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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

 

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  
   
  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 November 12, 2021, there were 12,388,865 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;
     
  · 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;

 

  · 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.

 

 

 

  i  

 

 

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, 2020, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  ii  

 

 

TABLE OF CONTENTS

 

    Page No.
     
PART I. FINANCIAL INFORMATION
 
Item 1. Condensed Consolidated Financial Statements 1
  Balance Sheets 1
  Statements of Operations 2
  Statements of Changes in Stockholders’ Equity 3
  Statements of Cash Flows 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 20
Item 4. Controls and Procedures 20
   
PART II. OTHER INFORMATION
   
Item 1. Legal Proceedings 21
Item 6. Exhibits 21
     
Signatures 22
Index to Exhibits 23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  iii  

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

DEEP DOWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

  

                 
    September 30, 2021     December 31, 2020  
    (In thousands, except share and per share amounts)  
ASSETS            
Current assets:                
Cash   $ 3,708     $ 3,745  
Accounts receivable, net of allowance of $618 and $84, respectively     5,094       4,650  
Inventory     254       187  
Contract assets     92       189  
Prepaid expenses and other current assets     91       151  
Total current assets     9,239       8,922  
Property, plant and equipment, net     1,853       2,604  
Intangibles, net     39       44  
Right-of-use operating lease assets     2,180       3,174  
Other assets     198       195  
Total assets   $ 13,509     $ 14,939  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
Accounts payable and accrued expenses   $ 1,667     $ 1,988  
Contract liabilities     478       730  
Current portion of PPP loan payable           863  
Current lease liabilities     1,298       1,261  
Total current liabilities     3,443       4,842  
                 
PPP loan payable           248  
Operating lease liability, long-term     918       1,951  
Total liabilities     4,361       7,041  
                 
Commitments and contingencies (Note 8)                
                 
Stockholders' equity:                
Common stock, $0.001 par value, 24,500,000 shares authorized and 15,756,010 issued     16       16  
Additional paid-in capital     73,684       73,638  
Treasury stock, 3,517,145 shares, at cost     (2,809 )     (2,809 )
Accumulated deficit     (61,743 )     (62,947 )
Total stockholders' equity     9,148       7,898  
Total liabilities and stockholders' equity   $ 13,509     $ 14,939  

 

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

 

 

 

 

  1  

 

 

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2021     2020     2021     2020  
    (In thousands, except per share amounts)  
                         
Revenues   $ 3,550     $ 3,136     $ 12,000     $ 9,466  
Cost of sales:                                
Cost of sales     2,569       1,794       7,518       5,252  
Depreciation expense     144       174       511       656  
Total cost of sales     2,713       1,968       8,029       5,908  
Gross profit     837       1,168       3,971       3,558  
Operating expenses:                                
Selling, general and administrative     1,336       1,351       4,623       5,049  
Depreciation and amortization     65       65       220       187  
Asset impairment                       4,490  
Total operating expenses     1,401       1,416       4,843       9,726  
Operating loss     (564 )     (248 )     (872 )     (6,168 )
Other (income) expense:                                
Interest expense, net     1       2       8       4  
Other income, net     (1,050 )           (2,193 )      
Loss on sale of property, plant and equipment     148             94        
Total other (income) expense     (901 )     2       (2,091 )     4  
Income (loss) before income tax expense     337       (250 )     1,219       (6,172 )
Income tax expense     5             15       5  
Net income (loss)   $ 332     $ (250 )   $ 1,204     $ (6,177 )
                                 
Net income (loss) per share:                                
Basic   $ 0.03     $ (0.02 )   $ 0.10     $ (0.49 )
Fully diluted   $ 0.03     $ (0.02 )   $ 0.10     $ (0.49 )
                                 
Weighted-average shares outstanding:                                
Basic     12,389       12,390       12,389       12,531  
Fully diluted     12,445       12,390       12,441       12,531  

 

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

 

 

 

  2  

 

 

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, 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  
                                                 
Net loss                             (5,290 )     (5,290 )
Restricted stock awards forfeited     (150 )                              
Share-based compensation                 24                   24  
                                                 
Balance at June 30, 2020     15,756     $ 16     $ 73,595     $ (2,808 )   $ (62,817 )   $ 7,986  
                                                 
Net loss                             (250 )     (250 )
Treasury shares purchased                       (1 )           (1 )
Share-based compensation                 39                   39  
                                                 
Balance at September 30, 2020     15,756     $ 16     $ 73,634     $ (2,809 )   $ (63,067 )   $ 7,774  
                                                 
Balance at December 31, 2020     15,756     $ 16     $ 73,638     $ (2,809 )   $ (62,947 )     7,898  
                                                 
Net income                             148       148  
Share-based compensation                 20                   20  
                                                 
Balance at March 31, 2021     15,756     $ 16     $ 73,658     $ (2,809 )   $ (62,799 )   $ 8,066  
                                                 
Net income                             724       724  
Share-based compensation                 17                   17  
                                                 
Balance at June 30, 2021     15,756     $ 16     $ 73,675     $ (2,809 )   $ (62,075 )   $ 8,807  
                                                 
Net income                             332       332  
Share-based compensation                 9                   9  
                                                 
Balance at September 30, 2021     15,756     $ 16     $ 73,684     $ (2,809 )   $ (61,743 )   $ 9,148  

 

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

 

 

 

  3  

 

 

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

                 
    Nine Months Ended  
    September 30,  
    2021     2020  
    (In thousands)  
Cash flows from operating activities:                
Net income (loss)   $ 1,204     $ (6,177 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:                
Share-based compensation     46       113  
Depreciation and amortization     731       843  
Loss on sale of property, plant and equipment     94        
Bad debt expense     534       426  
Non-cash lease expense     (1 )     10  
Forgiveness of PPP loan     (2,222 )      
Loss on asset impairment           4,490  
Changes in operating assets and liabilities:                
Accounts receivable, net     (943 )     126  
Contract assets     97       539  
Inventories     (67 )      
Prepaid expenses and other current assets     50       45  
Other assets     (3 )     (136 )
Accounts payable and accrued expenses     (321 )     (60 )
Contract liabilities     (252 )     (175 )
Net cash (used in) provided by operating activities     (1,053 )     44  
                 
Cash flows from investing activities:                
Proceeds from sale of property, plant and equipment     171        
Purchases of property, plant and equipment     (275 )     (118 )
Payments received on note receivable (included in Prepaid expenses and other current assets)     9       10  
Net cash used in investing activities     (95 )     (108 )
                 
Cash flows from financing activities:                
Proceeds from PPP loan     1,111       1,111  
Repurchase of common shares           (525 )
Net cash provided by financing activities     1,111       586  
Change in cash     (37 )     522  
Cash, beginning of period     3,745       3,523  
Cash, end of period   $ 3,708     $ 4,045  

 

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

 

 

 

 

  4  

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

NOTE 1: BASIS OF PRESENTATION

 

Basis of Presentation

 

Unless otherwise indicated, the terms “Deep Down, Inc.”, “Deep Down”, “Company”, “we”, “our” and “us” are used in this Report to refer to Deep Down, Inc., a Nevada corporation (“Deep Down Nevada”), and its directly wholly owned subsidiary, Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”). The accompanying unaudited condensed consolidated financial statements of Deep Down, Inc. 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, 2020.

 

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, 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 $3,708 and working capital was $5,796 as of September 30, 2021. As of December 31, 2020, cash on hand and working capital was $3,745 and $4,080, 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”).

 

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, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital investments. However, given the volatility in oil prices and the impact on global economic activity caused by the COVID-19 pandemic, as well as recent increases in raw materials costs and ongoing supply chain constraints, the Company cannot predict this with certainty. To mitigate this uncertainty and preserve liquidity, the Company will continue to pursue opportunistic cost containment initiatives, which can include workforce alignment, limiting overhead spending and research and development efforts to only critical items, and actively pursuing further cost reduction opportunities as they become available.

  

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 and nine months ended September 30, 2021 and 2020, we had one operating and reporting segment.

 

 

 

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NOTE 2: LEASES

 

In February 2016, the Financial Accounting Standards Board 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 is initially 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 is measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs. 

 

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 then-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 lease 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 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 September 30, 2021, 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:

 

                 
    September 30, 2021     December 31, 2020  
    (In thousands)  
Assets:            
Right-of-use assets   $ 2,180     $ 3,174  
                 
Liabilities:                
Current lease liabilities     1,298       1,261  
Non-current lease liabilities     918       1,951  
Total lease liabilities   $ 2,216     $ 3,212  

 

The components of our lease expense were as follows:

 

                               
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2021     2020     2021     2020  
Operating lease expense included in cost of sales   $ 313     $ 271     $ 946     $ 659  
Operating lease expense included in selling, general and administrative     35       26       143       100  
Short term lease expense     97       37       210       124  
Total lease expense   $ 445     $ 334     $ 1,299     $ 883  

 

Lease term and discount rate:

 

       
   

September 30,

2021

 

December 31,

2020

Weighted-average remaining lease terms on operating leases (yrs.)   1.71   2.43
Weighted-average discount rates on operating leases   5.374%   5.374%

 

During the three months ended September 30, 2021, the Company did not have any sale/leaseback transactions.

 

 

 

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Present value of lease liabilities:

 

       
    Operating Leases  
October 1, 2021 - September 30, 2022   $ 1,380  
October 1, 2022 - September 30, 2023     919  
October 1, 2023 - September 30, 2024     8  
October 1, 2024 - September 30, 2025     7  
Total lease payments   $ 2,314  
Less: Interest     (98 )
Present value of lease liabilities   $ 2,216  

 

 

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 each 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  
    September 30,  
    2021     2020  
Fixed Price Contracts   $ 1,866     $ 2,522  
Service Contracts     1,684       614  
Total   $ 3,550     $ 3,136  

 

      Nine Months Ended  
      September 30,  
      2021       2020  
Fixed Price Contracts   $ 5,170     $ 6,338  
Service Contracts     6,830       3,128  
Total   $ 12,000     $ 9,466  

 

 

 

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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.

  

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

 

 

 

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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 September 30, 2021 and December 31, 2020, there were no contracts with terms that extended beyond one year.

  

The following table summarizes our contract assets, which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts”.

 

               
    September 30, 2021     December 31, 2020  
Costs incurred on uncompleted contracts   $ 3,174     $ 2,098  
Estimated earnings on uncompleted contracts     4,216       3,153  
 Gross costs and estimated earnings     7,390       5,251  
Less: Billings to date on uncompleted contracts     (7,776 )     (5,792 )
 Costs incurred plus estimated earning less billings on uncompleted contracts   $ (386 )   $ (541 )
                 
Included in the accompanying unaudited condensed consolidated balance sheets under the following captions:                
Contract assets   $ 92     $ 189  
Contract liabilities     (478 )     (730 )
Costs incurred plus estimated earning less billings on uncompleted contracts   $ (386 )   $ (541 )

 

The contract asset and liability balances at September 30, 2021 and December 31, 2020 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.

 

 

 

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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 Company transfers a promised good or service to a customer and when the customer pays for that good or service is expected to be one year or less.

 

Further, in many of our service contracts, we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided). For those contracts, we have utilized the practical expedient in ASC 606-10-55-18, which allows us to recognize revenue in the amount for which we have the right to invoice.

 

Accordingly, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

  

NOTE 4: PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

                       
                Range of  
    September 30, 2021     December 31, 2020     Asset Lives  
Buildings and improvements   $ 285     $ 285       7 - 36 years  
Leasehold improvements     906       906       2 - 5 years  
Equipment     11,833       12,343       2 - 30 years  
Furniture, computers and office equipment     907       907       2 - 8 years  
Construction in progress     74       84        
                         
Total property, plant and equipment     14,005       14,525          
Less: Accumulated depreciation and amortization     (12,152 )     (11,921 )        
Property, plant and equipment, net   $ 1,853     $ 2,604          

 

 

 

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NOTE 5: SHARE-BASED COMPENSATION

 

Share-based compensation is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and additional paid-in capital in the accompanying unaudited consolidated balance sheets. During the three and nine months ended September 30, 2021, the Company recognized a total of $9 and $46 of share-based compensation expense, respectively. During the three and nine months ended September 30, 2020, the Company recognized a total of $39 and $113, respectively, of share-based compensation expense. The unamortized estimated fair value of nonvested shares of restricted stock and stock options was $2 and $48 at September 30, 2021 and December 31, 2020, respectively. These costs are expected to be recognized as expenses over a weighted-average period of 0.31 years.

  

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 three months 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. The repurchase program was exhausted as of March 31, 2020. 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 September 30, 2021 and December 31, 2020, management has recorded a full deferred tax asset valuation allowance.

 

NOTE 8: COMMITMENTS AND CONTINGENCIES

 

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. We had no outstanding letters of credit at September 30, 2021 or December 31, 2020.

 

Employment Agreement

 

Our Chief Executive Officer is employed under an employment agreement containing severance provisions. In the event of termination of the CEO’s employment for any reason, the CEO will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which the CEO is entitled or vested under the terms of all employee benefit and compensation plans, agreements, and arrangements in which the CEO participants as of the date of termination.

 

 

 

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In addition, subject to executing a general release in favor of the Company, the CEO 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 CEO with “good reason.” These severance payments include: (i) a lump sum in cash equal to one to two times the CEO’s annual base salary; (ii) a lump sum in cash equal to one to two times the average annual bonus paid to the CEO 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 the CEO’s annual base salary; and (iv) if the CEO’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 CEO shall immediately vest and become exercisable.

 

On April 1, 2020, the Company eliminated the position of Chief Operating Officer (“COO”) and relieved the COO of his duties pursuant to the terms of his employment agreement. In addition to payment of accrued and unpaid salary, vacation time, and other benefits referred to above, the Company made payments to the former COO equal to one time his contractual annual base salary of $245 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 and is involved in only one material legal proceeding as of the date of this Report.

  

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 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.

 

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. During the second quarter of 2020, the parties finalized the terms of a definitive settlement agreement which is now final and binding. Per the terms of the settlement, the Company shall pay GE $750 in total, which shall be paid on a monthly basis through December 2021. The Company accrued a liability related to this matter in the amount of $750 for the year ended December 31, 2019. The remaining liability was $90 at September 30, 2021.

 

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 the dilutive effect of common stock equivalents (warrants, nonvested stock awards and stock options) using the treasury method.

 

 

 

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In each relevant period, the net income used in the basic and diluted EPS calculations is the same. The following table reconciles the weighted-average basic number of common shares outstanding and the weighted-average diluted number of common shares deemed outstanding for the purpose of calculating basic and diluted EPS.

 

                               
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2021     2020     2021     2020  
Weighted average common shares outstanding - basic     12,389       12,390       12,389       12,531  
Dilutive effect of common stock equivalents     56             52        
Weighted average common shares outstanding - diluted     12,445       12,390       12,441       12,531  

 

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 $42 per month, from September 1, 2019 through December 31, 2019, and $15 per month, from January 1, 2020 through December 31, 2021, in exchange for his future services. The Company therefore recorded consulting expenses related to the Transition Agreement totaling $45 and $135 for the three and nine months ended September 30, 2021.

 

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 the assets or stock of Deep Down.

 

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. SMALL BUSINESS ADMINISTRATION’S PAYCHECK PROTECTION PROGRAM LOAN

 

The Company obtained a $1,111 loan under the Small Business Administration’s (“SBA”) Paycheck Protection Program in April 2020 (“April 2020 PPP Loan”). The April 2020 PPP Loan was used to finance covered payroll expenses during the second and third quarters of 2020. The Company applied for forgiveness of the April 2020 PPP Loan in October 2020 and received forgiveness of $1,111 from the SBA on June 29, 2021. The amount of loan forgiveness, including accrued interest, is presented as a component of other income on the condensed consolidated statement of operations for the nine months ended September 30, 2021.

 

The Company obtained a second $1,111 PPP loan in March 2021 (“March 2021 PPP Loan”). The March 2021 PPP Loan was used to finance covered payroll expenses during the first and second quarters of 2021. The Company applied for forgiveness of the March 2021 PPP Loan in August 2021 and received forgiveness of $1,111 from the SBA on September 10, 2021. The amount of loan forgiveness, including accrued interest, is presented as a component of other income on the condensed consolidated statement of operations for the three and nine months ended September 30, 2021.

 

 

 

 

 

 

 

 

 

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

(Amounts in thousands except per share amounts)

 

The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of Deep Down’s results of operations and financial condition. This information should be read in conjunction with the Company’s audited historical consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and which is available on the SEC’s website, and the Company’s 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.” 

 

General

 

Deep Down is a leading energy services company offering subsea equipment and support services to the world’s energy and offshore industries. We provide innovative solutions to complex customer challenges presented between the production facility and the energy source. 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 team can support subsea engineering, manufacturing, installation, commissioning, and maintenance projects located anywhere in the world.   

 

Industry and Executive Outlook

 

The oilfield services industry is dependent on the capital and operating expenditure programs of oil and gas companies. The decision for oil and gas operators to cut back or accelerate their exploration, drilling, and production operations is substantially driven by the overall condition of the oil and gas industry. This industry has historically been characterized by fluctuations in oil and gas prices, which are driven by a variety of market forces.

 

In March 2020, the energy industry encountered a significant economic disruption caused by the COVID-19 pandemic, which continues to impact markets globally. The low oil price environment caused by the pandemic, when coupled with restricted travel to mitigate against the spread of COVID-19, triggered many exploration and production companies to either significantly reduce, delay, or cancel their operating and capital spending programs. This decline in offshore drilling and production activity resulted in lower contract volumes or delays in significant contracts, which negatively impacted our earnings and cash flows. Our earnings and cash flows could also be negatively impacted by delays in payments by significant customers or delays in completion of our contracts for any reason.

 

Oil and gas operators, equipment providers, and services companies had to quickly adapt to overcome the challenges presented by these unprecedented times, and Deep Down was no exception. Our primary focus since this global economic disruption has been to improve our cost structure and manage our cash flows, which will remain a priority as we look toward the future.

 

The initial loan we received under the Paycheck Protection Program (“PPP”) in April 2020 supplemented our cash flows to fund payroll as revenues declined, and our second PPP loan in March 2021 provided a needed buffer to fund working capital while we continue to strengthen our workforce. We have now received confirmation of the forgiveness for both loans, which solidifies our working capital position as we evaluate future growth opportunities. One area we have been able to capitalize on has been the workforce reductions at other organizations, which has provided us the opportunity to add high caliber individuals to our team who possess a wealth of industry knowledge and experience.

 

During the first nine months of 2021, oil prices progressively rebounded to healthier levels as demand continued to strengthen and travel restrictions continued to ease. As a result, we managed to safely send teams to various international locations. We are cautiously optimistic that the prevalence of vaccines and the downward trend in COVID cases will continue to encourage border controls to be loosened. However, the cautious return to increased activities by our customers has presented margin pressures to us, as evidenced by our reduced gross margins despite increased revenue levels. Aside from pricing pressure from customers, margin compression has also come in the form of low margin pass-through third-party costs on select projects.

 

 

 

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We have seen an increase in bidding activity and execution of contract awards this year as operators mobilize to complete a backlog of projects, especially in the current favorable oil price environment. The Company received an order at the beginning of the year for the rental of one of our two carousels that are suitable for large umbilical or cable projects. Certain aspects of this project have not been performed before, which further solidifies our reputation as a service provider of choice for unique offshore installation projects. We envisioned that the successful execution of this project will provide further opportunities to utilize our carousels in the future, and our visions turned into reality when we received a contract award for the rental of the second carousel and associated umbilical spooling services in the fourth quarter of 2021. We are also actively engaged in multiple conversations with different customers to discuss additional rental opportunities for our carousels and associated cable management services.

  

The growth of our business remains a top priority and generating free cash flow and preservation of liquidity remains of critical importance to achieve this desired growth, especially in this current environment. We are keenly focused on the levers within our control, and we are experiencing an increase in requests for short-cycle service work, an area where we have a proven track record. We also believe customers will continue to be heavily focused on efficiency and shorter lead times without sacrificing quality and safety. As such, we are confident our streamlined operations and continued focus on our core strengths will enable us to be the primary choice for our customers.

 

Looking towards the future, we continue to engage with a variety of companies on different aspects of the transition to renewable energy with increasing interest in our installation capabilities, equipment, and knowledge of the subsea environment. There are several areas we see as potential growth opportunities, though the timing of these opportunities and associated cash flows is uncertain. As such, we are pursuing different partnerships especially around new technologies as we seek to leverage our core competencies to increase the market potential of our current product and service offerings. We are also working on developing the next generation of our equipment by incorporating designs that utilize a reduced carbon footprint.

 

We maintain our commitment to ensuring we continuously enhance value for our stockholders, while being an employer of choice in the industry.

 

Results of Operations

 

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

 

Revenues. Revenues for the three months ended September 30, 2021 were $3,550 compared to revenues of $3,136 for the three months ended September 30, 2020. The $414, or 13 percent, increase from the same period in 2020 was primarily the result of the progressive increase in demand for our subsea equipment, support services, and rental solutions.

 

Cost of Sales. Cost of sales increased by $775, or 43 percent, to $2,569 for the three months ended September 30, 2021 from $1,794 for the same period in 2020. The increase in cost of sales was mainly a result of increased project activity for the three months ended September 30, 2021. Cost of sales as percentage of revenue increased to 76% from 63% for the three months ended September 30, 2021 and 2020, respectively, primarily due to increases in labor and service costs.

 

Selling, general and administrative expenses. Selling, general and administrative expenses (“SG&A”) decreased by $15, or 1 percent, to $1,336 for the three months ended September 30, 2021 from $1,351 for the same period in 2020. The decrease in SG&A was primarily due to lower payroll costs.

 

Other income, net. During the three months ended September 30, 2021, the Company recorded net other income of $1,056, which was primarily related to the forgiveness of its second PPP loan obtained in March 2021.

 

Loss on sale of assets. During the three months ended September 30, 2021, loss on sales of assets was approximately $149 related to equipment sold by the Company. During the three months ended September 30, 2020, the Company did not record any gains or losses related to equipment and vehicles sold by the Company.

 

 

 

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Modified EBITDA. Deep Down management evaluates Company performance based on a non-US GAAP measure which consists of earnings (net income or loss) available to common stockholders 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 property, plant and equipment (“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. 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 condensed consolidated statements of operations.

  

We believe Modified EBITDA is a useful measure of 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. Additionally, 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.

  

The following is a reconciliation of net income (loss) to Modified EBITDA for the three months ended September 30, 2021 and 2020:

 

    Three Months Ended  
    September 30,  
    2021     2020  
Net income (loss)   $ 332     $ (250 )
                 
Add: Interest expense, net     1       2  
Add: Income tax expense     5        
Add: Depreciation and amortization     209       239  
Add: Share-based compensation     9       39  
Add: Loss on sale of property, plant and equipment     148        
Deduct: Forgiveness of PPP loan     (1,111 )      
                 
Modified EBITDA   $ (407 )   $ 30  

 

The $437 decrease in Modified EBITDA for the three months ended September 30, 2021 was primarily due to a decrease in gross margin as compared to the three months ended September 30, 2020.

 

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

 

Revenues. Revenues for the nine months ended September 30, 2021 were $12,000 compared to revenues of $9,466 for the nine months ended September 30, 2020. The $2,534, or 27 percent, increase from the same period in 2020 was primarily the result of the progressive increase in demand for our subsea equipment, support services, and rental solutions.

 

 

 

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Cost of Sales. Cost of sales increased by $2,266, or 43 percent, to $7,518 for the nine months ended September 30, 2021 from $5,252 for the same period in 2020. The increase in cost of sales was mainly a result of increased project activity for the nine months ended September 30, 2021. Cost of sales as percentage of revenue increased to 67% from 62% for the nine months ended September 30, 2021 and 2020, respectively, primarily due to increases in labor and service costs.

 

Selling, general and administrative expenses. SG&A decreased by $426, or 8 percent, to $4,623 for the nine months ended September 30, 2021 from $5,049 for the same period in 2020. The decrease in SG&A was primarily due to incurring a one-time $245 severance charge related to the elimination of the Company’s COO position during the nine months ended September 30, 2020. The Company also incurred lower payroll costs during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

 

Asset Impairment. During the nine months ended September 30, 2020, the Company recorded charges of $4,490 for the impairment of certain idle long-lived assets. The impairment was the result of an analysis of the carrying value of the assets and our inability to objectively project future cash flows from the sale or lease of these assets, particularly in light of the impact of the COVID-19 pandemic and resulting global economic disruption. No impairment of long-lived assets was recorded during the nine months ended September 30, 2021.

 

Other income, net. The Company recorded net other income of $2,212 during the nine months ended September 30, 2021, which was primarily related to the forgiveness of its two PPP loans.

 

Loss on sale of assets. During the nine months ended September 30, 2021, the net loss on sales of assets was approximately $94 and related to equipment sold by the Company. During the nine months ended September 30, 2020, the Company did not record any gains or losses related to equipment and vehicles sold by the Company.

 

Modified EBITDA. The following is a reconciliation of net income (loss) to Modified EBITDA for the nine months ended September 30, 2021 and 2020:

 

    Nine Months Ended  
    September 30,  
    2021     2020  
Net income (loss)   $ 1,204     $ (6,177 )
                 
Add: Interest expense, net     8       4  
Add: Income tax expense     15       5  
Add: Depreciation and amortization     731       843  
Add: Share-based compensation     46       113  
Add: Asset impairment           4,490  
Add: One-time charges related to elimination of COO position           245  
Add: Loss on sale of property, plant and equipment     94        
Deduct: Forgiveness of PPP loan     (2,222 )      
                 
Modified EBITDA   $ (124 )   $ (477 )

 

The $353 improvement in Modified EBITDA was due primarily to an increase in revenues and decrease in SG&A during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Modified EBITDA for the nine months ended September 30, 2021 was also impacted by recording a $534 reserve for doubtful accounts receivable as compared to recording a $448 reserve for doubtful accounts receivable for the nine months ended September 30, 2020.

 

 

 

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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 $5,796 as of September 30, 2021, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital investments.

 

Given the volatility in oil prices and global economic activity caused by COVID-19 in 2020, the Company cannot predict with certainty the future 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 alignment, wage reductions, rent abatements, and limiting capital expenditures and R&D efforts to only critical items. The Company continues to seek further opportunities to preserve liquidity.

 

The Company obtained a $1,111 PPP loan in April 2020 (“April 2020 PPP Loan”). The April 2020 PPP Loan was used to finance covered payroll expenses during the second and third quarters of 2020. The Company applied for forgiveness of the April 2020 PPP Loan in October 2020 and received forgiveness of $1,111 from the SBA on June 29, 2021. The amount of loan forgiveness, including accrued interest, is presented as a component of other income on the condensed consolidated statements of operations for the nine months ended September 30, 2021.

 

The Company obtained a second $1,111 PPP loan in March 2021 (“March 2021 PPP Loan”). The March 2021 PPP Loan was used to finance covered payroll expenses during the first and second quarters of 2021. The Company applied for forgiveness of the March 2021 PPP Loan in August 2021 and received forgiveness of $1,111 from the SBA on September 10, 2021. The amount of loan forgiveness, including accrued interest, is presented as a component of other income on the condensed consolidated statement of operations for the three and nine months ended September 30, 2021.

 

During the nine months ended September 30, 2021, the Company used $1,053 of net cash in operating activities primarily to fund working capital. The Company also used $95 of net cash in investing activities, primarily to fund capital expenditures. The Company generated $1,111 of net cash provided by financing activities from the March 2021 PPP Loan proceeds, which resulted in a $37 decrease in cash for the period.

 

During the nine months ended September 30, 2020, the Company generated $44 of net cash from operating activities, which was primarily due to reductions in accounts receivable and contract assets. The Company also used $108 in net cash for investing activities, primarily to fund capital expenditures. The Company generated $586 of net cash from financing activities, primarily through the $1,111 in proceeds from the April 2020 PPP Loan, which was partially offset by $525 of share repurchases.

  

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.

 

 

 

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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, 2020 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, 2020 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 three months 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. The repurchase program was exhausted as of March 31, 2020.

 

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.

  

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 September 30, 2021, 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 September 30, 2021.

 

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 three months September 30, 2021.

 

 

 

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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. The Company expenses or accrues legal costs as incurred and is involved in only one material legal proceeding as of the date of this Report.

 

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 the receivable and ultimately filed suit on November 16, 2012, in the Harris County District Court. Aker subsequently filed a counter claim on March 20, 2013 in the aggregate amount of $1,000 for reimbursement of insurance payments allegedly made for repairs. 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 6. EXHIBITS

 

Exhibits required 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. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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: November 12, 2021    
  By: /s/ Charles K. Njuguna
    Charles K. Njuguna
    President, Chief Executive Officer and Chief Financial Officer
    (Principal Executive and Financial Officer)
     
  By: /s/ Trevor L. Ashurst
    Trevor L. Ashurst
    Vice President of Finance
    (Principal Accounting Officer)
     
     
     
     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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* Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
   
101.SCH* Inline XBRL Taxonomy Extension Schema Document
   
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document
   
104* Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).

 

______________________________

* Filed or furnished herewith.

 

 

 

 

 

 

 

 

 

 

 

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