SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|þ||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the quarterly period ended March 31, 2019
|¨||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)
|(State or other jurisdiction of incorporation)||(I.R.S. Employer Identification No.)|
18511 Beaumont Highway,
|(Address of Principal Executive Offices)||(Zip Code)|
Registrant’s telephone number, including area code:(281) 517-5000
(Former name, former address and former fiscal year, if changed since last report)
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. þYes ¨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). YesþNo¨
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 ¨||Smaller reporting company þ|
|Emerging growth company ¨|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨No þ
At May 13, 2019, there were 13,390,680 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:
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 a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expect,” “may,” “will,” “should,” “intend,” “plan,” “could,” “estimate,” or “anticipate,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.
Given the risks and uncertainties relating to forward-looking statements, investors should not place undue reliance on such statements. Forward-looking statements included in this Report speak only as of the date of this Report and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to be incorrect. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. The risks and uncertainties mentioned previously relate to, among other matters, the following:
|•||Economic uncertainty and financial market conditions may impact our customer base, suppliers and backlog;|
|•||Our backlog is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future earnings;|
|•||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|
|•||Our previously announced plans to explore and evaluate strategic alternatives to maximize stockholder value.|
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, 2018, 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 (http://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.
DEEP DOWN, INC.
(In thousands, except share and par value amounts)
|Current assets:||March 31, 2019||December 31, 2018|
|Short term investment (certificate of deposit)||1,040||1,035|
|Accounts receivable, net of allowance of $10 and $10, respectively||6,981||4,388|
|Prepaid expenses and other current assets||148||621|
|Total current assets||10,772||9,990|
|Property, plant and equipment, net||9,328||9,691|
|Right-of-use operating lease assets||5,403||–|
|LIABILITIES AND STOCKHOLDERS' EQUITY|
|Accounts payable and accrued liabilities||$||2,155||$||1,982|
|Current lease liabilities||1,236||–|
|Current portion of long-term debt||9||9|
|Total current liabilities||4,437||2,964|
|Non-current lease liabilities||4,176||–|
|Long-term debt (Auto loan)||44||47|
|Total long term liabilities||4,220||47|
|Commitments and contingencies (Note 9)|
|Common stock, $0.001 par value, 24,500,000 shares authorized, 15,706,010 and 15,706,010 shares issued, respectively||16||16|
|Additional paid-in capital||73,375||73,271|
|Treasury stock, 2,255,330 and 2,027,217 shares, respectively, at cost||(2,232||)||(2,062||)|
|Total stockholders' equity||17,255||17,109|
|Total liabilities and stockholders' equity||$||25,912||$||20,120|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
DEEP DOWN, INC.
|Three Months Ended|
|(In thousands, except per share amounts)||2019||2018|
|Cost of sales:|
|Cost of sales||3,765||2,218|
|Total cost of sales||4,042||2,572|
|Selling, general and administrative||1,995||1,911|
|Depreciation and amortization||68||77|
|Total operating expenses||2,063||1,988|
|Operating income (loss)||195||(854||)|
|Interest income, net||7||9|
|Gain on sale of property, plant and equipment||15||–|
|Total other income||22||9|
|Income (loss) before income taxes||217||(845||)|
|Income tax expense||(5||)||(5||)|
|Net income (loss)||$||212||$||(850||)|
|Net income (loss) per share:|
|Weighted-average shares outstanding:|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
DEEP DOWN, INC.
|(In thousands)||Shares (#)||Amount ($)||Capital||Stock||Deficit||Total|
|Balance at December 31, 2017||15,438||$||15||$||73,247||$||(2,040||)||$||(49,375||)||$||21,847|
|Balance at March 31, 2018||15,438||$||15||$||73,251||$||(2,040||)||$||(50,225||)||$||21,001|
|Balance at December 31, 2018||15,706||$||16||$||73,271||$||(2,062||)||$||(54,116||)||$||17,109|
|Treasury shares purchased||–||–||–||(170||)||–||(170||)|
|Balance at March 31, 2019||15,706||$||16||$||73,375||$||(2,232||)||$||(53,904||)||$||17,255|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
DEEP DOWN, INC.
|Three Months Ended|
|Cash flows from operating activities:|
|Net income (loss)||$||212||$||(850||)|
|Adjustments to reconcile net income (loss) to net cash used in operating activities:|
|Depreciation and amortization||345||431|
|Gain on sale of property, plant and equipment||(15||)||–|
|Non-cash lease expense||9||–|
|Changes in operating assets and liabilities:|
|Accounts receivable, net||(2,566||)||(1,368||)|
|Prepaid expenses and other current assets||(34||)||64|
|Accounts payable and accrued liabilities||173||(238||)|
|Net cash used in operating activities||(583||)||(1,759||)|
|Cash flows from investing activities:|
|Proceeds from sale of property, plant and equipment||15||–|
|Purchases of property, plant and equipment||–||(277||)|
|Repayments on note receivable(included in Prepaid expenses and other current assets)||507||4|
|Short term investment - (certificate of deposit)||(5||)||–|
|Net cash provided by (used in) investing activities||517||(273||)|
|Cash flows from financing activities:|
|Principal payment on long-term debt||(3||)||(1||)|
|Cash paid for treasury shares purchased||(170||)||–|
|Net cash used in financing activities||(173||)||(1||)|
|Change in cash||(239||)||(2,033||)|
|Cash, beginning of period||2,015||3,939|
|Cash, end of period||$||1,776||$||1,906|
|Supplemental schedule of non-cash investing and financing activities:|
|Property, plant and equipment sold in accounts receivable||$||27||$||–|
|Financing of property, plant and equipment||$||–||$||67|
(Amounts in thousands except per share amounts)
|NOTE 1:||BASIS OF PRESENTATION|
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Deep Down, Inc. and its wholly-owned subsidiary (“Deep Down,” “we,” “us” or the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q. As permitted under those rules, certain notes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosed amounts of contingent assets and liabilities, and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
The Company’s primary and potential sources of liquidity include cash on hand, cash from operating activities, and proceeds from opportunistic sales of non-core equipment. The Company’s cash as of March 31, 2019 and December 31, 2018 was $1,776 and $2,015, respectively.
The Company’s plans to mitigate its limited liquidity include: closely monitoring capital expenditures planned for the remainder of 2019 and beyond to conserve capital; possibly selling certain non-core equipment; further reducing administrative costs; and pursuing a line of credit to further supplement our operating requirements.
The Company’s operations are influenced by a number of factors that are beyond its control, including general conditions of the offshore energy sector, oil and gas operators’ willingness to spend development capital, and other factors that could adversely affect the Company’s financial position, results of operations and liquidity.
Principles of Consolidation
The unaudited condensed consolidated financial statements presented herein include the accounts of Deep Down, Inc. and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated.
For the three months ended March 31, 2019 and 2018, we had one operating and reporting segment, Deep Down Delaware.
Recently Issued Accounting Standards Not Yet Adopted
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, as modified by subsequently issued ASU No. 2018-19. The guidance introduces a new credit reserving model known as the Current Expected Credit Loss ("CECL") model, which is based on expected losses, and differs significantly from the incurred loss approach used today. The CECL model requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. These ASUs affect an entity to varying degrees depending on the credit quality for the assets held by the entity, their duration and how the entity applies current US GAAP. These ASUs will become effective for us beginning January 1, 2020. We are currently evaluating the impact the adoption of this guidance will have on our financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which modifies the disclosure requirements of fair value measurements. ASU 2018-13 is effective for us beginning January 1, 2020. Certain disclosures are required to be applied on a retrospective basis and others on a prospective basis. We are currently evaluating the impact the adoption of this guidance will have on our financial statement disclosures.
All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated to determine if they will have a material impact on our financial position or results of operations.
|NOTE 2:||LEASES: ADOPTION OF ASC 842, “LEASES”|
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and subsequent amendments, which replaced existing lease guidance in US GAAP and requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet for leases greater than twelve months and disclose key information about leasing arrangements. We adopted the standard on January 1, 2019 using the modified retrospective method and used the effective date as our date of initial application. Financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. There were no adjustments to opening retained earnings on adoption.
The Company leases certain properties, buildings and equipment under various arrangements that provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists of operating leases, which expire at various dates through 2023.
The new standard provides a number of optional practical expedients for transition. We elected the package of practical expedients under the transition guidance which permitted us not to reassess under the new standard our prior conclusions for lease identification and lease classification on expired or existing contracts and whether initial direct costs previously capitalized would qualify for capitalization under Topic 842. We also elected the practical expedient related to land easements, which allowed us not to reassess our current accounting treatment for existing agreements on land easements, which are not accounted for as leases. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases.
The new standard also provides practical expedients and recognition exemptions for an entity’s ongoing accounting policy elections. Leases with an initial term of twelve months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. We do not separate lease and non-lease components. We therefore elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we do not recognize ROU assets or lease liabilities. Some of these agreements contain variable payment provisions that depend on an index or rate, initially measured using the index or rate at the lease commencement date, and are therefore not included in our future minimum lease payments. These variable lease agreements include usage-based payments for equipment under service contracts and other properties.
Our long-term lease agreements do not contain any material restrictive covenants. Our equipment leases have remaining terms of between 1 year and 3 years, and property leases have remaining terms of between 1 year and 5 years. Some of these leases may include options to extend the leases, and some may include options to terminate the leases within 30 days. When we are not certain to exercise these renewal options, the options are not considered in determining the lease term, and associated payments are excluded from future minimum lease payments.
ROU assets and lease liabilities are recognized at 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 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.
|March 31, 2019||January 1, 2019|
|Current lease liabilities||1,236||1,215|
|Non-current lease liabilities||4,176||4,492|
|Total lease liabilities||$||5,412||$||5,707|
The components of our lease expense were as follows:
|Operating lease expense included in Cost of sales||$||306|
|Operating lease expense included in SG&A||66|
|Short term lease expense||65|
|Total lease expense||$||437|
As of March 31, 2019, we do not have any finance lease assets or liabilities, nor do we have any subleases
|Other information related to operating leases were as follows:|
|Operating cash flows from operating leases||$||370|
|Lease Term and Discount Rate:||March 31, 2019||January 1, 2019|
|Weighted average remaining lease (years) terms on operating leases||4.1||4.5|
|Weighted average discount rates on operating leases||5.374%||5.374%|
During the first quarter, we did not have any sale/leaseback transactions.
|Future lease payments under operating leases were as follows for the annual periods ending March 31:|
|Total lease payments||6,025|
|Present value of lease liabilities||5,412|
|NOTE 3:||REVENUES: ADOPTION OF ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS”|
On January 1, 2018, we adopted ASC Topic 606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. There was no significant impact on the Company’s results of operations or financial position upon the adoption of ASC 606. We did not record any adjustments to opening retained earnings as of January 1, 2018 because the Company’s revenue recognition methodologies for both fixed price contracts (over time using cost to cost as an input measure of performance) and for service contracts (over time as services are performed) do not materially change by the adoption of the new standard.
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. To determine the proper revenue recognition method for our customer contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our fixed price contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation.
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Disaggregation of Revenue
The following table presents our revenues disaggregated by revenue sources of fixed price and service contracts. Sales taxes are excluded from revenues.
|March 31, 2019||March 31, 2018|
|Fixed Price Contracts||$||3,531||$||1,843|
Fixed price contracts
For fixed price contracts, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Additionally, in other fixed price contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit in connection with delivery of products or services that do not have an alternative use to the Company.
Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.
Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
We have a company-wide standard and disciplined quarterly estimate at completion process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred exceed total estimates of revenue to be earned on a performance obligation related to fixed price contracts, a provision for the entire loss on the performance obligation is recognized in the period the loss is estimated.
We recognize revenue for service contracts measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred over time when the services are rendered to the customer on a daily basis. Specifically, we recognize revenue as the services are provided as we have the right to invoice the customer for the services performed. Services are billed and are generally required to be paid on a monthly basis. Payment terms for services are usually 30 days from invoice receipt, but during the recent downturn in the industry, some of our customers have begun instituting new payment terms of up to 60 days from invoice receipt.
Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer and contracts are not shown as complete until virtually all anticipated costs have been incurred and the risk of loss has passed to the customer.
Assets related to costs and estimated earnings in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year, thus complete collection of amounts related to these contracts may extend beyond one year, though such long-term contracts include contractual milestone billings as discussed above. At March 31, 2019 and December 31, 2018, we had no contracts whose term extended beyond one year.
The following table summarizes our contract assets, which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts”.
|March 31, 2019||December 31, 2018|
|Costs incurred on uncompleted contracts||$||3,033||$||9,697|
|Estimated earnings on uncompleted contracts||3,474||10,787|
|Less: Billings to date on uncompleted contracts||(6,717||)||(19,526||)|
|Included in the accompanying unaudited condensed consolidated balance sheets under the following captions:|
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders and also any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of ASC 606.
At March 31, 2019 and December 31, 2018, all of our fixed price contracts are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.
Many of our services contracts are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
Additionally, our payment terms are short-term in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Further, in many of our service contracts we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided). For those contracts, we have utilized the practical expedient in ASC 606-10-55-18, which allows us to recognize revenue in the amount for which we have the right to invoice.
Accordingly, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
|NOTE 4:||PROPERTY, PLANT AND EQUIPMENT|
The components of property, plant and equipment, net are summarized below:
|March 31, 2019||December 31, 2018|
|Buildings and improvements||$||285||$||285||7 - 36 years|
|Leasehold improvements||896||908||2 - 5 years|
|Equipment||19,016||18,640||2 - 30 years|
|Furniture, computers and office equipment||596||1,166||2 - 8 years|
|Construction in progress||45||158||–|
|Total property, plant and equipment||20,838||21,157|
|Less: Accumulated depreciation and amortization||(11,510||)||(11,466||)|
|Property, plant and equipment, net||$||9,328||$||9,691|
|NOTE 5:||LONG-TERM DEBT|
In January 2018, we financed a new Company vehicle. The financed amount was $67 and is for a term of six years with an interest rate of 0.9%, with monthly payments of $1. The financing company will hold a lien on the vehicle until all payments have been made.
|NOTE 6:||SHARE-BASED COMPENSATION|
On July 27, 2018, we granted 300 shares of restricted stock to our Chief Financial Officer (“CFO”). These shares have a fair value grant price of $0.79 per share, based on the closing price of our common stock on that day. These shares vest over three years in equal tranches on the anniversary date of his appointment to the role, subject to continued service as our CFO. We are amortizing the related share-based compensation of $237 over the three-year requisite service period.
For the three months ended March 31, 2019 and 2018, we recognized a total of $104 and $4 respectively, of share-based compensation expense related to restricted stock awards, which is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. The unamortized estimated fair value of unvested shares of restricted stock was $118 at March 31, 2019 and $222 at December 31, 2018. These costs are expected to be recognized as expense over a weighted-average period of 2.04 years.
At March 31, 2019 and December 31, 2018 there were no other unvested restricted shares or options.
|NOTE 7:||TREASURY STOCK|
On March 26, 2018, the Board of Directors authorized the repurchase of up to $1,000 of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Program was funded from cash on hand. During the three months ended March 31, 2019, 228 shares of our outstanding common stock were purchased under the Repurchase Program. The Repurchase Program expired on March 31, 2019.
|NOTE 8:||INCOME TAXES|
Income tax expense during interim periods is based on applying the estimated annual effective income tax rate to interim period operations. The estimated annual effective income tax rate may vary from the statutory rate due to the impact of permanent items relative to our pre-tax income, as well as by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized. At March 31, 2019 and December 31, 2018 management has recorded a full deferred tax asset valuation allowance.
|NOTE 9:||COMMITMENTS AND CONTINGENCIES|
From time to time we are involved in legal proceedings arising from the normal course of business. We expense or accrue legal costs as we incur them. A summary of our material legal proceedings is as follows:
On August 6, 2018, GE Oil and Gas UK Ltd (“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR. The dispute involves alleged delays and defects in products manufactured by the Company for GE dating back to 2013. Mediation took place on November 28, 2018, but no resolution was reached. The original amount in dispute was $2,630, but as of GE’s latest filing with the ICC, the amount in dispute has been reduced to $2,252. The parties are in the process of filing preliminary submissions, and the arbitration date has not yet been set. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. At this point in the legal process, we do not believe a loss to us is probable, therefore we have not recorded a liability related to this matter.
In November 2011, the Company delivered equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270 alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required. The Company repeatedly attempted to collect on the receivable, and ultimately filed suit on November 16, 2012, in the Harris County District Court. Aker subsequently filed a counter-claim on March 20, 2013 in the aggregate amount of $1,000, for reimbursement of insurance payments allegedly made for repairs. Trial is scheduled for July 2019. At this point in the legal process, we do not believe a loss to us is probable, therefore we have not recorded a liability related to this matter.
|NOTE 10:||EARNINGS PER COMMON SHARE|
Basic earnings per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents (warrants, nonvested stock awards and stock options) outstanding during the period. Diluted EPS reflects the potential dilution that could occur if options to purchase common stock were exercised for shares of common stock and all nonvested stock awards vest.
At March 31, 2019 and 2018, there were no potentially dilutive securities outstanding.
The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of our results of operations and financial condition. This information should be read in conjunction with our audited historical consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and our unaudited condensed consolidated financial statements, and notes thereto, included with this Quarterly Report on Form 10-Q (“Report”) in Part I. Item 1. “Financial Statements,” and is available on the SEC’s website. Dollar amounts are in thousands, except backlog amount.
We are 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, buoyancy products and services, remotely operated vehicles (“ROVs”) and toolings. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions.
Industry and Executive Outlook
We are pleased by our first quarter 2019 results, having generated our highest first quarter revenues in recent history as our customers begin executing new projects. These results attest to the cautious optimism exhibited across the offshore oil and gas industry of a coming recovery, and we remain cautiously optimistic about our ability to continue to generate improved results for the balance of 2019, and beyond.
Our customers have largely adapted their operations to the new normal of fluctuating oil prices, and are increasingly focused on new projects, as opposed to the past few years when they were mostly focused on maintaining their existing assets. However, given the pressures they are facing to return more cash to their shareholders, they continue to evaluate ways to reduce project execution costs, which has provided opportunities for us.
The oil and gas industry has seen a resurgence of mergers and acquisitions activity, creating fewer, but larger organizations. As service providers work through their consolidation, we are seeing opportunities arise, especially from customers who appreciate our ability to provide solutions in a nimble manner, compared to our significantly bigger competitors. We continue to educate both new and existing customers on the value we provide.
In July 2018, we announced that our Board of Directors had initiated a review of our strategic alternatives to maximize shareholder value, including a potential sale of the Company. The review is ongoing, though at this point there can be no assurance that the exploration of strategic alternatives will result in any transaction or other alternative. We continue to engage with different parties as part of the review and continue to receive valuable feedback on the best alternatives to maximize shareholder value. We have not set a timetable for completion of the process, and do not intend to comment further regarding the process unless a specific transaction or other alternative is approved by the Board of Directors, the process is concluded, or it is otherwise determined that further disclosure is appropriate or required by law.
While our committed backlog for the balance of the year stands at $10 million, we are engaged in promising discussions with different customers and look forward to providing further updates in the coming months. We continue to maintain a solid balance sheet and remain committed to being the solutions provider of choice for our customers and the employer of choice for our employees, as we continue to seek to maximize value for our shareholders.
Results of Operations
Three Months EndedMarch31, 2019 Compared to Three Months EndedMarch31, 2018
Revenues. Revenues for the three months ended March 31, 2019 were $6,300 compared to revenues of $3,706 for the three months ended March 30, 2018. The $2,594, or 70 percent, increase was primarily the result of more projects in process during the three months ended March 31, 2019, compared to the three months ended March 31, 2018.
Gross profit. Gross profit for the three months ended March 31, 2019 was $2,258, or 36 percent of revenues, compared to $1,134, or 31 percent of revenues, for the three months ended March 31, 2018. The $1,124, or 99%, increase in gross profit, and 5 percent increase in gross profit percentage, respectively, was due to increased revenues during the three months ended March 31, 2019, compared to the three months ended March 31, 2018.
Selling, general and administrative expenses.Selling, general and administrative (“SG&A”) expenses were $1,995, or 32 percent of revenues, for the three months ended March 31, 2019 compared to $1,911, or 52 percent of revenues, for the three months ended March 31, 2018. The decrease in SG&A expense as a percent of revenues was due to higher revenues during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
Modified EBITDA. Our management evaluates our performance based on a non-US GAAP measure which consists of earnings (net income or loss) available to common shareholders before net interest income, income taxes, non-cash share-based compensation expense, non-cash impairments, depreciation and amortization, other non-cash items and one-time charges (“Modified EBITDA”). This measure may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with US GAAP. The measure should not be considered in isolation or as a substitute for operating income or loss, net income or loss, cash flows provided by operating, investing or financing activities, or other cash flow data prepared in accordance with US GAAP. The amounts included in the Modified EBITDA calculation, however, are derived from amounts included in the accompanying unaudited condensed consolidated statements of operations.
We believe Modified EBITDA is useful to investors in evaluating our operating performance because it is widely used to measure a company’s operating performance, which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired. It helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest); asset base (primarily depreciation and amortization); and actions that do not affect liquidity (share-based compensation expense from our operating results; and it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase or acquisition in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.
The following is a reconciliation of net income (loss) to Modified EBITDA (EBITDA loss) for the three months ended March 31, 2019 and 2018:
|Three Months Ended|
|Net income (loss)||$||212||$(850||)|
|Deduct interest income, net||(7||)||(9||)|
|Add depreciation and amortization||345||431|
|Add income tax expense||5||5|
|Add share-based compensation||104||4|
|Modified EBITDA (EBITDA loss)||$||659||$(419||)|
The $1,078 increase in Modified EBITDA was due primarily to the increase in revenues and the resulting increase in gross profit during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
Liquidity and Capital Resources
During the three months ended March 31, 2019 and March 31, 2018, we primarily financed our operating and capital needs through cash on hand.
During the three months ended March 31, 2019 we used $756 to fund our operating and financing activities. We used $583 in our operating activities, primarily due to a $2,566 increase in accounts receivable, partially offset by our net income and a decrease in our contract assets. We also used $173 in financing activities, primarily for repurchases of our outstanding stock. We generated $517 from our investing activities, primarily due to receipt of $507 in repayments on a note receivable.
During the three months ended March 31, 2018 we used $2,033 to fund our operating, investing and financing activities. We used $1,759 to fund our operating activities, primarily due to decreased customer orders. We also used $273 in investing activities, primarily for purchases of Property, Plant and Equipment (“PP&E”).
Through a combination of our current working capital of $6,335, cash expected to be generated from operations, potential opportunistic sales of PP&E in the future and reduction in our capital budget, we believe we will have adequate liquidity to meet our future operating requirements.
We also continue to engage in discussions with different financial institutions, in the event that we would need credit facilities to further supplement our operating requirements. There can be no assurance that we could obtain credit facilities, if needed.
Inflation and Seasonality
We do not believe that our operations are significantly impacted by inflation. Our business is not significantly seasonal in nature.
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, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates used in our financial statements relate to revenue recognition where we measure progress towards completion on cost-to-cost basis on our fixed-price contracts, the allowance for doubtful accounts, and the valuation allowance for deferred income tax assets. These estimates require judgments, which we base 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, 2018 for a discussion of our critical accounting policies and estimates.
Recently Issued Accounting Standards
Except as set forth in Note 1 to our unaudited condensed consolidated financial statements, management has not yet determined whether recently issued accounting standards, which are not yet effective, will have a material impact on our condensed consolidated financial statements upon adoption.
Share Repurchase Program
On March 26, 2018, the Board of Directors authorized the repurchase of up to $1,000 of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Program was funded from cash on hand. During the three months ended March 31, 2019, 228,113 shares of our outstanding common stock were purchased under the Repurchase Program. The Repurchase Program expired on March 31, 2019
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 March 31, 2019, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2019.
Management’s Report on Internal Control Over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Although the internal controls over financial reporting were not audited, the Company’s management, including the principal executive and principal financial officer, assessed the effectiveness of internal controls over financial reporting as of March 31, 2019, based on criteria issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled“Internal Control-Integrated Framework.” Upon evaluation, the Company’s management has concluded that the Company’s internal controls over financial reporting were effective as of March 31, 2019.
Changes in Internal Control Over Financial Reporting. The Company’s management, with the participation of the principal executive and principal financial officer, have concluded there were no changes in internal control over financial reporting during the fiscal quarter ended March 31, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, except controls and procedures associated with the adoption of the Financial Accounting Standards Board Topic 842, Leases.
From time to time, we may be involved in legal proceedings arising in the normal course of business. We expense or accrue legal costs as we incur them. A summary of our material legal proceedings is as follows:
On August 6, 2018, GE Oil and Gas UK Ltd (“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR. The dispute involves alleged delays and defects in products manufactured by the Company for GE dating back to 2013. Mediation took place on November 28, 2018, but no resolution was reached. The original amount in dispute was $2,630,000, but as of GE’s latest filing with the ICC, the amount in dispute has been reduced to $2,252,000. The parties are in the process of filing preliminary submissions, and the arbitration date has not yet been set. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. At this point in the legal process, we do not believe a loss to us is probable, therefore we have not recorded a liability related to this matter.
In November 2011, the Company delivered equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270,000 alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required. The Company repeatedly attempted to collect on the receivable, and ultimately filed suit on November 16, 2012, in the Harris County District Court. Aker subsequently filed a counter-claim on March 20, 2013 in the aggregate amount of $1,000,000, for reimbursement of insurance payments allegedly made for repairs. Trial is scheduled for July 2019. At this point in the legal process, we do not believe a loss to us is probable, therefore we have not recorded a liability related to this matter.
In July 2018, we announced that the Board of Directors is conducting a process to explore and evaluate strategic alternatives to maximize stockholder value. The Board has not made any decisions related to any strategic alternatives at this time. No assurances can be made with regard to the timeline for completion of the strategic review, or whether the review will result in any particular outcome. This process may divert the attention of management and cause us to incur various expenses, whether or not any particular outcome is achieved. This process could also negatively impact our relationships with our customers and employees.
The table below summarizes information about our purchases of common stock, based on trade date, during the quarter ended
March 31, 2019:
|ISSUER PURCHASES OF EQUITY SECURITIES|
|Total Number of Shares Purchased||Average Price Paid per Share||Total Number of Shares Purchased as Part of Publicly Announced Programs||Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs|
|January 1 - January 31||228,113||$||0.7459||228,113||$||808,609|
|February 1 - February 28||–||–||–||808,609|
|March 1 - March 31||–||–||–||–|
|Total activity for the three months ended March 31, 2019||228,113||$||0.7459||228,113|
On March 26, 2018, the Board of Directors authorized the repurchase of up to $1,000,000 of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Program was funded from cash on hand. The Repurchase Program expired on March 31, 2019.
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
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.|
|Date: May 13, 2019|
|By:||/s/ Ronald E. Smith|
|Ronald E. Smith|
|President and Chief Executive Officer|
|(Principal Executive Officer)|
|By:||/s/ Charles K. Njuguna|
|Charles K. Njuguna|
|Chief Financial Officer|
|(Principal Financial Officer)|
|By:||/s/ Matthew A. Auger|
|Matthew A. Auger|
|(Principal Accounting Officer)|
|31.1*||Certification of Ronald E. Smith, President and Chief Executive 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 Charles K. Njuguna, Chief Financial Officer, furnished pursuant to Rules 13a-14 and 15d-14(a) of the Securities Exchange Act of 1934, as amended.|
|32*||Statement of Ronald E. Smith, President and Chief Executive Officer and Charles K. Njuguna, 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.|
|101.INS*||XBRL Instance Document|
|101.SCH*||XBRL Schema Document|
|101.CAL*||XBRL Calculation Linkbase Document|
|101.DEF*||XBRL Definition Linkbase Document|
|101.LAB*||XBRL Label Linkbase Document|
|101.PRE*||XBRL Presentation Linkbase Document|
* Filed or furnished herewith.