. We are
confident that we will be able to reach an agreement regarding this extension on or before April 15, 2014.
Our credit agreement with Whitney obligates
us to comply with the following financial covenants:
|
·
|
Leverage Ratio
- The ratio of total
debt to consolidated EBITDA must be less than 3.0 to 1.0; actual Leverage Ratio as of December 31, 2013: 2.78 to 1.0.
|
|
·
|
Fixed Charge Coverage Ratio -
The
ratio of consolidated EBITDA to consolidated net interest expense, plus principal payments on total debt, must be greater than
1.5 to 1.0; actual Fixed Charge Coverage Ratio as of December 31, 2013: 1.51 to 1.0.
|
|
·
|
Tangible Net Worth
- Our consolidated
net worth, after deducting other assets as are properly classified as “intangible assets,” plus 50 percent of net income,
after provision for taxes, must be in excess of $13,000; actual Tangible Net Worth as of December 31, 2013: $25,344.
|
|
·
|
Moreover, we continue to have obligations
for other covenants, including, among others, limitations on issuance of common stock, liens, transactions with affiliates, additional
indebtedness and permitted investments.
|
As of December 31, 2013 and 2012, we were
in compliance with all of the covenants.
Other Debt
On November 5, 2013, we entered into a
Purchase and Sale Agreement (“PSA”) with a customer to buy back a 3.5 metric ton portable umbilical carousel, which
we had fabricated specifically for this customer. The PSA calls for purchase price of $3,293 to be paid in 24 monthly installments
of $137.2, commencing November 5, 2013 through October 5, 2015. The obligation is non-interest bearing. The balance of this debt
at December 31, 2013 was $2,906.
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
Debt Maturities
Maturities of long-term debt as of December
31, 2013 were as follows:
|
|
Debt Maturities
|
|
Years ending December 31,:
|
|
|
|
|
2014
|
|
$
|
1,716
|
|
2015
|
|
|
1,510
|
|
2016
|
|
|
111
|
|
2017
|
|
|
116
|
|
2018
|
|
|
1,481
|
|
|
|
$
|
4,934
|
|
NOTE 7: EARNINGS OR LOSS PER COMMON SHARE
The following is a reconciliation of the
number of shares used in the basic and diluted net earnings or loss per common share calculation:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(595
|
)
|
|
$
|
(2,454
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
11,858
|
|
|
|
10,185
|
|
Effect of dilutive securities
|
|
|
2
|
|
|
|
–
|
|
Denominator for diluted earnings per share
|
|
|
11,860
|
|
|
|
10,185
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share outstanding, basic
and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.24
|
)
|
At December 31, 2013 and 2012, there were
outstanding warrants convertible to 0 and 6 shares of common stock, respectively. At December 31, 2013 and 2012, there were outstanding
stock options convertible to 945 and 1,008 shares of common stock, respectively.
NOTE 8: SHARE-BASED COMPENSATION
We have a share-based compensation plan,
the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”).
Awards of stock options and stock granted under the Plan have vesting periods of three years. Some awards of stock have performance
criteria as an additional condition of vesting. Once vested, stock options may be exercised for up to five years. Share-based compensation
expense related to awards is based on the fair value at the date of grant, and is recognized over the vesting periods, net of estimated
forfeitures. The value of performance-based awards is recognized as expense only when it is considered probable that the performance
criteria will be met. Under the Plan, the total number of options permitted is 15 percent of issued and outstanding common shares.
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
Summary of Shares of Restricted Stock
For the years ended December 31, 2013 and
2012, we recognized a total of $460 and $213, respectively, of share-based compensation expense related to restricted stock awards,
which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The
unamortized estimated fair value of restricted stock awards was $980 at December 31, 2013.
The following table summarizes the activity
of our restricted stock for the years ended December 31, 2013 and 2012. The aggregate intrinsic value is based upon the closing
price of $2.06 of our common stock on December 31, 2013.
|
|
|
Restricted Shares
|
|
|
Weighted-Average Grant-Date Fair Value
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2011
|
|
|
|
400
|
|
|
$
|
1.80
|
|
|
$
|
400
|
|
|
Forfeited
|
|
|
|
(17
|
)
|
|
|
1.80
|
|
|
|
|
|
|
Vested
|
|
|
|
(8
|
)
|
|
|
1.80
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
|
375
|
|
|
$
|
1.80
|
|
|
$
|
488
|
|
|
Granted
|
|
|
|
730
|
|
|
|
2.03
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(33
|
)
|
|
|
1.80
|
|
|
|
|
|
|
Vested
|
|
|
|
(17
|
)
|
|
|
1.80
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
|
1,055
|
|
|
$
|
1.96
|
|
|
$
|
2,173
|
|
Summary of Stock Options
Based on the shares of common stock
outstanding at December 31, 2013, there were approximately 2,289 options available for grant under the Plan as of that date. We
expense all stock options on a straight-line basis, net of forfeitures, over the requisite expected service periods. We determine
the fair value of stock options on the date of the grant using the Black-Scholes option pricing model.
For the years ended December 31, 2013 and
2012, we recognized a total of $150 and $341, respectively, of share-based compensation expense related to outstanding stock option
awards, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
The unamortized portion of the estimated fair value of outstanding stock options was $44 at December 31, 2013.
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
The following table summarizes our stock
option activity for the years ended December 31, 2013 and 2012:
In thousands, except per share amounts
|
|
Shares Underlying Options
|
|
|
Weighted- Average Exercise Price
|
|
|
Weighted- Average Remaining Contractual Term (in years)
|
|
Outstanding at December 31, 2011
|
|
|
1,063
|
|
|
$
|
2.00
|
|
|
|
2.4
|
|
Cancellations & Forfeitures
|
|
|
(55
|
)
|
|
|
2.19
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
1,008
|
|
|
$
|
2.00
|
|
|
|
2.4
|
|
Cancellations & Forfeitures
|
|
|
(63
|
)
|
|
|
1.93
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
945
|
|
|
$
|
1.98
|
|
|
|
1.3
|
|
Exercisable at December 31, 2013
|
|
|
837
|
|
|
$
|
2.01
|
|
|
|
1.2
|
|
The aggregate intrinsic
value is based on the closing price of $2.06 on December 31, 2013. As of December 31, 2013, the aggregate intrinsic value of stock
options outstanding and stock options exercisable was $76. The total fair value of stock options vested during the year ended
December 31, 2013 was $42. The following summarizes our outstanding options and their respective exercise prices at December
31, 2013:
Exercise Price
|
|
Shares
Underlying
Options
|
|
$1.80
|
|
|
325
|
|
$2.00
|
|
|
500
|
|
$2.40
|
|
|
120
|
|
|
|
|
945
|
|
NOTE 9: WARRANTS
We have issued warrants related to various
transactions in previous years; a summary of warrant transactions follows for the year ended December 31, 2013. The aggregate intrinsic
value is based on the closing price of $2.06 on December 31, 2013.
|
|
Shares Underlying Warrants
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average Remaining Contractual Term (in years)
|
|
|
Aggregate
Intrinsic Value (In-The-Money)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2012
|
|
|
6
|
|
|
$
|
20.20
|
|
|
|
–
|
|
|
$
|
–
|
|
Outstanding and exercisable at December 31, 2013
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
NOTE 10: COMMON STOCK
On July 17, 2012, we filed a Certificate
of Change with the Nevada Secretary of State for the purposes of reducing the number of authorized and outstanding shares of the
Company’s common stock, on a basis of one share of common stock for each twenty shares of common stock outstanding (the “Reverse
Stock Split”). The change was effective as of July 18, 2012.
During the third quarter of 2013, we issued
an additional 4,444 shares of common stock resulting in net cash proceeds of $7,628.
NOTE 11: INCOME TAXES
The provision for income taxes is comprised
of the following for the years ended December 31, 2013 and 2012.
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(4)
|
|
|
$
|
15
|
|
Deferred
|
|
|
(36
|
)
|
|
|
(520
|
)
|
Total
|
|
$
|
(40
|
)
|
|
$
|
(505
|
)
|
State:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(14
|
)
|
|
$
|
37
|
|
Deferred
|
|
|
36
|
|
|
|
520
|
|
Total
|
|
$
|
22
|
|
|
$
|
557
|
|
Total income tax expense (benefit)
|
|
$
|
(18
|
)
|
|
$
|
52
|
|
The provision for income taxes differs from the amount computed
by applying the U.S. statutory income tax rate before income taxes for the reasons set forth below for the years ended December
31, 2013 and 2012.
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Income tax expense at federal statutory rate
|
|
|
34.00%
|
|
|
|
34.00%
|
|
State taxes, net of federal expense
|
|
|
(4.32)%
|
|
|
|
(21.53)%
|
|
Return to provision adjustments
|
|
|
47.30%
|
|
|
|
24.30%
|
|
Valuation allowance
|
|
|
(67.93)%
|
|
|
|
(36.39)%
|
|
Permanent differences
|
|
|
(6.03)%
|
|
|
|
(2.57)%
|
|
Total effective rate
|
|
|
3.02%
|
|
|
|
(2.19)%
|
|
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, as well as operating loss and tax credit carry forwards. The tax effects of the temporary
differences and carry forwards are as follow at December 31, 2013 and 2012:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
198
|
|
|
$
|
353
|
|
Net operating loss
|
|
|
5,258
|
|
|
|
4,249
|
|
Share-based compensation
|
|
|
1,140
|
|
|
|
990
|
|
Investment in joint venture
|
|
|
4,599
|
|
|
|
4,700
|
|
Other
|
|
|
90
|
|
|
|
122
|
|
Total deferred tax assets
|
|
$
|
11,285
|
|
|
$
|
10,414
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization on property, plant and equipment
|
|
$
|
(2,797
|
)
|
|
$
|
(2,360
|
)
|
Amortization of intangibles
|
|
|
(59
|
)
|
|
|
(41
|
)
|
Total deferred tax liabilities
|
|
$
|
(2,856
|
)
|
|
$
|
(2,401
|
)
|
Less: valuation allowance
|
|
|
(8,429
|
)
|
|
|
(8,013
|
)
|
Net deferred tax position
|
|
$
|
–
|
|
|
$
|
–
|
|
We have $15,444 in net operating loss (“NOL”)
carry forwards available to offset future taxable income. These federal NOL’s will expire at various dates through 2028.
Management analyzed its current operating results and future projections and determined that a full valuation allowance was needed
due to our cumulative losses in recent years. We have no uncertain tax positions at December 31, 2013. Our tax returns from the
tax years ended December 31, 2009 through December 31, 2012 are open to examination by the IRS.
NOTE 12: COMMITMENTS AND CONTINGENCIES
Litigation
We are from time to time involved in legal
proceedings arising from the normal course of business. As of the date of this Report, we are not currently 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 2016.
At December 31, 2013, future minimum contractual lease obligations
were as follows:
Years ending December 31,:
|
|
Capital Leases
|
|
|
Operating Leases
|
|
2014
|
|
$
|
63
|
|
|
$
|
1,346
|
|
2015
|
|
|
58
|
|
|
|
1,348
|
|
2016
|
|
|
–
|
|
|
|
1,246
|
|
2017
|
|
|
–
|
|
|
|
1,080
|
|
2018
|
|
|
–
|
|
|
|
1,080
|
|
Thereafter
|
|
|
–
|
|
|
|
4,770
|
|
Total minimum lease payments
|
|
$
|
121
|
|
|
$
|
10,870
|
|
Residual principal balance
|
|
|
–
|
|
|
|
|
|
Amount representing interest
|
|
|
(10
|
)
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
111
|
|
|
|
|
|
Less current maturities of capital lease obligations
|
|
|
(55
|
)
|
|
|
|
|
Long-term contractual obligations
|
|
$
|
56
|
|
|
|
|
|
Rent expense for the years ended December
31, 2013 and 2012 was $1,007 and $498, respectively.
Notes to Consolidated Financial Statements
for the Years ended December 31, 2013 and 2012
(Amounts in thousands except per share
amounts)
Letters of Credit
Certain customers could require us to issue
standby letters of credit in the normal course of business to ensure performance under terms of contracts or as a form of product
warranty. The beneficiary of a letter of credit could demand payment from the issuing bank for the amount of the outstanding letter
of credit. Letters of credit outstanding at December 31, 2013 and 2012 under the Fifth Amendment with Whitney are as follows:
Type
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Performance
|
|
$
|
–
|
|
|
$
|
235
|
|
Warranty
|
|
|
415
|
|
|
|
592
|
|
Total
|
|
$
|
415
|
|
|
$
|
827
|
|
Employment Agreements
Certain of our Executives are employed
under employment agreements containing severance provisions. In the event of termination of an Executive’s 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 Executive is entitled or vested under the terms of all employee benefit and compensation plans, agreements
and arrangements in which the Executive is a participant as of the date of termination.
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 his employment
is terminated 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 three 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.
NOTE 13: RELATED PARTY TRANSACTIONS
We have a fabrication facility located
in Cleveland, Texas on property currently owned by one of our employees (and who is not one of our “named executive officers”).
In October 2012, we reached an understanding with the owner of the property to purchase the property for aggregate consideration
of $500. The property includes 15 acres of land, and currently contains residential buildings, recreational facilities and livestock.
We plan to expand the fabrication facility in order to increase our production capacity at such location, use the residential buildings
at such location to house employees and contractors for projects being conducted at the site, and otherwise use the facilities
at the site for general corporate purposes.
Although the transaction had yet
to be consummated, we took possession of the property in October 2012, and had paid the full purchase price
of $500 by December 31, 2013. These payments have been accounted for in our financial statements as purchase
deposits. We hope to consummate the transaction within sixty days of the date of this Report.