Document and Entity Information
Document and Entity Information - shares | 3 Months Ended | |
Mar. 31, 2020 | May 11, 2020 | |
Cover [Abstract] | ||
Entity Registrant Name | Deep Down, Inc. | |
Entity Central Index Key | 0001110607 | |
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2020 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Is Entity's Reporting Status Current? | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Entity Small Business | true | |
Entity Emerging Growth | false | |
Entity Shell Company | false | |
Entity Interactive Data Current | Yes | |
Entity Incorporation State Country Code | NV | |
Entity File Number | 000-30351 | |
Entity Common Stock, Shares Outstanding | 12,391,365 | |
Document Fiscal Period Focus | Q1 | |
Document Fiscal Year Focus | 2020 |
CONDENSED CONSOLIDATED BALANCE
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($) $ in Thousands | Mar. 31, 2020 | Dec. 31, 2019 |
Current assets: | ||
Cash | $ 3,033 | $ 3,523 |
Accounts receivable, net of allowance of $50 and $50, respectively | 4,635 | 4,454 |
Contract assets | 544 | 814 |
Prepaid expenses and other current assets | 120 | 156 |
Total current assets | 8,332 | 8,947 |
Property, plant and equipment, net | 7,734 | 7,964 |
Intangibles, net | 49 | 50 |
Right-of-use operating lease assets | 4,039 | 4,334 |
Other assets | 340 | 256 |
Total assets | 20,494 | 21,551 |
Current liabilities: | ||
Accounts payable and accrued liabilities | 2,271 | 2,204 |
Contract liabilities | 900 | 623 |
Current lease liabilities | 1,196 | 1,181 |
Total current liabilities | 4,367 | 4,008 |
Operating lease liability, long-term | 2,875 | 3,180 |
Total liabilities | 7,242 | 7,188 |
Commitments and contingencies (Note 8) | ||
Stockholders' equity: | ||
Common stock, $0.001 par value, 24,500,000 shares authorized, 15,906,010 and 15,906,010 shares issued, respectively | 16 | 16 |
Additional paid-in capital | 73,571 | 73,521 |
Treasury stock, 3,364,645 and 2,620,830 shares, respectively, at cost | (2,808) | (2,284) |
Accumulated deficit | (57,527) | (56,890) |
Total stockholders' equity | 13,252 | 14,363 |
Total liabilities and stockholders' equity | $ 20,494 | $ 21,551 |
CONDENSED CONSOLIDATED BALANC_2
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - USD ($) $ in Thousands | Dec. 31, 2019 | Dec. 31, 2018 |
ASSETS | ||
Accounts receivable allowance | $ 50 | $ 50 |
Stockholders' equity: | ||
Common stock par value | $ 0.001 | $ 0.001 |
Common stock shares authorized | 24,500,000 | 24,500,000 |
Common stock outstanding | 15,906,010 | 15,906,010 |
Common stock issued | 15,906,010 | 15,906,010 |
Treasury stock shares | 3,364,645 | 2,620,830 |
CONDENSED CONSOLIDATED STATEMEN
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) shares in Thousands, $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Income Statement [Abstract] | ||
Revenues | $ 3,605 | $ 6,300 |
Cost of sales: | ||
Cost of sales | 2,241 | 3,765 |
Depreciation expense | 241 | 277 |
Total cost of sales | 2,482 | 4,042 |
Gross profit | 1,123 | 2,258 |
Operating expenses: | ||
Selling, general and administrative | 1,693 | 1,995 |
Depreciation and amortization | 61 | 68 |
Total operating expenses | 1,754 | 2,063 |
Operating income (loss) | (631) | 195 |
Other income: | ||
Interest (expense) income, net | (1) | 7 |
Gain on sale of property, plant and equipment | 0 | 15 |
Total other income (expense) | (1) | 22 |
Income (loss) before income taxes | (632) | 217 |
Income tax expense | 5 | 5 |
Net income (loss) | $ (637) | $ 212 |
Net income (loss) per share: | ||
Basic | $ (0.05) | $ .02 |
Fully diluted | $ (0.05) | $ 0.02 |
Weighted-average shares outstanding: | ||
Basic | 12,710 | 13,511 |
Fully diluted | 12,710 | 13,511 |
CONDENSED CONSOLIDATED STATEM_2
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) - USD ($) shares in Thousands, $ in Thousands | Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | Total |
Beginning Balance, Shares at Dec. 31, 2018 | 15,706 | ||||
Beginning Balance, Amount at Dec. 31, 2018 | $ 16 | $ 73,271 | $ (2,062) | $ (54,116) | $ 17,109 |
Net income (loss) | 212 | 212 | |||
Treasury shares purchased | (170) | (170) | |||
Share-based compensation | 104 | 104 | |||
Ending Balance, Shares at Mar. 31, 2019 | 15,706 | ||||
Ending Balance, Amount at Mar. 31, 2019 | $ 16 | 73,375 | (2,232) | (53,904) | 17,255 |
Beginning Balance, Shares at Dec. 31, 2019 | 15,906 | ||||
Beginning Balance, Amount at Dec. 31, 2019 | $ 16 | 73,521 | (2,284) | (56,890) | 14,363 |
Net income (loss) | (637) | (637) | |||
Treasury shares purchased | (524) | (524) | |||
Share-based compensation | 50 | 50 | |||
Ending Balance, Shares at Mar. 31, 2020 | 15,906 | ||||
Ending Balance, Amount at Mar. 31, 2020 | $ 16 | $ 73,571 | $ (2,808) | $ (57,527) | $ 13,252 |
CONDENSED CONSOLIDATED STATEM_3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Cash flows from operating activities: | ||
Net income (loss) | $ (637) | $ 212 |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||
Share-based compensation | 50 | 104 |
Depreciation and amortization | 302 | 345 |
Gain on sale of property, plant and equipment | 0 | 15 |
Non-cash lease expense | 5 | 9 |
Changes in operating assets and liabilities: | ||
Accounts receivable, net | (181) | (2,566) |
Contract assets | 270 | 1,104 |
Prepaid expenses and other current assets | 32 | (34) |
Other assets | (94) | 21 |
Accounts payable and accrued liabilities | 67 | 173 |
Contract liabilities | 277 | 64 |
Net cash provided by (used in) operating activities | 91 | (583) |
Cash flows from investing activities: | ||
Proceeds from sale of property, plant and equipment | 0 | 15 |
Purchases of property, plant and equipment | (61) | 0 |
Payments received on note receivable (included in Prepaid expenses and other current assets) | 4 | 507 |
Short term investment - (certificate of deposit) | 0 | (5) |
Net cash provided by (used in) investing activities | (57) | 517 |
Cash flows from financing activities: | ||
Principal payment on long-term debt | 0 | (3) |
Repurchase of common shares | (524) | (170) |
Net cash used in financing activities | (524) | (173) |
Change in cash | (490) | (239) |
Cash, beginning of period | 3,523 | 2,015 |
Cash, end of period | 3,033 | 1,776 |
Supplemental schedule of non-cash investing and financing activities: | ||
Property, plant and equipment sold in accounts receivable | $ 0 | $ 27 |
1. BASIS OF PRESENTATION
1. BASIS OF PRESENTATION | 3 Months Ended |
Mar. 31, 2020 | |
Accounting Policies [Abstract] | |
BASIS OF PRESENTATION | NOTE 1: BASIS OF PRESENTATION Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Deep Down, Inc. and its wholly-owned subsidiary (“Deep Down,” “we,” “us” or the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q. As permitted under those rules, certain notes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2019. Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosed amounts of contingent assets and liabilities, and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Liquidity The Company’s cash on hand was $3,033 and working capital was $3,965 as of March 31, 2020. As of December 31, 2019, cash on hand and working capital was $3,523 and $4,939, respectively. The Company does not have a credit facility in place and depends on cash on hand, cash flows from operations, and the potential opportunistic sales of property, plant and equipment (“PP&E”) to meet its liquidity needs. Given the abrupt decline in oil prices and global economic activity caused by COVID-19, the Company cannot predict with certainty the overall impact on the Company’s operations and cash flows. The Company has taken steps to mitigate the challenges presented by the current macro environment, including workforce reductions, wage reductions, rent abatement, and limiting capital expenditures and R&D efforts to only critical items. The Company continues to seek further cost reduction opportunities to preserve liquidity. Additionally, the Company applied for a loan under the Small Business Administration’s Paycheck Protection Program. On April 29, 2020, the Company received a loan in the amount of $1,111, which will be used to finance payroll, rent, and utilities over the balance of the second quarter of 2020. The loan principal and related interest accrued may be forgivable, partially or in full, if certain conditions are met. The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of cash on hand, cash expected to be generated from operations, current working capital, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital investments. Principles of Consolidation The unaudited condensed consolidated financial statements presented herein include the accounts of Deep Down, Inc. and its wholly owned subsidiary. All intercompany transactions and balances have been eliminated. Segments For the three months ended March 31, 2020 and 2019, we had one operating and reporting segment, Deep Down Delaware. |
2. LEASES
2. LEASES | 3 Months Ended |
Mar. 31, 2020 | |
Leases [Abstract] | |
LEASES | NOTE 2: LEASES In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (“ASC Topic 842”). Under this guidance, lessees are required to recognize on the balance sheet a lease liability and a right-of-use (“ROU”) asset for all leases, except for short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make lease payments arising from a lease and will be measured as the present value of the lease payments. The ROU asset represents the lessee’s right to use a specified asset for the lease term, and will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs. Practical Expedients ASC Topic 842 provides for certain practical expedients when adopting the guidance. The Company elected the package of practical expedients allowing the Company, for all leases that commenced prior to the adoption date, to not reassess whether any expired or existing contracts are, or contain, leases, the lease classification for any expired or existing leases or initial direct costs for any expired or existing leases. The Company utilizes the land easements practical expedient allowing the Company to not assess whether any expired or existing land easements are, or contain, leases if they were not previously accounted for as leases under the existing leasing guidance. Instead, the Company will continue to apply its existing accounting policies to historical land easements. The Company elects to apply the short-term lease exception; therefore, the Company will not record an ROU asset or corresponding lease liability for leases with an initial term of twelve months or less that are not reasonably certain of being renewed and instead will recognize a single lease cost allocated over the lease term, generally on a straight-line basis. The Company elects to apply the practical expedient to not separate lease components from non-lease components and instead account for both as a single lease component for all asset classes. The Company elects to not capitalize any lease in which the estimated value of the underlying asset at the commencement date is less than the Company’s capitalization threshold. A lease would need to qualify for the low value exception based on various criteria. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and a portion is recorded in cost of sales, and the remainder is recorded in selling, general and administrative expenses. The accounting for some of our leases may require significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rate to utilize in our net present value calculation of lease payments for lease agreements which do not provide an implicit rate and assessing the likelihood of renewal or termination options. As of March 31, 2020, we do not have any finance lease assets or liabilities, nor do we have any subleases. The following tables present information about our operating leases: March 31, 2020 December 31, 2019 Assets: (In thousands) Right-of-use assets $ 4,039 $ 4,334 Liabilities: Current lease liabilities 1,196 1,181 Non-current lease liabilities 2,875 3,180 Total lease liabilities $ 4,071 $ 4,361 The components of our lease expense were as follows: Three Months Ended March 31, 2020 2019 (In thousands) Operating lease expense included in Cost of sales $ 308 $ 306 Operating lease expense included in SG&A 60 73 Short term lease expense 34 65 Total lease expense $ 402 $ 444 Lease term and discount rate: March 31, 2020 December 31, 2019 Weighted-average remaining lease terms on operating leases (yrs.) 3.12 3.28 Weighted-average discount rates on operating leases 5.374 % 5.374 % During the quarter ended March 31, 2020, the Company did not have any sale/leaseback transactions. Present value of lease liabilities: Twelve months ending March 31, Operating Leases (In thousands) 2021 $ 1,381 2022 1,395 2023 1,411 2024 236 Thereafter – Total lease payments 4,423 Less: Interest (352 ) Present value of lease liabilities $ 4,071 |
3. REVENUE FROM CONTRACTS WITH
3. REVENUE FROM CONTRACTS WITH CUSTOMERS | 3 Months Ended |
Mar. 31, 2020 | |
Revenue from Contract with Customer [Abstract] | |
REVENUES: ADOPTION OF ASC 606 | NOTE 3: REVENUE FROM CONTRACTS WITH CUSTOMERS Revenues are recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. To determine the proper revenue recognition method for our customer contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our fixed price contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Disaggregation of Revenue The following table presents the Company’s revenues disaggregated by fixed price and service contracts. Sales taxes are excluded from revenues. Three Months Ended March 31, 2020 2019 (In thousands) Fixed Price Contracts $ 1,744 $ 3,531 Service Contracts 1,861 2,769 Total $ 3,605 $ 6,300 Fixed price contracts For fixed price contracts, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. In our fixed price contracts, the customer either controls the work in process or we deliver products with no alternative use to the Company and have rights to payment for work performed to date plus a reasonable profit as evidenced by contractual termination clauses. Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. We have a company-wide standard and disciplined quarterly estimate at completion process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred exceed total estimates of revenue to be earned on a performance obligation related to fixed price contracts, a provision for the entire loss on the performance obligation is recognized in the period the loss is estimated. Service Contracts We recognize revenue for service contracts measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred over time when the services are rendered to the customer on a daily basis. Specifically, we recognize revenue as the services are provided as we have the right to invoice the customer for the services performed. Services are billed and paid on a monthly basis. Payment terms for services are usually 30 days from invoice receipt. Contract balances Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded based on the extent of progress towards completion but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer and contracts are not shown as complete until virtually all anticipated costs have been incurred and the risk of loss has passed to the customer. Assets related to costs and estimated earnings in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year, thus complete collection of amounts related to these contracts may extend beyond one year, though such long-term contracts include contractual milestone billings as discussed above. At March 31, 2020 and December 31, 2019, there were no contracts with terms that extended beyond one year. The following table summarizes our contract assets, which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts”. March 31, 2020 December 31, 2019 (In thousands) Costs incurred on uncompleted contracts $ 1,716 $ 1,687 Estimated earnings on uncompleted contracts 2,659 2,294 4,375 3,981 Less: Billings to date on uncompleted contracts (4,731 ) (3,790 ) $ (356 ) $ 191 Included in the accompanying unaudited condensed consolidated balance sheets under the following captions: Contract assets $ 544 $ 814 Contract liabilities (900 ) (623 ) $ (356 ) $ 191 The contract asset and liability balances at March 31, 2020 and December 31, 2019 consisted primarily of revenue related to fixed-price projects. Remaining Performance Obligations Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and excludes unexercised contract options, potential orders, and any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of ASC 606. Practical Expedients and Exemptions We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses. Many of our services contracts are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. Additionally, our payment terms are short-term in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Further, in many of our service contracts, we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided). For those contracts, we have utilized the practical expedient in ASC 606-10-55-18, which allows us to recognize revenue in the amount for which we have the right to invoice. Accordingly, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. |
4. PROPERTY, PLANT AND EQUIPMEN
4. PROPERTY, PLANT AND EQUIPMENT | 3 Months Ended |
Mar. 31, 2020 | |
Property, Plant and Equipment [Abstract] | |
PROPERTY, PLANT AND EQUIPMENT | NOTE 4: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following: March 31, 2020 December 31, 2019 Range of Asset Lives (In thousands) Buildings and improvements $ 285 $ 285 7 - 36 years Leasehold improvements 896 896 2 - 5 years Equipment 17,896 17,887 2 - 30 years Furniture, computers and office equipment 901 901 2 - 8 years Construction in progress 116 64 – Total property, plant and equipment 20,094 20,033 Less: Accumulated depreciation and amortization (12,360 ) (12,069 ) Property, plant and equipment, net $ 7,734 $ 7,964 |
5. SHARE-BASED COMPENSATION
5. SHARE-BASED COMPENSATION | 3 Months Ended |
Mar. 31, 2020 | |
Share-based Payment Arrangement [Abstract] | |
SHARE-BASED COMPENSATION | NOTE 5: SHARE-BASED COMPENSATION On May 2, 2017, the Company granted 30 shares of restricted stock to the current Chairman of the Board (“Chairman”). These shares have a fair value grant price of $1.15 per share, based on the closing price of our common stock on that day. These shares vest over three years in equal tranches on the anniversary date of the grant subject to continued service to the Company. The related share-based compensation of $35 is being amortized over the three-year requisite service period, and the Company recognized $3 in compensation expense for the quarter ended March 31, 2020. On July 27, 2018, the Company granted 300 shares of restricted stock to the current Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). These shares have a fair value grant price of $0.79 per share, based on the closing price of our common stock on that day. These shares vest over three years in equal tranches on the anniversary date of his appointment as CFO, subject to continued service to the Company. The related share-based compensation of $237 is being amortized over the three-year requisite service period, and the Company recognized $20 in compensation expense for the quarter ended March 31, 2020. On June 24, 2019, the three non-employee members of the Board of Directors (the “Board”) were each granted an option to purchase 50 shares of our common stock at a price of $0.75 per share. Fair value of these stock options was $0.44 per share at the date of grant. The options vested 25% on August 31, 2019, 25% on November 30, 2019, 25% on February 29, 2020, and the remainder is scheduled to vest on May 31, 2020, subject to the recipient’s continued service on the Board. Once vested, the options are exercisable until June 24, 2024. The related share-based compensation of $66 is being amortized over the requisite service period, and the Company recognized $16 in compensation expense for the quarter ended March 31, 2020. On September 23, 2019, the Company granted 200 shares of restricted stock to the former Chief Operating Officer (“COO”). These shares have a fair value grant price of $0.65 per share, based on the closing price of our common stock on that day. One fourth of the shares vested immediately, but the remaining shares will not vest as the position of COO was eliminated by the Company following March 31, 2020. The Company recognized $11 in compensation expense for the quarter ended March 31, 2020. On September 24, 2019, the Company granted an option to purchase 150 shares of our common stock to the CEO at a price of $0.65 per share. Fair value of these stock options was $0.39 per share at the date of grant. The options are scheduled to vest in two equal tranches on the first and second anniversaries of the grant subject to his continued service as CEO. The related share-based compensation of $59 will be amortized over the two-year requisite service period as the shares vest, and the compensation expense for the quarter ended March 31, 2020 was immaterial. On January 20, 2020, the Company granted an option to purchase 50 shares of our common stock to the VP of Finance at a price of $0.76 per share. Fair value of these stock options was $0.31 per share at the date of grant. The options are scheduled to vest in two equal tranches on the first and second anniversaries of the grant subject to his continued service to the Company. The related share-based compensation of $16 will be amortized over the two-year requisite service period as the shares vest, and the compensation expense for the quarter ended March 31, 2020 was immaterial. Summary of Restricted Stock and Stock Options For the three months ended March 31, 2020 and 2019, we recognized a total of $50 and $104, respectively, of share-based compensation expense related to restricted stock awards and stock options, which is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. The number of unvested shares of restricted stock was 210 and 360 at March 31, 2020 and December 31, 2019, respectively. The unamortized estimated fair value of unvested shares of restricted stock was $101 and $134 at March 31, 2020 and December 31, 2019, respectively. These costs are expected to be recognized as expense over a weighted-average period of 1.81 years. The number of unvested stock options was 238 and 225 at March 31, 2020 and December 31, 2019, respectively. The unamortized estimated fair value of unvested stock options was $107 and $91 at March 31, 2020 and December 31, 2019, respectively. |
6. TREASURY STOCK
6. TREASURY STOCK | 3 Months Ended |
Mar. 31, 2020 | |
Equity [Abstract] | |
TREASURY STOCK | NOTE 6: TREASURY STOCK On December 23, 2019, the Board authorized the repurchase of up to 500 shares of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Program was funded from cash on hand and cash provided by operating activities. The Board separately authorized the repurchase of additional shares during the quarter ended March 31, 2020, in a privately negotiated transaction. During the three months ended March 31, 2020, 744 shares of common stock were purchased for an aggregate amount of $524. As of March 31, 2020, the repurchase program has been exhausted. Treasury shares are accounted for using the cost method. |
7. INCOME TAXES
7. INCOME TAXES | 3 Months Ended |
Mar. 31, 2020 | |
Income Tax Disclosure [Abstract] | |
INCOME TAXES | NOTE 7: INCOME TAXES Income tax expense during interim periods is based on applying the estimated annual effective income tax rate to interim period operations. The estimated annual effective income tax rate may vary from the statutory rate due to the impact of permanent items relative to our pre-tax income, as well as by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized. At March 31, 2020 and December 31, 2019, management has recorded a full deferred tax asset valuation allowance. |
8. COMMITMENTS AND CONTINGENCIE
8. COMMITMENTS AND CONTINGENCIES | 3 Months Ended |
Mar. 31, 2020 | |
Commitments and Contingencies Disclosure [Abstract] | |
COMMITMENTS AND CONTINGENCIES | NOTE 8: COMMITMENTS AND CONTINGENCIES Employment Agreements The Company’s CEO and COO (the “Executives”) are employed under employment agreements containing severance provisions. In the event of termination of the Executives’ employment for any reason, the Executive will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which the Executives are entitled or vested under the terms of all employee benefit and compensation plans, agreements and arrangements in which the Executives are participants as of the date of termination. In addition, subject to executing a general release in favor of the Company, the Executive will be entitled to receive certain severance payments in the event of termination of the Executive’s employment by the Company “other than for cause” or by the Executive with “good reason.” These severance payments include: (i) a lump sum in cash equal to one to two times the Executive’s annual base salary; (ii) a lump sum in cash equal to one to two times the average annual bonus paid to the Executive for the prior two full fiscal years preceding the date of termination; (iii) a lump sum in cash equal to a pro rata portion of the annual bonus payable for the period in which the date of termination occurs based on the actual performance under the Company’s annual incentive bonus arrangement, but no less than fifty percent of Executive’s annual base salary; and (iv) if the Executive’s termination occurs prior to the date that is twelve months following a change of control, then each and every share option, restricted share award and other equity-based award that is outstanding and held by the Executive shall immediately vest and become exercisable. Subsequent to March 31, 2020, the Company eliminated the position of COO and relieved the COO of his duties pursuant to the terms of his employment agreement, and placed him on garden leave for the remainder of his employment through May 31, 2020. In addition to payment of accrued and unpaid salary, vacation time, and other benefits referred to above, and subject to execution of a release of claims by the COO, the Company is required to pay him one time his current annual base salary of $245,000, payable over 12 months. Litigation From time to time, the Company is party to various legal proceedings arising in the ordinary course of business. The Company expenses or accrues legal costs as incurred. A summary of the Company’s material legal proceedings is as follows: On August 6, 2018, GE Oil and Gas UK Ltd. (“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR (“ICC”). The dispute involved alleged delays and defects in products manufactured by the Company for GE dating back to 2013. The Company disputed GE’s allegations and vigorously defended itself against these allegations. Mediation took place on November 28, 2018 but was not resolved. On February 22, 2019, GE initiated arbitration proceedings with the ICC. The total amount in dispute was originally $2,630 but was later reduced to $2,252. On February 26, 2020, the parties agreed in principle to settle the dispute, and the parties are working toward finalizing the terms of a definitive settlement agreement. The Company therefore accrued a liability related to this matter in the amount of $750 for the year ended December 31, 2019. In November 2011, the Company delivered equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270 alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required. The Company repeatedly attempted to collect on the receivable, and ultimately filed suit on November 16, 2012, in the Harris County District Court. Aker subsequently filed a counterclaim on March 20, 2013 in the aggregate amount of $1,000 for reimbursement of insurance payments allegedly made for repairs. The parties have not reached a resolution on this matter. At this point, it is not clear as to whether an unfavorable outcome is either probable or remote, and the Company is unable to determine the likelihood of an unfavorable outcome or the amount or range of potential loss if the outcome should be unfavorable. |
9. EARNINGS PER COMMON SHARE
9. EARNINGS PER COMMON SHARE | 3 Months Ended |
Mar. 31, 2020 | |
Net income (loss) per share: | |
INCOME OR LOSS PER COMMON SHARE | NOTE 9: EARNINGS PER COMMON SHARE Basic earnings per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents (warrants, nonvested stock awards and stock options) outstanding during the period. Diluted EPS reflects the potential dilution that could occur if options to purchase common stock were exercised for shares of common stock and all nonvested stock awards vest. At March 31, 2020 and 2019, all such securities were anti-dilutive. |
10. RELATED PARTY TRANSACTIONS
10. RELATED PARTY TRANSACTIONS | 3 Months Ended |
Mar. 31, 2020 | |
Related Party Transactions [Abstract] | |
RELATED PARTY TRANSACTIONS | NOTE 10: RELATED PARTY TRANSACTIONS On August 15, 2019, Mr. Ronald E. Smith, the Company's Founder, resigned as Chief Executive Officer and as a member of the Board, effective as of August 31, 2019. In connection with Mr. Smith's resignation, the Company and Mr. Smith entered into a Transition Agreement, effective as of September 1, 2019 (the “Transition Agreement”). The Transition Agreement provides for Mr. Smith to serve as an independent consultant to the Company from September 1, 2019 through December 31, 2021. The Company agreed to pay Mr. Smith $15 per month, from January 1, 2020 through December 31, 2021, in exchange for his future services. The Company therefore recorded consulting expenses related to the Transition Agreement totaling $45 for the quarter ended March 31, 2020. In addition to the other payments provided for under the Transition Agreement, the Company also agreed to pay Mr. Smith 1.5% of the net sale or lease value of two carousels owned by Company, if such sale or lease occurs prior to December 31, 2021, unless those assets are sold or leased in conjunction with a sale of all or substantially all of the assets or stock of Deep Down, in which case no commission is due. As part of the Transition Agreement, Mr. Smith is bound by certain non-disclosure and confidentiality provisions, and a non-compete and non-hire agreement. |
11. SUBSEQUENT EVENTS
11. SUBSEQUENT EVENTS | 3 Months Ended |
Mar. 31, 2020 | |
Subsequent Events [Abstract] | |
SUBSEQUENT EVENTS | NOTE 11. SUBSEQUENT EVENTS We have evaluated subsequent events through the date the condensed consolidated financial statements included in this Report were filed with the Securities and Exchange Commission. As a result of the abrupt decline in oil prices and global economic activity caused by COVID-19, the Company applied for a loan under the Small Business Administration’s Paycheck Protection Program, and on April 29, 2020, the Company received a loan in the amount of $1,111, which will be used to finance payroll, rent, and utilities over the balance of the second quarter of 2020. The loan principal and related interest accrued may be forgivable, partially or in full, if certain conditions are met. Also, on April 6, 2020, the Company signed a Letter of Understanding for Landlord to Temporarily and Partially Abate Rent (the “Abatement Letter”) provided by the Company’s landlord of our corporate office and facility. According to the Abatement Letter, our landlord agreed to reduce rent payments over a four-month period beginning with the April 2020 payment. Over this four-month period, the Company’s rent will be lowered by a total of $253. In exchange for the rent abatement, the Company agreed to extend the lease by two months. |
1. BASIS OF PRESENTATION (Polic
1. BASIS OF PRESENTATION (Policies) | 3 Months Ended |
Mar. 31, 2020 | |
Accounting Policies [Abstract] | |
Basis of Presentation | Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Deep Down, Inc. and its wholly-owned subsidiary (“Deep Down,” “we,” “us” or the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q. As permitted under those rules, certain notes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2019. Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosed amounts of contingent assets and liabilities, and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. |
Liquidity | Liquidity The Company’s cash on hand was $3,033 and working capital was $3,965 as of March 31, 2020. As of December 31, 2019, cash on hand and working capital was $3,523 and $4,939, respectively. The Company does not have a credit facility in place and depends on cash on hand, cash flows from operations, and the potential opportunistic sales of property, plant and equipment (“PP&E”) to meet its liquidity needs. Given the abrupt decline in oil prices and global economic activity caused by COVID-19, the Company cannot predict with certainty the overall impact on the Company’s operations and cash flows. The Company has taken steps to mitigate the challenges presented by the current macro environment, including workforce reductions, wage reductions, rent abatement, and limiting capital expenditures and R&D efforts to only critical items. The Company continues to seek further cost reduction opportunities to preserve liquidity. Additionally, the Company applied for a loan under the Small Business Administration’s Paycheck Protection Program. On April 29, 2020, the Company received a loan in the amount of $1,111, which will be used to finance payroll, rent, and utilities over the balance of the second quarter of 2020. The loan principal and related interest accrued may be forgivable, partially or in full, if certain conditions are met. The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of cash on hand, cash expected to be generated from operations, current working capital, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital investments. |
Principles of Consolidation | 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 | Segments For the three months ended March 31, 2020 and 2019, we had one operating and reporting segment, Deep Down Delaware. |
2. LEASES (Tables)
2. LEASES (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Leases [Abstract] | |
Operating lease right to use | The following tables present information about our operating leases: March 31, 2020 December 31, 2019 Assets: (In thousands) Right-of-use assets $ 4,039 $ 4,334 Liabilities: Current lease liabilities 1,196 1,181 Non-current lease liabilities 2,875 3,180 Total lease liabilities $ 4,071 $ 4,361 |
Components of lease expense | The components of our lease expense were as follows: Three Months Ended March 31, 2020 2019 (In thousands) Operating lease expense included in Cost of sales $ 308 $ 306 Operating lease expense included in SG&A 60 73 Short term lease expense 34 65 Total lease expense $ 402 $ 444 Lease term and discount rate: March 31, 2020 December 31, 2019 Weighted-average remaining lease terms on operating leases (yrs.) 3.12 3.28 Weighted-average discount rates on operating leases 5.374 % 5.374 % |
Future minimum lease payments | Present value of lease liabilities: Twelve months ending March 31, Operating Leases (In thousands) 2021 $ 1,381 2022 1,395 2023 1,411 2024 236 Thereafter – Total lease payments 4,423 Less: Interest (352 ) Present value of lease liabilities $ 4,071 |
3. REVENUE FROM CONTRACTS WIT_2
3. REVENUE FROM CONTRACTS WITH CUSTOMERS (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Revenue from Contract with Customer [Abstract] | |
Disaggregation of Revenue - Contract Revenue | The following table presents the Company’s revenues disaggregated by fixed price and service contracts. Sales taxes are excluded from revenues. Three Months Ended March 31, 2020 2019 (In thousands) Fixed Price Contracts $ 1,744 $ 3,531 Service Contracts 1,861 2,769 Total $ 3,605 $ 6,300 |
Schedule of earnings in excess of billings on uncompleted contracts | March 31, 2020 December 31, 2019 (In thousands) Costs incurred on uncompleted contracts $ 1,716 $ 1,687 Estimated earnings on uncompleted contracts 2,659 2,294 4,375 3,981 Less: Billings to date on uncompleted contracts (4,731 ) (3,790 ) $ (356 ) $ 191 Included in the accompanying unaudited condensed consolidated balance sheets under the following captions: Contract assets $ 544 $ 814 Contract liabilities (900 ) (623 ) $ (356 ) $ 191 |
4. PROPERTY, PLANT AND EQUIPM_2
4. PROPERTY, PLANT AND EQUIPMENT (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Property, Plant and Equipment [Abstract] | |
Schedule of property, plant and equipment | March 31, 2020 December 31, 2019 Range of Asset Lives (In thousands) Buildings and improvements $ 285 $ 285 7 - 36 years Leasehold improvements 896 896 2 - 5 years Equipment 17,896 17,887 2 - 30 years Furniture, computers and office equipment 901 901 2 - 8 years Construction in progress 116 64 – Total property, plant and equipment 20,094 20,033 Less: Accumulated depreciation and amortization (12,360 ) (12,069 ) Property, plant and equipment, net $ 7,734 $ 7,964 |
1. BASIS OF PRESENTATION (Detai
1. BASIS OF PRESENTATION (Details Narrative) $ in Thousands | 3 Months Ended | 4 Months Ended | |||
Mar. 31, 2020USD ($)Integer | Apr. 29, 2020USD ($) | Dec. 31, 2019USD ($) | Mar. 31, 2019USD ($) | Dec. 31, 2018USD ($) | |
Cash | $ 3,033 | $ 3,523 | $ 1,776 | $ 2,015 | |
Working capital | $ 3,965 | $ 4,939 | |||
Number of reportable segments | Integer | 1 | ||||
Number of operating segments | Integer | 1 | ||||
Subsequent Event [Member] | SBA Paycheck Protection Program [Member] | |||||
Proceeds from loan | $ 1,111 |
2. LEASES (Details - Operating
2. LEASES (Details - Operating lease info) - USD ($) $ in Thousands | 3 Months Ended | ||
Mar. 31, 2020 | Mar. 31, 2019 | Dec. 31, 2019 | |
Right of use operating lease assets | $ 4,039 | $ 4,334 | |
Current lease liabilities | 1,196 | 1,181 | |
Non-current lease liabilities | 2,875 | 3,180 | |
Total lease liabilities | 4,071 | $ 4,361 | |
Components of lease expense | |||
Short term lease expense | 34 | $ 65 | |
Total lease expense | $ 402 | 444 | |
Right of use assets obtained in exchange for new operating liabilities | |||
Weighted average remaining lease (years) terms on operating leases | 3 years 1 month 13 days | 3 years 3 months 11 days | |
Weighted average discount rates on operating leases | 5.374% | 5.374% | |
Cost of Sales [Member] | |||
Components of lease expense | |||
Operating lease expense | $ 308 | 306 | |
Selling, General and Administrative Expenses [Member] | |||
Components of lease expense | |||
Operating lease expense | $ 60 | $ 73 |
2. LEASES (Details - Minimum le
2. LEASES (Details - Minimum lease payments) - USD ($) $ in Thousands | Mar. 31, 2020 | Dec. 31, 2019 |
Leases [Abstract] | ||
Future minimum lease payment 2021 | $ 1,381 | |
Future minimum lease payment 2022 | 1,395 | |
Future minimum lease payment 2023 | 1,411 | |
Future minimum lease payment 2024 | 236 | |
Future minimum lease payment thereafter | 0 | |
Total lease payments | 4,423 | |
Less: interest | (352) | |
Present value of lease liabilities | $ 4,071 | $ 4,361 |
3. REVENUE FROM CONTRACTS WIT_3
3. REVENUE FROM CONTRACTS WITH CUSTOMERS (Details - Disaggregation of Revenue) - USD ($) $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Revenues | $ 3,605 | $ 6,300 |
Fixed-price Contract [Member] | ||
Revenues | 1,744 | 1,861 |
Service Contracts [Member] | ||
Revenues | $ 3,531 | $ 2,769 |
3. REVENUE FROM CONTRACTS WIT_4
3. REVENUE FROM CONTRACTS WITH CUSTOMERS (Details - Contract balances) - USD ($) $ in Thousands | Mar. 31, 2020 | Dec. 31, 2019 |
Billings In Excess Of Costs And Estimated Earnings On Uncompleted Contracts And Deferred Revenues | ||
Costs incurred on uncompleted contracts | $ 1,716 | $ 1,687 |
Estimated earnings on uncompleted contracts | 2,659 | 2,294 |
Gross costs and estimated earnings | 4,375 | 3,981 |
Less: Billings to date on uncompleted contracts | (4,731) | (3,790) |
Costs incurred plus estimated earning less billings on uncompleted contracts, net | (356) | 191 |
Included in the accompanying condensed consolidated balance sheets under the following captions: | ||
Contract Assets | 544 | 814 |
Contract Liabilities | (900) | (623) |
Costs incurred plus estimated earning less billings on uncompleted contracts | $ (356) | $ 191 |
4. PROPERTY, PLANT AND EQUIPM_3
4. PROPERTY, PLANT AND EQUIPMENT (Details) - USD ($) $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Dec. 31, 2019 | |
Property, Plant and Equipment [Line Items] | ||
Total property, plant and equipment | $ 20,094 | $ 20,033 |
Less: Accumulated depreciation and amortization | (12,360) | (12,069) |
Property, plant and equipment, net | 7,734 | 7,964 |
Building and improvements [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Total property, plant and equipment | $ 285 | 285 |
Range of Asset Lives | 7 to 36 years | |
Leasehold Improvements [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Total property, plant and equipment | $ 896 | 896 |
Range of Asset Lives | 2 to 5 years | |
Equipment [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Total property, plant and equipment | $ 17,896 | 17,887 |
Range of Asset Lives | 2 to 30 years | |
Furniture, computers and office equipment [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Total property, plant and equipment | $ 901 | 901 |
Range of Asset Lives | 2 to 8 years | |
Construction in Progess [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Total property, plant and equipment | $ 116 | $ 64 |
5. SHARE-BASED COMPENSATION (De
5. SHARE-BASED COMPENSATION (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands | 1 Months Ended | 3 Months Ended | ||
Jan. 20, 2020 | Mar. 31, 2020 | Mar. 31, 2019 | Dec. 31, 2019 | |
Share-based compensation | $ 50 | $ 104 | ||
Restricted Stock [Member] | ||||
Unamortized estimated fair value of restricted stock awards | $ 101 | $ 134 | ||
Unamortized expense recognition period | 1 year 9 months 22 days | |||
Unvested restricted stock | 210,000 | 360,000 | ||
Stock Options [Member] | ||||
Unvested options | 238,000 | 225,000 | ||
Unamortized estimated fair value of stock options | $ 107 | $ 91 | ||
VP of Finance [Member] | ||||
Options granted | 50 | |||
Options granted price per share | $ 0.31 | |||
May 7, 2017 [Member] | ||||
Share-based compensation | 3 | |||
July 27, 2018 [Member] | ||||
Share-based compensation | 20 | |||
June 24, 2019 [Member] | ||||
Share-based compensation | 16 | |||
September 23, 2019 [Member] | ||||
Share-based compensation | $ 11 |
6. TREASURY STOCK (Details Narr
6. TREASURY STOCK (Details Narrative) - USD ($) shares in Thousands, $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Equity [Abstract] | ||
Stock purchased, value | $ 524 | $ 170 |
Stock repurchases, shares | 744 |
8. COMMITMENTS AND CONTINGENC_2
8. COMMITMENTS AND CONTINGENCIES (Details Narrative) $ in Thousands | Dec. 31, 2019USD ($) |
Commitments and Contingencies Disclosure [Abstract] | |
Severance payable | $ 245 |
Litigation liability | $ 750 |
10. RELATED PARTY TRANSACTIONS
10. RELATED PARTY TRANSACTIONS (Details Narrative) $ in Thousands | 3 Months Ended |
Mar. 31, 2020USD ($) | |
Related Party Transactions [Abstract] | |
Consulting expenses | $ 45 |